Part 2 Discussion

Key Term: Foreign Exchange Markets

The key term I would like to focus on this week is the Foreign Exchange Market; this subject interested my attention because it is where the foreign countries and international financial institutions exchange their currency for another. As countries look to engage in a global market it is critical to know the principle functions of the Foreign Exchange, and what services it provides. Although it is not related to what I do for a living. However, this subject is interesting as it deals with convertible currencies of different countries. It is also interesting because it indicates the purchasing power parity of countries, and how the international loans affect the foreign exchange market.

Explanation of the key term

Foreign exchange market (also known as forex market) is an international market for trade of currencies (Ghashghaie, S, et al, 1996). Major international banks can be described as the key players of this market. The foreign exchange market helps in the investment and international trade, by facilitating currency conversion. For instance, it enables a business in US to import goods from the member states of European Union, and make payment in Euros, despite the fact that the income is in United States dollars. The foreign exchange market also functions through financial institutions, and conducts operations on various levels.

Foreign exchange transactions are about seventy to ninety per cent speculative. It means that, the person or institution that purchased or sold the currency has no intentions to actually have the possession of the currency; instead they were only speculating on the fluctuation rate of that specific currency into their advantage. Hedge funds are known for aggressive currency speculation. They control equity worth billions of dollars and have the capability to borrow billions more, and thus are likely to overwhelm intervention by central banks to facilitate any currency, provided that the economic conditions are to the advantage of hedge funds.

Major Summary of the Article

Since the progress to comprehensive floating in1973, foreign exchange rates between major currencies have been subject to large-scale fluctuations. This instability of foreign exchange rates is a vital domain of policy of government and its comprehension constitutes a challenge for foreign exchange market behavior theories. In this article there has been an identification of the limit to fluctuation of foreign exchange markets. This has been done by analyzing the scale of short-run fluctuations in exchange rates in ...