Chapter 3Foreign Exchange and Eurocurrency Markets

There was a story about the quantum theorist Werner Heisenberg on his deathbed, declaring that he will have two questions for God: why relativity, and why turbulence. Heisenberg says, “I really think He may have an answer to the first question.”

— James Gleick, Chaos

The foreign exchange (or currency) market allows currencies to be exchanged at a point in time—either now or at some future date. The Eurocurrency market is a market in bank deposits and loans that allows funds to be borrowed or invested over time within a single currency. In combination, these markets allow capital to be moved across currencies and over time. An understanding of these markets—and of the global network of commercial banks and financial exchanges that link these markets—is essential for understanding the opportunities, costs, and risks of international business and finance.

3.1 Characteristics of Financial Markets

Financial markets are markets for financial (as opposed to real) assets and liabilities. Although there are many ways to classify financial markets, a market's most important characteristic is its liquidity. Liquidity refers to the ease with which you can capture an asset's value. Liquid assets can be quickly converted into their cash value. Liquidity is closely related to transaction volume, with high-volume markets being more liquid than low-volume markets. The interbank currency and Eurocurrency markets enjoy high liquidity in large ...

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