All open economies are interconnected through international trade and capital flows. Foreign exchange rates are determined by the demand and supply of currencies in global foreign exchange markets. These markets allow currencies to be bought and sold and facilitate international trade, investment, and credit. They include central banks, commercial banks, importers/exporters and other entities. Foreign exchange markets operate through both spot exchanges for immediate trades and forward markets for future trades, and involve hedging, arbitrage, and speculative activities. Exchange rates can be either floating rates that adjust based on market forces or fixed rates set by governments.
All open economies are interconnected through international trade and capital flows. Foreign exchange rates are determined by the demand and supply of currencies in global foreign exchange markets. These markets allow currencies to be bought and sold and facilitate international trade, investment, and credit. They include central banks, commercial banks, importers/exporters and other entities. Foreign exchange markets operate through both spot exchanges for immediate trades and forward markets for future trades, and involve hedging, arbitrage, and speculative activities. Exchange rates can be either floating rates that adjust based on market forces or fixed rates set by governments.
All open economies are interconnected through international trade and capital flows. Foreign exchange rates are determined by the demand and supply of currencies in global foreign exchange markets. These markets allow currencies to be bought and sold and facilitate international trade, investment, and credit. They include central banks, commercial banks, importers/exporters and other entities. Foreign exchange markets operate through both spot exchanges for immediate trades and forward markets for future trades, and involve hedging, arbitrage, and speculative activities. Exchange rates can be either floating rates that adjust based on market forces or fixed rates set by governments.
All open economies are interconnected through international trade and capital flows. Foreign exchange rates are determined by the demand and supply of currencies in global foreign exchange markets. These markets allow currencies to be bought and sold and facilitate international trade, investment, and credit. They include central banks, commercial banks, importers/exporters and other entities. Foreign exchange markets operate through both spot exchanges for immediate trades and forward markets for future trades, and involve hedging, arbitrage, and speculative activities. Exchange rates can be either floating rates that adjust based on market forces or fixed rates set by governments.
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Introduction
All open economies are economically interdependent. Their internal macroeconomic
conditions are affected by the economic changes outside the country. The effects of outside changes get transmitted to other economies through foreign trade changes in exchange rate, inflow and outflow of foreign exchange and international flow of capital.
Foreign Exchange Rate
Foreign exchange rate can be expressed as the foreign price of a domestic currency. Ex: Rupee of Dollar
Foreign Exchange Market
foreign exchange market is the market in which foreign currencies are bought and sold. It is a system not a place.
The major constituents and dealers of foreign exchange market
Central bank Brokers Commercial banks Exporters, importers, tourists, investors, immigrants
Major Functions of Foreign Exchange Market
1. Transferring foreign currency from one country to another 2. Provide short -term credit facilities to importers to and thereby facilitating smooth flow of goods and services between the countries. 3. Stabilizing the foreign exchange rate.
Kinds of foreign Exchange Market
Spot market Forward market
Transactions in foreign Market
Hedging Arbitrage Speculation
Floating (flexible) Exchange Rate System
The system of exchange rate in which the value of a currency is allowed to adjust freely or to float as determined by demand and supply of foreign exchange is called a flexible exchange rate system, which is also known as floating exchange rate system. Fixed Exchange Rate System If the exchange rate determined by the Govt it is called as fixed exchange rate system. Disequilibrium of balance of payment cause to rise either excess demand or excess demand or excess supply of foreign exchange -under the fixed exchange rate system central bank of the country has to buy and sell the required quantities of foreign exchange to eliminate the excess demand and supply.
