Introduction to Foreign Exchange Rates

CHAPTER 2

Foreign Exchange Volatility

Although spot foreign exchange (FX) rates at the moment are known and observable, one does not know ahead of time what the path of any future spot FX rate will be. Many try to predict and speculate, but there is always uncertainty about where FX rates will go in the future. Some FX rates are more volatile than others, depending on supply and demand and whether government policies tend to stabilize or destabilize. In this chapter, we explain some of the supply and demand factors that affect FX rates, and some of the workings of the market for FX rates. We go into the reasons why FX rates can be volatile like stock prices, and why this volatility creates problems for companies.

Fundamental Supply and Demand ...