The Foreign Exchange Market

Abstract

The foreign exchange market is where the various national currencies are bought and sold. In this chapter we examine the various participants in the market and the basic forces that operate within it. We examine the basic determinants of exchange rate behaviour and in particular look at the crucial role played by exchange rate expectations in the determination of exchange rates. We then look at the basic operational differences between fixed and floating exchange rate regimes, concluding by examining the relationship between the spot and forward exchange rates.