Fundamental Analysis

Foreign Exchange and Money Market Transactions

Money Market Transactions and Foreign Exchange

Money Market Transactions and Foreign Exchange Discussion

Money Market Transactions and Foreign Exchange discussion details is given bellow_

Money Market Transactions and Foreign Exchange Currency markets are a source of fascination to market players and observers alike. The momentum and the volatility of the markets, the wide range of factors affecting exchange rates and their impact on the economy as a whole make this a particularly varied and interesting topic. There is good reason why currency market analysis is regarded as one of the key economic disciplines.

Currency market analysis is a key economic discipline. After all, the currency markets influence many areas of our daily life. Their impact extends beyond imports and exports to factors that have an indirect effect on us, e.g. the relationship between interest rates and exchange rates. These in turn influence economic decisions that apparently have nothing to do with foreign trade.

Changes in exchange rates are one of the major risks to which companies and investors are exposed. It is thus impossible to imagine company managers or asset managers ignoring the risks inherent in a shift in exchange rates.

This publication looks at various aspects of the foreign currency markets. It starts with an overview of the main factors determining exchange rates and a brief history of the currency markets. However, the main focus is on how the currency markets work, with particular reference to new financial instruments. The aim is to provide a balanced insight into the theory and workings of the currency markets.

Anyone who has travelled abroad is aware that there is a certain element of risk involved in changing money. The price paid for a foreign currency – known as the exchange rate – can fluctuate. The following sections provide some basic definitions and outline the factors affecting long-term exchange rates. Terms such as exchange rates, volatility, balance of payments and gross domestic product are introduced to illustrate the concept of purchasing power parity and the importance of capital flows in determining exchange rates. Currencies are referred to using the official ISO codes. For example, CHF stands for the Swiss franc and USD for the US dollar.

xchange rates show the purchasing power of a currency in a different currency. They make the monetary value of goods, services, capital spending and investments comparable the world over. An exchange rate of e.g. USD/CHF 1.39 expresses the price of the US dollar in Swiss francs. The notation USD/CHF is the system used by traders, although mathematically it would be more correct to express the exchange rate the other way round, as it shows how many CHF have to be paid to obtain USD 1. At this exchange rate, CHF 1,000,000 would buy goods, services or securities worth USD 719,424. If the exchange rate were to drop from USD/CHF 1.39 to USD/CHF 1.37, the Swiss franc would appreciate. At the new exchange rate, we obtain more USD for the same amount of CHF, i.e. 1,000,000 would now buy USD 729,927. If one currency appreciates, the other automatically depreciates.

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David Richard

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