6.2 The nature and functions of the foreign exchange market
The word 'market' means a place where goods are offered for sale but it also means the business of buying and selling a specified commodity. Nearly all international business activity requires the transfer of money from one country to another, so 'foreign exchange market' means a place where one form of money (for example $A) is changed for another form (for example $US). The term also encompasses the business of converting from one currency to another. Thus we speak of the major trading centres ( London , New York and Tokyo ) and the secondary trading centres ( Zurich , Frankfurt, Paris , Hong Kong , Singapore , San Francisco and Sydney ).
When we speak of converting one currency to another, we mean the business of changing pounds or yen into dollars, regardless of the place where the transaction occurs. We are then in the foreign exchange market . The exchange rate is the rate at which that market converts one currency into another. For example, in January 2005, it took $A1.00 to buy $US0.76. Alternatively, $US1 would buy $A1.32.
Foreign exchange (FX) transactions normally take place between commercial banks and their customers, and among commercial banks themselves which buy and sell foreign currencies either locally or internationally.
At this point we should look at some basic terms used in the foreign exchange market.
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