Money markets, therefore, represent the short-term spectrum of the financial markets, where securities that mature in a year or less are traded. Key money market characteristics: 2. Each day billions of dollars are traded in the money markets.

Transactions in Foreign Exchange Market

Several important money market instruments are listed below: 3. Forces influencing interest rates in the money markets are varied and may reflect supply and demand conditions in different money market instruments.

There are also broader forces that affect interest rates in all money and capital markets. Rose notes that Treasury bills, with no default risk and an active secondary market, usually yield the lowest rate in the money market and that other instruments appear to move with Treasury bill rates.

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The foreign exchange markets play a critical role in facilitating cross-border trade, investment, and financial transactions. These markets allow firms making transactions in foreign currencies to convert the currencies or deposits they have into the currencies or deposits they want. Most transactions are handled by foreign exchange dealers; on a typical day they handle over a trillion dollars in foreign currency exchanges involving U.

The importance of foreign exchange markets has grown with increased global economic activity, trade, and investment, and with technology that makes real-time exchange of information and trading possible.

A number of factors may influence foreign exchange rates, including the following cited by Rose :. Other money market instruments include bankers' acceptances, and securities repurchase agreements. In addition, futures, options, and swaps markets usually involve money market instruments. Cook, Timothy Q. LaRoche, editors.

What Is Forex Trading?

Federal Reserve Bank of New York. Rose, Peter S. They are the major source of market information. These are the persons who do not themselves buy the foreign currency, but rather strike a deal between the buyer and the seller on a commission basis. The central bank of any country is the apex body in the organization of the exchange market. They work as the lender of the last resort and the custodian of foreign exchange of the country. The central bank has the power to regulate and control the foreign exchange market so as to assure that it works in the orderly fashion.

The foreign exchange market

One of the major functions of the central bank is to prevent the aggressive fluctuations in the foreign exchange market, if necessary, by direct intervention. Intervention in the form of selling the currency when it is overvalued and buying it when it tends to be undervalued.

A currency which speculators believe is going to go up in value would likely see much investment. Therefore, speculators can be seen to operate based on how they think other speculators will act in the currency market. The volatile condition of the Forex market leaves businesses businessess to establish currency management strategies to protect their business from exchange rate fluctuation.

The foreign exchange market moves based on how currency valuations change in relation to other currencies through exchange rates. There are two types of exchange rate: floating and fixed. A floating exchange rate is free of government restrictions. Floating currencies includeU.

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A fixed exchange rate involves government restrictions on the currency in order to protect its value. A fixed exchange rate system is usually used by countries with more vulnerable economies.

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Prominent examples of countries with a fixed exchange rate system include Brazil, Russia and Argentina. The change in exchange rates is dependent on a large number of factors, including import and export levels, interest rates, inflation, domestic political stability, foreign geopolitical factors and tourism.

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