Learning Goals:
        Understand the meaning and functions of the 
          foreign exchange market
        Know what the spot, forward, cross, and effective 
          exchange rates are
        Understand the meaning of foreign exchange 
          risks, hedging, speculation, and interest arbitrage
 Salvatore: International Economics, 11th Edition  © 2013 John Wiley & Sons, Inc.
        Introduction
       Foreign Exchange Market
            Where individuals, firms and banks buy and 
             sell foreign currencies or foreign exchange.
  Salvatore: International Economics, 11th Edition  © 2013 John Wiley & Sons, Inc.
         Functions of the Foreign Exchange Markets
        1. Transfer purchasing power from one nation and 
           currency to another.
             Demand for currency arises when:
                 Tourists visit another country
                 Domestic firm wants to import from other countries
                 Individual wants to invest abroad
             Supply of currency arises from:
                 Foreign tourist expenditures
                 Export earnings
                 Receiving foreign investments
  Salvatore: International Economics, 11th Edition  © 2013 John Wiley & Sons, Inc.
        Functions of the Foreign Exchange Markets
        2. Provide credit for foreign transactions
            Credit is needed when goods are in transit, and to 
              allow the buyer time to resell the goods to make 
              the payment.
        3. Provide the facilities for hedging and speculation.
            About 90% of foreign exchange trading reflects 
              purely financial transactions, and only about 10% 
              trade financing.
  Salvatore: International Economics, 11th Edition  © 2013 John Wiley & Sons, Inc.
         Functions of the Foreign Exchange Markets
         Participants
              Those needing currency to fund transactions
                  Tourists, importers, exporters, investors, etc.
              Commercial banks
                  Serve as the clearinghouses for currency exchange
              Foreign exchange brokers
                  Clearinghouse for surpluses and shortages between 
                   the commercial banks
              Central banks
                  Buyer or seller of last resort in the foreign exchange 
                   market
   Salvatore: International Economics, 11th Edition  © 2013 John Wiley & Sons, Inc.