The Art of Monetary Policy

By David C. Colander; Dewey Daane | Go to book overview
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A Trader's View of the Foreign Exchange Market

The foreign exchange market spans the globe, with trading virtually around the clock. The amounts of money exchanged are huge, with close to $1 trillion a day changing hands. It has no central marketplace, and yet it is linked together by modern communications equipment--telephones, telexes, faxes, and computers. At any point in time there may be some 10,000 people around the world at their telephones, at their computer terminals, or in trading pits ready to buy or sell in response to the flow of political events, economic data, and rumors that affect their expectations. The pace is hectic.

Foreign exchange is a collection of international markets in time as well as space. If you want to be paid for goods to be delivered three months from now, or even five years from now, you can arrange to enter into a forward exchange contract with a bank, at a separate exchange rate for that date of delivery in the future, as distinct from a cash trade when the goods are delivered. If you want to invest in D-marks for three months, you can arrange a swap, buying spot marks and selling forward marks, which effectively eliminates your exchange risk. If you wish to speculate, you can trade futures on organized exchanges such as the Chicago Mercantile Exchange, based on the open-cry system developed in the U.S. commodity markets. The gamut of options trades (puts and calls) is also available through the banks and through the organized exchanges. Computers assist at every stage of a transaction--from analyzing a trading strategy to clearing the funds after a trade is done.

The Major Players

Banks are at the center of the foreign exchange market. They clear the dollars, the British pounds, the German marks, and the Japanese yen


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The Art of Monetary Policy


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