In our world of mainly national currencies, the foreign exchange market plays the indispensable role of providing the essential machinery for making payments across borders, transferring funds and purchasing power from one currency to another, and determining that singularly important price, the exchange rate. The foreign exchange market is the largest and most liquid financial market in the world. The UK and USA in particular, is by far the largest global market for foreign exchange trading. Foreign exchange trading has been quite volatile in recent years. This report is mean to introduce the foreign exchange markets in UK and USA and compare their differences and similarities so that people can get more information about the international trading.
1 Introduction 5
2 Foreign exchange markets in UK and USA 3.1 Foreign exchange market in UK 5 3.2 Foreign exchange market in USA 7 3.3 Policies under foreign exchange market in UK 8 3.4 Policies under foreign exchange market in USA 9 3.5 Similarities and differences of the policy between UK and USA 10
3 Conclusion 11
The foreign exchange markets exist whenever and wherever financial transactions are conducted which are denominated in a foreign currency. The foreign exchange markets facilitate the exchange of value from one currency to another and allow market participants to buy and sell foreign currencies (Viney, 2009). There are six main participants in foreign exchange markets, which including foreign exchange dealers and brokers, central banks, firms conducting international trade transactions, investors and borrowers in the international money markets and capital markets, foreign currency speculators and arbitrageurs. This report lists UK and USA, which is represented as two examples, to investigate how foreign exchange markets work and compare the policy with their similarities and differences.
2. Foreign exchange markets in UK and USA
2.1 Foreign exchange market in UK
Almost every nation has its own national currency or monetary unit—its dollar, its peso, its rupee—used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in Figure Ⅰ
any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners (Amit, K. & Edward, N.,2002). It means that the primary purpose of the foreign exchange market is to assist international trade and investment, by allowing businesses to convert one currency to another currency. Foreign exchange has however gradually developed into an asset class, a type of investment. As the UK foreign exchange market an example, the bulk of trading was conducted in London which is by far the largest global centre for foreign exchange business. FigureⅠabove shows the daily value for the trade-weighted value of sterling in the foreign exchange rate. It indicates the changing trend of foreign exchange rate in recent years. Twice as Figure Ⅱ
many dollars are traded on the foreign exchange market in the UK than in the US, and more than twice as many euros are traded in the UK than in all the euro-area countries combined. London’s leading position as a centre for foreign exchange trading reflects its position as the main financial centre in Europe and the leading global international financial...