U3 Foreign exchange trading - TACN3 (Kinh tế và kinh doanh quốc tế) FTU

FOREIGN EXCHANGE TRADING Foreign Exchange • money or currency of a foreign country Exchange rates • The exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. • For example an exchange rate of 102 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 102 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day. • The spot exchange rate refers to the current exchange rate. • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. Nominal and real exchange rates • The nominal exchange rate e is the price in foreign currency of one unit of a domestic currency. • The real exchange rate (RER) is defined as , RER = e(P/Pf ) where Pf is the foreign price level and P the domestic price level. P and Pf must have the same arbitrary value in some chosen base year. Hence in the base year, RER = e. MONEY Main functions of money: •Medium of exchange •Unit of account •Store of value •Purchasing power •Devaluation •Revaluation