【The Foreign Exchange Market】
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It introduces the real-world institutions of currency trading. Much of the study of exchange rates is like a trip to another planet. It is a strange land, far removed from the economics of an ordinary household. It also happens that competition prevails in most international financial markets despite a folklore full of tales about how wealthy speculators manage to corner those markets. Monopoly（垄断/专利） and oligopoly（卖方市场） are evident in much of the direct investment activity as well as in the cartels. Ordinary demand and supply curves would not do justice to the facts in those areas.
- The Basics of Currency Trading
Foreign exchange is the act of trading different nation`s moneys.The moneys take the same forms as money within a country.
An exchange rate is the price of one nations money in terms of another nations money. The spot exchange rate is the price for "immediate" exchange. The forward exchange rate is the price set now for an exchange that will take place sometimes in the future.
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The foreign exchange market is not a single gathering place where traders shout buy and sell orders at each other. Rather, banks and the traders who work at banks are at the center of the foreign exchange market. These banks and their traders use computers and telephones to conduct foreign exchange trades with their customers and with each other. The trading done with customers is called the retail part of the market. Some of this is trading with individuals in small amounts. Most of the retail part of the market involves nonfinancial companies, financial institutions, and other organizations that undertake large trades as the customers of the banks that actively deal in the market. The trading done between the banks active in the market is called the interbank part of the market. Yet the number of people employed as foreign exchange traders in banks in this industry is several thousand for the world as a whole.
-- Using the Foreign Exchange Market:
Spot foreign exchange serves a clearing function, permitting payments to be made between entities who want to hold or use different currencies. The exchange rate is determined by supply and demand, within any constraints imposed by the governmental choice of an exchange-rate system or regime.
In the customer or retail part of the spot foreign exchange market, individuals, businesses, and other organizations can acquire foreign moneys to make payments, or they can sell foreign moneys that they have received in payments. The spot foreign exchange market thus provides clearing services that permit payments to flow between individuals, businesses, and other organizations that prefer to use different moneys. These payments are for all of the types of items included in the balance-of-payments accounts, including payments for exports and imports of goods and services and payments for purchases and sales of foreign assets.
As with most payments that are purely domestic, demand deposits are used in this foreign exchange trade and in completing the international payment for the airplane. The British firm uses the pounds in its demand deposit account to acquire the dollars needed. The U.S. producer uses its demand deposit in its correspondent bank in New York for two purposes: (1) as the dollars that it sells to its customer in the foreign transaction and (2) as the same dollars that are then transferred to the U.S. producer as payment.
-- Interbank Foreign Exchange Trading:
Most interbank trading occurs through electronic brokering systems, with only a small remaining role for voice brokers who function by telephone. The use of brokers provides anonymity to the traders until an exchange rate is agreed on for a trade. A small amount of interbank trading involves traders at different banks in direct contact to negotiate the exchange rate and to book the transaction.
A little less than 40 percent of foreign exchange trading is trading among the banks themselves in the interbank part of the foreign exchange market. What`s being traded is still the same - demand deposits denominated in different currencies. But each deal is between one foreign exchange trader and another trader, not an "outside" customer.
Interbank trading allows a bank to readjust its own position quickly and at low cost when it separately conducts a large trade with a customer. For instance, if Citigroup may be unwilling to continue holding the yen. Citigroup then can sell the yen to another bank to speculate on exchange-rate movements in the near future. Such speculative positions are usually held only for a short time, typically being closed out by the end of the day.
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- Demand and Supply for Foreign Exchange
To understand what makes the exchange-rate value of a country's currency rise and fall, you should proceed through the same steps used to analyze any competitive market. First, portray the interaction of demand and supply as determinants of the equilibrium price and quantity, and then explore what forces lie behind the demand and supply curves.
U.S. exports of goods and services create a supply of foreign currency and a demand for U.S. dollars to the extent that foreign buyers have their own currencies to offer and U.S. exporters prefer to end up holding U.S. dollars and not some other currency. Importing goods and services correspondingly tends to cause the home currency to be sold in order to buy foreign currency. U.S. imports goods and services create a demand for foreign currency and a supply of U.S. dollars to offer and foreign exporters prefer to end up holding their own currencies. U.S. capital outflows create a demand for foreign currency and a supply of U.S. dollars to the extent that the investors begin with dollars and a desire to invest in foreign financial assets that must be paid for in foreign currencies. U.S. capital inflows create a supply of foreign currency and a demand for dollars to the extent that investors begin with foreign currency and desire to invest in U.S. financial assets that must be paid for in $.
-- Floating Exchange Rates
The simplest system is the floating exchange-rate system without intervention by governments or central bankers. The spot price of foreign currency is market-driven, determined by the interaction of private demand and supply for that currency. The market clears itself through the price mechanism. To see the likelihood of the downward slope, imagine that exchange rate has just shifted from a larger number to a less one. The demand curve for foreign exchange can be shifted to the right or raised by either of the following changes related to balance of payments. (A shift of U.S. demand toward the goods and services of other countries; A rise in U.S. willingness to lend money to or invest in other countries. ) If the demand curve shifts to the right, then the market equilibrium exchange-rate value of the pound rises.
-- Fixed Exchange Rates
Officials strive to keep the exchange rate virtually fixed or pegged even if the rate they choose differs from the current equilibrium rate. Their usual procedure is to declare a narrow "band" of exchange rates within which the rate is allowed to vary. Under the floating-rate system a fall in the market price of a currency is called a depreciation of that currency; a rise is an appreciation. We refer to a discrete official reduction of otherwise fixed par value of a currency as a devaluation; revaluation is the antonym describing a discrete raising of the official par. Devaluation and revaluations are the main ways of changing exchange rates in a nearly fixed-rate system, a system where the rate is usually, but not always, fixed.
-- Current Arrangements
Here is an overview, without getting into everything now. First, most major currencies, including the U.S. dollar, the euro, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar, the Australian dollar, and the Swedish krona, have floating exchange rates relative to each other. Second, the governments of a large number of other countries sat they have floating exchange rates, though many use some amount of official exchange market intervention to "manage" the float. Third, some countries/regions have fixed exchange rates between their currencies and the U.S. dollar. The urban includes HONG KONG and Saudi Arabia. Fourth, some countries, including Denmark, Bulgaria, and former French colonies in Africa, fix the exchange-rate value of their currencies to the euro.
- Arbitrage Within the Spot Exchange Market
Yet we have also noted that trading occurs in different locations around the world. For instance, for a period of time each day, trading is occurring in both New York and London as well as in other money centers in Europe. Arbitrage, the process of buying and selling to make a nearly riskless pure profit, ensures that rates in different locations are essentially the same, and that rates and cross-rates are related and consistent among themselves. Although it is more subtle, there is also an opportunity to make a riskless profit by arbitraging through the three rates-a process called triangular arbitrage. To see this, start with some number of dollars, say 150 buys 300 francs (100/0.50). Use these francs to buy pounds at the cross-rate, and you have 100 pounds (300/3). Convert these pounds back into dollars and you end up with
10 profit for each $150 you started with. This profit occurs almost instantly and with essentially no risk if you establish all three spot trades at the same time.
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