1. Foreign Exchange Markets The Foreign Exchange Market is the generic term for the worldwide institutions that exist to exchange or trade the currencies of different countries

2. Functions of FXMs n Clearing –the act of helping international traders to end up with the kind of currency they prefer; n Hedging –the act of reducing or eliminating a net asset or a net liability position in a foreign currency; and n Speculating –the act of taking a net asset position (long) or a net liability (short) position in a foreign currency

3. Exchange Rate An exchange rate is the price of one money in terms of another. Exchange rate is expressed in terms of the number of units of a currency required to purchase a unit of another currency.

4. Balanced Trade t Goods, services and assets move internationally from exporters to importers; t Payments move domestically from importers to exporters; t The FXM’s holdings of each country’s currency are unchanged; and t Residents holdings of the domestic currency are unchanged.

5. Trade Imbalance t Goods, services and assets move internationally from exporters to importers; t Payments move domestically from importers to exporters; t The FXMs holdings of each currency change; t Residents holdings of domestic currency change