Chapter 9

Foreign Exchange

Abstract

Most currencies are free to fluctuate. These have “floating” exchange rates and can be contrasted with “fixed” exchange rates which are determined and maintained by governments. Foreign exchange is traded in the spot market and the forward market. These over-the-counter markets are dominated by dealer banks trading trillions of dollars each day. Most trading is electronic on Thomson Reuters, EBS, and Bloomberg platforms. There are also exchange traded futures, options, and swaps. The theory of “purchasing power parity” states that relative exchange rates will equilibrate to the point where the price of a basket of goods in one country will equal the price of the same basket of goods in a second country. TransferWise ...

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