Trading Money

Introduction to Money

Everybody wants to do business at the best possible exchange rates. Exchanging dollars for euros, pounds for yen, or rupees for rubles is big business - to the tune of more than $2 trillion a day.

Money flows across national borders all the time, so foreign exchange - changing one currency for another - flourishes. The global foreign exchange market, or forex, is not a physical market that you can see. Rather it is a network of interconnected telephones and computers that operate virtually around the clock.

Traders working for big banks and other financial institutions buy and sell currencies in what is by far the largest single financial market in the world. Corporations that do business on a global scale depend on foreign exchange.

Currency exchange is a huge business, handled by traders working for large commercial banks or through electronic brokering systems. You are unlikely to be involved in having to negotiate what a dollar is worth. But you are directly affected by the fact that its value is constantly changing, whether you are travelling abroad or buying imported goods.

A survey of the approximate rate of echange for the U.S. dollar against various currencies is reported every week in The Wall Street Journal and other major newspapers around the world.

The near-universal popularity of credit cards and the growing use of globally linked electronic banking systems has made it easier to handle money matters when you travel. When the transactions appear on your statement, the value of the transactions is converted to dollars, usually at favorable rates. And the reason is that the credit card companies do such a huge volume of international business.

Large-scale currency trading is done by telephone or electronically through a network controlled by banks and other financial institutions. That unseen market is known as over-the-counter market.

The trades can be handled three different ways:
1. Spot transactions - in which the currency trade occurs immediately and is settled in two days.
    They are big money deals with minimum trades of $1 million. The trading day starts when
    New Zealand market opens and runs through the end of New York trading.

2. Forward transactions - Companies doing business in more than one country need to protect
    themselves against sudden changes in the relative value of currencies. They, therefore, hedge
    commitments to invest, sell or borrow with agreements that have predetermined forex rates.

3. Swap contracts - involve converting a cash flow or interest rate in one currency to a cash flow
    or interest rate in another.