FOREIGN EXCHANGE MARKET : OPERATION
AND MECHANICS
Resume
It there were a single international
currency, there wouls be no need for a foreign exchange market. The purpose of
the foreign exchange market is to permit transfers of purchasing power
denominated in one currency to another
to trade one currency for another currency.
Most currency transactions are
channeled through the worldwide interbank market, the wholesale market in which
major banks trade with one another. In
the spot market, currencies are traded immediate delivery, which is actually
within two business days after the transactions has been concluded. In the
forward market, contract are made to buy or sell currencies for future
delivery.
A large fractions of the interbank
transactions in the united states is conducted through foreign exchange
brokers, specialist in matching net supplier and demander banks. The major
participants in the forward market can be categorized as arbitrageurs, traders,
hedgers, and speculators. Arbitrageurs seek to earn risk free profits by taking
advantage of differences in interest rates among countries.
Clearing House interbank Payments
System (CHIPS) is a computerized network developed by the New York Clearing
House Association for transfer of international dollar payments, currently
linking 46 major depository institutions that have offices or affiliates in New
York City. The New York Fed has established a settlement account for member
banks into which debit settlement payments are sent and from which credit
settlement payments are disbursed.
Analyze
The primary function of the foreign
exchange market is to transfer purchasing power denominated in one currency to
another and thereby facilitate international trade and investment. In the spot
market, currencies are traded for settlement within two business days after the
transactions has been concluded. The major participants in the forward market
are categorized as arbitrageurs, traders, hedgers, and speculators.
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