The foreign exchange market facilitates the exchange of one currency for another. It is make up of banks, commercial companies, investment management firms, forex brokers, and investors. It is considered to be the largest financial market in the world. This paper will discuss everything from how the foreign exchange market began to the current market.
History of Foreign Exchange
The foreign exchange market has evolved over the years. From 1876 to 1913, the gold standard was used; meaning countries used gold to back its currency. Each currency was able to be converted to gold at a specified rate. This means that the exchange rate between currencies was determined by how ...view middle of the document...
Even with the looser restrictions of the Smithsonian Agreement, some governments still had trouble keeping exchange rates within bounds. In March of 1973, things changed once again. The Smithsonian Agreement was eliminated. Currencies were then allowed to fluctuate freely according to market demand. This is the system that is still used today.
Foreign Exchange Transactions
Foreign Exchange Quotations
When looking at foreign exchange quotations, the first thing that is important to understand is the bid/ask spread. Institutions that offer foreign exchange services will charge a fee when doing so. They will buy the currency at a lower rate, called the bid price, then sell the currency at a slightly higher rate, called the ask price. That said, the bid/ask spread can be simply defined as the difference between the ask price and the bid price.
For comparison reasons, the bid/ask spread is almost always stated as a percentage. The reasoning for this is that currencies with small values will show a seemingly smaller differential than currencies with larger values. This is illustrated in the table below:
If one were to only look at the differential, then they would assume that the British Pound...