Foreign Exchange Markets And Exchange Rates

The foreign exchange market is undoubtedly the world's largest financial market. It is the market where one country's currency is traded for another's. Most of the trading takes place in a few currencies: the U.S. dollar ($), the German deutsche mark (DM), the British pound sterling (£), the Japanese yen (¥), the Swiss franc (SF), and the French franc (FF). Of course, with the introduction of the euro (see our chapter opener), some of these currencies have disappeared. Table 22.1 lists some of the more common currencies and their symbols.

The foreign exchange market is an over-the-counter market, so there is no single location where traders get together. Instead, market participants are located in the major commercial and investment banks around the world. They communicate using computer terminals, telephones, and other telecommunications devices. For example, one communications network for foreign transactions is maintained by the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a Belgian not-for-profit cooperative. Using data transmission lines, a bank in New York can send messages to a bank in London via SWIFT regional processing centers.

The many different types of participants in the foreign exchange market include the following:

1. Importers who pay for goods using foreign currencies

2. Exporters who receive foreign currency and may want to convert to the domestic currency

3. Portfolio managers who buy or sell foreign stocks and bonds

4. Foreign exchange brokers who match buy and sell orders

5. Traders who "make a market" in foreign currencies

6. Speculators who try to profit from changes in exchange rates

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