Glamor Economics

Chapter 125

Chapter 16 Section 5 Means of Payment for International Settlement - Foreign Exchange and Foreign Exchange Market
As the process of global integration continues to accelerate, the foreign exchange market has developed into the world's largest financial market.In the traditional concept, foreign exchange transactions are considered to be transactions between banks and consortiums. With the development of the foreign exchange market, foreign exchange transactions have now connected global foreign exchange traders, including banks, central banks, brokers and corporate organizations. Exporters and individual investors, many institutions and organizations including the Federal Bank of the United States have made huge profits through foreign exchange.Today, the foreign exchange market not only provides profit opportunities for banks and consortiums, but also brings profit opportunities for individual investors.So, how did the foreign exchange market come about?This starts with the increasingly frequent international trade.

Because of trade, investment, tourism and other economic exchanges between countries, there will always be monetary receipts and payments.However, the currency systems of various countries are different. If you want to pay abroad, you must first purchase foreign currency with your own currency, and you must also convert the foreign currency payment certificate received from abroad to the domestic currency before it can be circulated in the country.This creates the problem of exchanging domestic currency with foreign currency.The parity between the currencies of the two countries is called the exchange rate or exchange rate.

As a means of payment for international settlement, foreign exchange is an indispensable tool for international economic exchanges.The foreign exchange market is a place where the currencies of different countries are traded and the foreign exchange rate is determined. The foreign exchange market has the functions of international settlement, exchange, credit, hedging and speculation.

The frequent trade exchanges and the increase of international investment have formed an inseparable relationship between the economies of various countries, and thus created the world's largest trading market - the foreign exchange market.

The foreign exchange market has undergone several changes since its inception.After World War II, with the rise of the US dollar, the era of the Bretton Woods system began to come.The United States and its allies all follow the "Bretton Woods Agreement" as a guideline, that is, the exchange rate of a country's currency is pegged to the amount of its gold reserves.In the summer of 1971, President Nixon promulgated the New Economic Policy, suspending the conversion of the US dollar and gold, resulting in a floating exchange rate system.The exchange rate of a country's currency is now determined by its supply and demand and its relative value.

From a functional point of view, foreign exchange is a payment certificate expressed in foreign currency for international settlement.The International Monetary Fund's interpretation of foreign exchange is: foreign exchange is the international currency held by the monetary administration (central bank, monetary institution, foreign exchange stabilization fund and the Ministry of Finance) in the form of bank deposits, treasury bills of the Ministry of Finance, long-term and short-term government securities, etc. Creditor's rights that can be used when the balance of payments is in deficit.

Foreign exchange mainly includes the following contents: foreign currency, including banknotes, coins, etc.; foreign currency securities, including government bonds, treasury bills, corporate bonds, stocks, coupons, etc.; foreign currency payment certificates, including bills, bank deposit certificates, postal savings certificates, etc. ; Other foreign exchange funds.

The foreign exchange market is a place where currencies of different countries are traded and foreign exchange rates are determined.In the foreign exchange market, net capital outflows equal net exports.When China has a trade surplus, China sells more goods and services than China buys foreign goods and services, and at the same time receives a large amount of foreign currency.If these currencies are used to purchase foreign assets, it means that Chinese capital flows abroad; when China’s trade deficit occurs, the money China spends on purchasing foreign goods and services is less than the money China receives from selling goods and services. It is necessary to sell China's foreign assets to raise funds, so that foreign capital can enter China.

Like other markets, exchange rates in the foreign exchange market are mostly not fixed and fluctuate weekly or monthly.We can use the supply and demand curve to illustrate how the market determines the price of foreign exchange.

The supply and demand for currencies of various countries in the foreign exchange market determine the real exchange rate.As shown in the figure above, taking the U.S. dollar as an example, it shows that the supply of U.S. dollars comes from the net capital outflow of the United States.Net capital outflow is not determined by the real exchange rate, therefore, the supply curve is a vertical line.The demand for dollars is determined by net exports.When the real exchange rate is low, net exports will increase and the demand curve will slope to the right.When the real exchange rate is at equilibrium, Americans supply exactly the same amount of dollars to buy foreign assets as foreign countries demand to buy net exports.

Therefore, only when the real exchange rate is at an equilibrium level can the demand for dollars caused by net exports of goods and services from the United States exactly equal the supply of dollars caused by net capital outflows from the United States.

The role of the foreign exchange market mainly has the following points:

(1) International settlement.Because foreign exchange is used as a means of payment and liquidation for international economic exchanges, liquidation is the most basic function of the foreign exchange market.

(2) Exchange function.Buying and selling currencies in the foreign exchange market, converting one currency into another as a means of payment, realizes the effective conversion of different currencies in terms of purchasing power.

(3) Credit granting.Since the bank operates foreign exchange business, it is possible to provide loans to importers and exporters by taking advantage of the time difference between foreign exchange receipts and payments.

(4) Hedging.That is, value-preserving futures trading.When the exporter has a forward foreign exchange income, in order to avoid possible risks caused by changes in the exchange rate, this foreign exchange can be sold as futures; conversely, the importer can also buy foreign exchange futures in the foreign exchange market to deal with futures payment needs.

(5) Speculation.That is, buying and selling foreign exchange in anticipation of price changes.In the foreign exchange futures market, speculators can take advantage of changes in the exchange rate to make profits, create "long positions" and "short positions", and place bets on future market conditions. "Long position" means that the exchange rate of a certain foreign exchange is expected to rise, that is, it is bought at the current price, and when the forward delivery is made, the exchange rate of this foreign currency rises, and it is sold immediately at the spot price, so as to obtain the difference in exchange rate changes.On the contrary, "short" means that the exchange rate of a certain foreign currency is expected to fall, that is, the foreign currency for forward delivery is sold at the current price. After the expiration, the price falls, and the foreign currency is bought at the spot price to make up.This kind of speculation is carried out by taking advantage of the fluctuations in the foreign exchange market at different times.

[links to related words]

The invisible foreign exchange market, also known as the abstract foreign exchange market, refers to the foreign exchange market without a fixed and specific place.This kind of market was initially popular in the United Kingdom and the United States, so its organizational form is called the Anglo-American way.Now, this form of organization has spread not only to Canada, Tokyo and other regions, but also to the European continent.

The tangible foreign exchange market, also known as the specific foreign exchange market, refers to the foreign exchange market with specific fixed places.This kind of market was originally popular in continental Europe, so its organizational form is called the continental way.

(End of this chapter)