Foreign Exchange Market Summary Essay Example
Currency trading is the world's largest market. As people learn more and find ways to invest, the market will continue to grow. All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. This paper will summarize the function of the world’s major currency exchange markets as well as the positive and negative aspects of using gold standard. The foreign exchange market is the market in which national currencies are traded. As in any market, a price must exist at which trade can occur (Woodbury 1999). An exchange rate is the price of a unit of domestic currency against a foreign currency. If the exchange rate of the US dollar is higher than the Japanese yen, the US dollar has depreciated and the yen has appreciated. Domestic residents in an open economy often complete international transaction. For example, American car dealers buy Japanese cars to sell. Transactions such as this require one or more participants to acquire a foreign currency. The American dealer may purchase cars from Japan but must pay in yen. It is then up to the American dealer to convert the yen in to US dollars to determine if the transaction is profitable. (Woodbury, 1999) Money markets are places where monies can be bought, sold or borrowed. As stated earlier, the foreign exchange market is when one currency is traded for another currency. It is the largest market in the world for trading cash value, trading between large banks, central banks, currency speculators, multinational corporations and governments. (Ball et al, 2005) The foreign exchange market is said to be unique due to its trading value, the liquidity of the market, the large number and variety of traders in the market, how they are wide spread geographically, and because of its long trading hours (Bordo n.d). The major