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Demanders and suppliers of currency in foreign exchange markets

In foreign exchange markets, demand and supply become closely interrelated, because a person or firm who demands one currency must at the same time supply another currency—and vice versa. To get a sense of this, it is useful to consider four groups of people or firms who participate in the market: (1) firms that are involved in international trade of goods and services; (2) tourists visiting other countries; (3) international investors buying ownership (or part-ownership) of a foreign firm; (4) international investors making financial investments that do not involve ownership. Let’s consider these categories in turn.

Firms that buy and sell on international markets find that their costs for workers, suppliers, and investors are measured in the currency of the nation where their production occurs, but their revenues from sales are measured in the currency of the different nation where their sales happened. So, a Chinese firm exporting abroad will earn some other currency—say, U.S. dollars—but will need Chinese yuan to pay the workers, suppliers, and investors who are based in China. In the foreign exchange markets, this firm will be a supplier of U.S. dollars and a demander of Chinese yuan.

International tourists will supply their home currency to receive the currency of the country they are visiting. For example, an American tourist who is visiting China will supply U.S. dollars into the foreign exchange market and demand Chinese yuan.

Financial investments that cross international boundaries, and require exchanging currency, are often divided into two categories. Foreign direct investment (FDI) refers to purchasing a firm (at least ten percent) in another country or starting up a new enterprise in a foreign country For example, in 2008 the Belgian beer-brewing company InBev bought the U.S. beer-maker Anheuser-Busch for $52 billion. To make this purchase of a U.S. firm, InBev would have to supply euros (the currency of Belgium) to the foreign exchange market and demand U.S. dollars.

The other kind of international financial investment, portfolio investment    , involves a purely financial investment that does not entail any management responsibility. An example would be a U.S. financial investor who purchased bonds issued by the government of the United Kingdom, or deposited money in a British bank. To make such investments, the American investor would supply U.S. dollars in the foreign exchange market and demand British pounds.

Portfolio investment is often linked to expectations about how exchange rates will shift. Look at a U.S. financial investor who is considering purchasing bonds issued in the United Kingdom. For simplicity, ignore any interest paid by the bond (which will be small in the short run anyway) and focus on exchange rates. Say that a British pound is currently worth $1.50 in U.S. currency. However, the investor believes that in a month, the British pound will be worth $1.60 in U.S. currency. Thus, as [link] (a) shows, this investor would change $24,000 for 16,000 British pounds. In a month, if the pound is indeed worth $1.60, then the portfolio investor can trade back to U.S. dollars at the new exchange rate, and have $25,600—a nice profit. A portfolio investor who believes that the foreign exchange rate for the pound will work in the opposite direction can also invest accordingly. Say that an investor expects that the pound, now worth $1.50 in U.S. currency, will decline to $1.40. Then, as shown in [link] (b), that investor could start off with £20,000 in British currency (borrowing the money if necessary), convert it to $30,000 in U.S. currency, wait a month, and then convert back to approximately £21,429 in British currency—again making a nice profit. Of course, this kind of investing comes without guarantees, and an investor will suffer losses if the exchange rates do not move as predicted.

Questions & Answers

but if I may ask what brings this poverty in existence and how can such actions be deminish in our generation
Philemon Reply
Poverty comes from many factors, ranging from very low income for the households sector (purchasing power is low), basic needs such as safe drinking water, lack of sustainable development goals (roads, agriculture, technology, power, etc), business sector is poor, etc
Hadji
Such action can be diminished by effectively and efficiently using the four (4) factors of production. Land, Labor , Capital and Technology.
Hadji
Poverty - Increase in the cost of living without subsequent increase in the amount of minimum wage. Poverty can be reduced extremely if the minimum wage equals or equals more than the cost of living.
harmony
land labour capital and organisation factors of production
divya
what are positive and normative statements
Alethia Reply
p
Mohd
positive is realistic normative is imaginary
Prashant
give basic idea about India's national income
Maloy Reply
what are the sources of recessions and booms
Zweli Reply
A few years ago, Ama paid $500 to put together a record collection. Today she sold her albums at a garage sale for $100. how does the same affect GDP?
teresa Reply
It saves time its creates more employment
Gold Reply
Scarcity means human wants exceeds the resources needed to satisfy them 1. Limited resources 2. Numerous human wants
Gold
Scarcity means shortage!!!
Lewis
Gold you're knowlwgist bro keep going lion
Moha
hmm am fresh here oh
Andy
Being newest means u have it all!!!
Lewis
where you from university of malakand.or where are you.
Naeemuddin
What is mean by small open economy ?
Gecho
1. there is specialization of labor 2. skilled labor 3. increase in productivity
Amma Reply
1 to make right choices 2. to handle scarcity 3. make informed decisions
Amma
what is the difference between demand and quantity demanded?
Mursal Reply
Demand is affected by other factors while price is held constant Quantity demanded is affected by price while other factors are held constant
Gold
discuss advantages and disadvantages of international trade.
Ram Reply
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ISRAR
me . I'm *
ISRAR
So kindly help me. where I will click......***
ISRAR
What are the reasons of demand pull inflation
GIRIDHARI Reply
the reasons behind pull inflation are high rate of interest
Ahmed
yes
M-H-S
in other hand when demand of specific commodity is high and its supply is low there will be inflation of price
Ahmed
Thank you
GIRIDHARI
you are welcome
Ahmed
thank you
Mohamed
some hot stuff from Ahmed
JOSHUA
what is barter system
twinkel Reply
a system in which goods are exchanged for other goods
daniel
Barter system is said to be the process whereby goods are being exchange for goods
Asamoah
a system in which money have not play any role
Ramu
goods and services are exchanged .. problem is finding equitable or agreeable value for the exchange of the goods or services.. I teach maths privately and love home made cake, I decided 4 home made cakes was worth an hour of private maths 😁
jax
ok.thank u
twinkel
thanks a lot to everyone .
ISRAR
bater system is a system of trade where by goods are exchange for goods which exist before existence of what we call money
ADEGOKE
accounts in balance of trade
Kamuyu Reply
What is fiscal policy and intrest rates
Attah Reply
fiscal policy is the use of govt. revenue collection and expenditure to influence the economy.
twinkel
it is government spending, taxing, regulatory, borrowing powers on the economy.
JOSHUA
income and expenditure
Bittu Reply
Income is revenue generated from a business while expenditure is money spent
Gold
For short income is gain while expenditure is loss.
Lewis
what is the difference b/w income per capita and income
Moha
What is aggregate
Patrice
aggregate means total
konglan
Macro economics : it is the study of all aggregate of all economic activities of an economic as whole.
Rajat Reply

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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