It introduces real-world currency trading institutions. Many exchange rate studies are like traveling to another planet. This is a strange place, far from the economic situation of ordinary families. In addition, although there are stories about how wealth speculators try to monopolize these markets, competition still prevails in most international financial markets. Monopoly (monopoly/patent) and oligopoly (seller's market) are evidence of many direct investment activities and cartels. An orderly demand and supply curve will not treat the facts in these fields fairly.
Foreign exchange is an act of trading currencies of different countries. The form of money is the same as that within a country.
Exchange rate is the price of one country's currency relative to another's currency. Spot exchange rate is the price of "instant" exchange. The forward exchange rate is the price set now for the exchange that will take place sometime in the future.
The foreign exchange market is not a single gathering place where traders shout orders to each other. On the contrary, banks and traders working in banks are the centers of the foreign exchange market. These banks and their traders use computers and telephones to conduct foreign exchange transactions with their customers and with each other. Transactions with customers are called the retail part of the market. So my idea is to make small transactions with individuals. Most of the retail part of the market involves non-financial companies, financial institutions and other organizations, who conduct large-scale transactions as customers of banks actively trading in the market. Transactions between banks active in the market are called the interbank part of the market. However, globally, there are only a few thousand foreign exchange traders in banks in this industry.
-Making use of the foreign exchange market;
Spot foreign exchange has a clearing function, allowing payment between entities wishing to hold or use different currencies. The exchange rate is determined by supply and demand, and is not limited by the exchange rate system or system chosen by the government.
In the customer or retail part of the spot foreign exchange market, individuals, enterprises and other organizations can get foreign currency for payment, or they can sell the foreign currency they get during payment. Therefore, the spot foreign exchange market provides clearing services, allowing payments to flow between individuals, enterprises and other organizations that prefer to use different currencies. These payments include all types of items in the balance of payments account, including payments for the import and export of goods and services and payments for the purchase and sale of foreign assets.
Like most pure domestic payments, demand deposits are used for foreign exchange transactions and international payments for airplanes. The British company used the pounds in its current account to buy the dollars it needed. The American manufacturer uses the current deposit of its correspondent bank in new york for two purposes: (1) as the US dollar it sells to customers in foreign transactions, and (2) as the US dollar that is subsequently transferred to the American manufacturer as payment.
-Inter-bank foreign exchange transactions:
Most inter-bank transactions are conducted through electronic brokerage system, and only a few are voice brokers conducted by telephone. The use of brokers provides anonymity for traders until the exchange rate of transactions is agreed. A small number of inter-bank transactions involve direct contact between traders from different banks to negotiate exchange rates and book transactions.
Less than 40% of foreign exchange transactions are conducted between banks in the foreign exchange market. The content of the transaction is still the same-demand deposits denominated in different currencies. But every transaction is between one foreign exchange trader and another, not an "external" customer.
Inter-bank transactions allow banks to quickly adjust their positions at low cost when conducting large transactions with customers alone. For example, if Citigroup is unwilling to continue to hold the yen. Then, Citigroup can sell yen to another bank to speculate on recent exchange rate changes. This speculative position is usually held only for a short time and usually closes at the end of the day.
To understand what makes the exchange rate of a country's currency rise and fall, you should follow the same steps as analyzing any competitive market. Firstly, the interaction between demand and supply is described as the decisive factor of balancing price and quantity, and then the power behind the demand and supply curve is explored.
American exports of goods and services create foreign exchange supply and demand for dollars, because foreign buyers have their own currencies to offer, while American exporters prefer to hold dollars in the end rather than other currencies. Correspondingly, importing goods and services will lead to selling domestic currency to buy foreign currency. American imports of goods and services have created a demand for foreign exchange and a supply of dollars, and foreign exporters prefer to hold their own currencies eventually. The capital outflow from the United States has created the demand for foreign currency and the supply of dollars, because investors hold dollars from the beginning and want to invest in foreign financial assets that must be paid in foreign currency. The inflow of American capital has created the supply of foreign exchange and the demand for dollars, so that investors begin to hold foreign exchange and want to invest in American financial assets that must be paid in dollars.
-Floating exchange rate
The simplest system is a floating exchange rate system without government or central bank intervention. The spot price of foreign currency is determined by the market and the interaction between private demand and supply of the currency. The market cleans itself up through the price mechanism. To know the possibility of economic downturn, imagine that the exchange rate has just changed from a large number to a smaller number. The foreign exchange demand curve can move to the right or rise, which is caused by the following changes related to the balance of payments. The transfer of American demand to goods and services from other countries; The willingness of the United States to lend or invest in other countries has increased. If the demand curve moves to the right, the market equilibrium exchange rate of the pound will rise.
-Fixed exchange rate
Even if the exchange rate they choose is different from the current equilibrium exchange rate, officials try to keep the exchange rate actually fixed or pegged. Their usual practice is to announce a narrow exchange rate "range" and allow the exchange rate to change within this range. Under the floating exchange rate system, the decline in the market price of a currency is called the depreciation of the currency; Raising wages is an appreciation. We call the discontinuous official reduction of the fixed par value of a currency devaluation; Revaluation is an antonym to describe the discontinuous increase of official face value. In a system with a nearly fixed exchange rate, depreciation and appreciation are the main ways to change the exchange rate. In this system, the exchange rate is usually fixed, but not always fixed.
-Current arrangements
This is an overview, and it doesn't cover everything now. First of all, most major currencies, including US dollar, Euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar and Swedish krona, have floating exchange rates with each other. Second, many other governments insist on floating exchange rates, although many countries "manage" floating exchange rates through a certain amount of official foreign exchange market intervention. Third, some countries/regions have fixed exchange rates between their currencies and the US dollar. Cities include Hong Kong and Saudi Arabia. Fourth, some countries, including Denmark, Bulgaria and former French African colonies, linked their currencies to the euro.
However, we also noticed that the transactions took place in different places around the world. For example, during a certain period of time every day, there are transactions between new york and London and other financial centers in Europe. Arbitrage, that is, the process of buying and selling to obtain almost risk-free net profit, ensures that the interest rates in different places are basically the same, and the interest rates and cross-interest rates are interrelated and consistent. Although it is more subtle, there are also opportunities to obtain risk-free profits through three kinds of interest rate arbitrage-this process is called triangle arbitrage. To see this, start with some dollars, say 150 and buy 300 francs (100/0.50). Use these francs to buy pounds at the cross exchange rate, and you have 100 pounds (300/3). Convert these pounds back into dollars, and you will eventually make a profit of 10 for every 150 at the beginning. If you set up all three spot transactions at the same time, this profit is almost instantaneous and there is basically no risk.