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The Foreign Exchange Market

In: International Macroeconomics and Finance

Author

Listed:
  • Edward E. Ghartey

    (The University of the West Indies)

Abstract

In this chapter, we have discussed the foreign exchange market (FEM) where transactors of foreign exchange or currencies, mainly central banks, which are national banks, commercial banks, nonbanking financial institutions, such as cambios or foreign exchange brokers, corporations, exporters, importers, and tourists conduct businesses with national and vehicle currency or reserve currency. We have explained concepts such as foreign currency, foreign exchange trading, spot rate, forward rate, arbitrage, seigniorage, real exchange rate, nominal effective exchange rate (NEXR), forward contracts, futures, option contracts, speculation, hedging, forward discount, and premium. We have worked through examples and used illustrations to explain and elucidate arbitrage trading, hedging, speculation, to name a few, and solved problems relating to foreign exchange risk, currency swap, covered interest arbitrage margin, and parity. Furthermore, we have also explained types of foreign exchange risks, and how hedging and currency swaps can be used to minimize foreign exchange risk. We have explained terms such as long position, short position, and how they can be employed by investors and traders to make profit or minimize losses, and to either destabilize or stabilize the foreign exchange market. We ended the Chapter with a discussion of the effect of taxes on covered interest arbitrage margin, when income taxes are not equal to capital gain taxes.

Suggested Citation

  • Edward E. Ghartey, 2025. "The Foreign Exchange Market," Springer Books, in: International Macroeconomics and Finance, chapter 0, pages 31-51, Springer.
    • Handle: RePEc:spr:sprchp:978-3-032-04145-6_3
    DOI: 10.1007/978-3-032-04145-6_3
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