Foreign Exchange Market
The transaction of a currency takes place in the foreign exchange market. The supply of a currency depends on the ups and downs of the market. In the market large financial institutions and banks trade with money.
Factors Affecting Demand and Supply of Foreign Exchange
The supply and demand of foreign exchange depends on lots of factors. They are:
Economic Factors that include economic policies formulated by central Banks and government agencies, economic reports, conditions and other economic indicators.
Political conditions within and around the country also affect the currency market. Regional, central and international politics cast a profound effect on the currency market.
The Market Psychology and the perception of the traders and buyers also affect the currency market in various ways.
All these factors affect the currency market and in turn the supply and demand of foreign exchange falters.
Equilibrium in the Foreign Exchange Market
Whatever the exchange rate may be the aim of world economy is to maintain equilibrium. The foreign exchange market is considered to be in equilibrium when the deposits of all the currencies provide equal rate of return that was expected. The Basic Equilibrium condition depends on interest rate parity. The interest rate parity condition is achieved when the anticipated returns on deposits of any two currencies are same when evaluated in the same currency. This essentially means that the assets are valued as equals. The potential foreign currency holders perceive all of them as equally desirable assets.
BOP Theory of Exchange Rate
Theory of Exchange Rate Determination
Purchasing Power Parity Theory of Exchange Rate
Call Money Market |
Capitalism |
Cartel |
Ceteris paribus