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Chapter 11: Problem 1

What is meant by the foreign exchange market? Where is it located?

Short Answer

Expert verified
The Foreign Exchange Market (Forex) is a global marketplace for trading national currencies against one another. It is a decentralized market, meaning it does not have a physical location. Instead, trades are conducted electronically, and the market operates round the clock, spanning major financial centres globally.

Step by step solution

01

Defining the Foreign Exchange Market

The Foreign Exchange Market, often known as 'Forex,' is a global marketplace where individuals, companies, and institutions buy, sell, and speculate on different currencies. It's responsible for determining the foreign exchange rates for every currency in the world. This market operates on several levels, with the banks form the topmost tier, exchanging large quantities of money for commercial and investment purposes. On a secondary level, smaller financial firms and investment corporations trade currencies to balance risk and interest rates.
02

Identifying the Location of the Foreign Exchange Market

The foreign exchange market does not have a specific concrete location. It is a global and decentralized market, which is predominantly operated by banks, institutions, and individuals via electronic networks. This means trades can be executed anywhere, anytime. The market operates 24 hours a day, five days a week, with major trading centers located in cities like London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.

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Most popular questions from this chapter

Who are the participants in the forward exchange market? What advantages does this market afford these participants?

Explain why exchange rate quotations stated in different financial centers tend to be consistent with one another.

What is the strategy of speculating in the forward market? In what other ways can one speculate on exchange rate changes?

If the exchange rate changes from \(\$ 1.70=£ 1\) to \(\$ 1.68=£ 1\), what does this mean for the dollar? For the pound? What if the exchange rate changes from \(\$ 1.70=£ 1\) to \(\$ 1.72=£ 1\) ?

What is meant by the forward market? How does it differ from the spot market?
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