Foreign Exchange Markets Paper

Essay by DANIMAL69 October 2007

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"Foreign exchange markets are composed of international foreign exchange markets and international capital markets. International capital markets include international money markets, international stock markets, international bond markets, and international loan markets;" (Shenkar & Luo, 2005) all of these markets have a role in facilitating the international trade of the countries China and Japan. Although the theory of comparative advantage proves that China and Japan could both benefit from trading with one another, open trade between each nation has been "strained by competition for energy resources, disputes over the way history textbooks assess Japan's role in World War II, and Japan's pledge to aid the United States in defending Taiwan." (Kahn, 2005) "The foreign exchange market is where foreign currencies are bought and sold." (Shenkar & Luo, 2005) "It is the physical as well as institutional structures through which currencies are exchanged, exchange rates are determined, and foreign exchange transactions completed."

(Daniels, Radebaugh, & Sullivan, 2004) Although trade specifically between China and Japan is somewhat restricted, both countries utilize the foreign exchange market to facilitate trade with the rest of the world. "A foreign exchange transaction is an agreement between a buyer and a seller for the delivery of a certain amount of one currency at a specific rate in exchange for some other currency." (Shenkar & Luo, 2005) Thus, China and Japan will conduct foreign exchange transactions on the foreign exchange market in order to enhance their global trading positions. According to Golub (2003), "The US, by weakening Japan's regional construction efforts, unintentionally enhanced China's strategic position. Regional economic integration, which earlier was led by Japan, is now happening under Chinese auspices." This example suggests that China has a stronger or more influential global trading position than Japan. Understanding the relative strengths and weaknesses of Chinese and Japanese currency...