External Transactions

Abstract

An exchange rate is the price of one currency, for our purposes the £ sterling, in terms of another currency or set of currencies. As such, it is in principle determined in the market place for currencies, and moves up or down in accordance with the relative forces of demand and supply. In this case the market place is no longer physical, since currency transactions are these days conducted on electronic screens, and this in turn means that anyone can deal in currencies at any time of the day or night anywhere in the world. Not surprisingly, exchange rates are as a consequence constantly on the move as dealers try to make money by taking advantage of very small movements in rates. Most transactions are for immediate delivery at the current price on the spot market, but it is possible to transact in the forward market where a price is agreed today for delivery at some future date. Buying or selling forward is valuable for firms engaging in trade, since it guarantees for them the amount of pounds sterling which they will have to pay for imports or receive for exports.