International businessLesson 1 of 2 in the course Exchange Rates and International Capital Flows

Foreign Exchange Markets: Trading, Participants, and Exchange-Rate Effects

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

This lesson introduces the foreign exchange market and explains why exchange rates matter in an economy where countries use different currencies.

Most countries have their own currencies. When people and businesses cross national borders to sell, buy, hire, borrow, travel, or invest, they often need to exchange one currency for another. The market where people and firms use one currency to purchase another is the foreign exchange market, often shortened to the forex market.

All flashcards

Dollarization
A country’s adoption of the U.S. dollar as its currency.
Foreign direct investment (FDI)
Investment involving at least 10% ownership of a foreign firm or starting a foreign enterprise; it often includes a longer-term commitment.
Portfolio investment
A financial investment in foreign assets, such as bonds, without management responsibility.
Currency-office spread
The difference between the rates at which a currency office buys and sells currency.
Hedging
Using a financial arrangement to reduce exposure to exchange-rate risk, often by locking in a future rate.

Quiz questions

  1. A U.S. tourist exchanges dollars for yuan before visiting China. In that transaction, what does the tourist supply and demand?Answer: Supplies U.S. dollars and demands yuan.
  2. What is the name for trading currencies between banks and other foreign-exchange dealers?Answer: The interbank market.
  3. An exchange rate is quoted as Canadian dollars per U.S. dollar. If the quoted number rises, what happens to the U.S. dollar against the Canadian dollar?Answer: It appreciates, because it buys more Canadian dollars.
  4. A 2019 Bank for International Settlements survey reported roughly how much foreign-exchange trading per day?Answer: About $5.3 trillion per day.
  5. When the U.S. dollar strengthens, what generally happens to U.S. exporters’ foreign-currency earnings when converted into dollars?Answer: They convert into fewer dollars than before.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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