The Capital Markets

CHAPTER 32Currency

Simon Derrick

THE EMERGENCE OF A FOREIGN EXCHANGE MARKET

The reemergence of currency as a medium for facilitating business can be traced back to Frisian and Anglo Saxon traders from around 700 CE. Small, thick silver coins (deniers) were minted on both sides of the North Sea from around this time and have been found scattered along the Frankish trade routes into Frisia.¹ However, even then it was clear that the money produced in different regions would also have different values. In Aquitaine, for example, Frisian coins were much preferred to the debased money coming from what is now France.² By the reign of England's Henry VII (1457–1509) the need for traders to exchange one currency for another had grown so strong that a currency exchange was established within Leadenhall market in London. Indeed, Henry VII is recorded as having speculated on the European currency markets himself, using his favored broker, the Bolognese financier Lodovico della Fava, to carry out the trades.³

The need to exchange one currency for another is therefore almost as old as the emergence of money as a medium for trade. However, in order to exchange one currency for another there needs to be a price at which the deal can be fixed. This is the exchange rate.

THE MECHANISM

Although an exchange rate can in some instances be for a transaction that settles on the same day, within the modern currency markets the normal convention is that the deal will settle in two banking days in ...