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Global Financing and Exchange Rate Mechanisms Paper

Analyze Euro currency Market. Describe Euro Currency Market, how it is used in global financing operations, and its importance in managing risks. Use at least three sources.

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The forex 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 fall. As the price for an item falls, the quantity demanded will rise. It is the interaction of these basic forces that results in the movement of currency prices in the forex market.

For example, if Euro investors saw an opportunity in the U.S., they might be willing to pay more Euro in order to get dollars to invest in the U.S. If the dollar moved from one euro per dollar to one and a half euro per dollar, the dollar "strengthened against the franc." In other words, a dollar could buy more Euros.

Implication on Foreign investment risk

When the value of the dollar falls or weakens in relation to another currency, prices of goods and services from that country rise for U.S. consumers. It takes more dollars to purchase the same amount of foreign currency to buy goods and services. That means U.S. consumers and U.S. companies that import products have reduced purchasing power.

At the same time, a weak dollar means prices for U.S. products fall in foreign markets, benefiting U.S. exporters and foreign consumers. With a weak dollar, it takes fewer units of foreign currency to buy the right ...

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