Foreign Exchange
and Money Market Transactions
Currency markets are a source of fasci-
nation to market players and observers
alike. The momentum and the volatility
of the markets, the wide range of
factors affecting exchange rates and
their impact on the economy as a
whole make this a particularly varied
and interesting topic. There is good
reason why currency market analysis is
regarded as one of the key economic
disciplines.
After all, the currency markets influ-
ence many areas of our daily life. Their
impact extends beyond imports and
exports to factors that have an indirect
effect on us, e.g. the relationship be-
tween interest rates and exchange
rates. These in turn influence eco-
nomic decisions that apparently have
nothing to do with foreign trade.
Changes in exchange rates are one
of the major risks to which companies
and investors are exposed. It is thus
impossible to imagine company man-
agers or asset managers ignoring the
risks inherent in a shift in exchange
rates.
This publication looks at various aspects
of the foreign currency markets. It
starts with an overview of the main
factors determining exchange rates
and a brief history of the currency mar-
kets. However, the main focus is on
how the currency markets work, with
particular reference to new financial
instruments. The aim is to provide a
balanced insight into the theory and
workings of the currency markets.
Currency market ana-
lysis is a key economic
discipline
Preface
3
5
1.
Introduction
7
2. Factors determining long-term
11
currency market trends
3. Factors with an immediate impact
23
on exchange rates
4. History of the foreign exchange market
35
5. Principles of foreign exchange dealing
49
6. Types of foreign exchange trading
57
7. Forwards, futures and options
71
8. Exercises
95
9. Glossary
105
10. Index
125
Contents
What do exchange rate
and volatility mean?
7
Anyone who has travelled abroad is aware that there
is a certain element of risk involved in changing
money. The price paid for a foreign currency – known
as the ex