Function of the Foreign Exchange Market
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A) What is the function of the foreign exchange market?
B) Who are the market participants?
C) What is the difference between the spot and forward markets?
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Solution Summary
This solution of 557 words lists four main functions of foreign exchange markets, four types of market participants and explains the difference between spot and forward markets. References used are included.
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A) What is the function of the foreign exchange market?
Foreign exchange refers to money denominated in the currency of another country. This market is essentially governed by the law of supply and demand and is generally not regulated by any government or coalition of governments. This is true in the U.S., where participation in the forex market is not regulated. The prices set for each country's money is determined by the desire of those trading to acquire more of it or to hold less of it. Each individual acts on the belief that he or she will benefit from the transaction.
According to the law of supply, as prices rise for a given item (in this case money), the quantity of the item that is supplied will increase; conversely, as the price falls, the quantity provided will fall. The law of demand states that as the price for an item rises, the quantity demanded will ...
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