Foreign Exchange Markets Summary

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Date Submitted: 08/13/2010 05:16 PM

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Foreign Exchange Markets Summary

Currency trading is the world's largest market. As people learn more about it and find ways to invest within it, the market will continue to grow. All trading that takes place in the foreign exchange market involves the buying of one currency and the selling of another currency concurrently. The reason behind this is that the value of one currency is determined by its comparison to another currency. Furthermore, as we go on, we will touch bases on the function of the world’s major currency exchange markets as well as the positive and negative aspects of using gold standard.

To introduce one to the foreign exchange market we must start by briefly explaining the gold standard. So how does one define the gold standard succinctly? The gold standard can be explained in short as that “each country set a certain number of units of its currency per ounce of gold, and the comparison of the numbers of units per ounce from country to country was the exchange rate between any two currencies on the gold standard (Ball, McCulloch, Frantz, Geringer, Minor, 2005).” Under the gold standard “U.S. households and businesses could exchange their dollars for gold… [however], this practice was abandoned in 1933 during the great depression to allow freer expansion of money supply (FEM, n.d.).” For the time being, foreign markets were still able to exchange their dollars for gold up until 1971 when the United States terminated the gold exchange standard completely (FEM, n.d.). There were many advantages of this system, those of which are that…

• It served as a common measure of value

• It helped keep inflation in check by keeping money supply in the gold-exchange standard economies fairly stable

• Long-term planning was easier as rate changes were infrequent

Some disadvantages of this system were that “...because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid...