Foreign Exchange Market of China
The foreign exchange market is a financial market for trading currencies. The market is decentralized and there are financial centers around the world that operate as places of trade, where different types of buyers and sellers can trade the currencies. Ultimately, these trades directly influence how each currency is valued relative to the world market. The foreign exchange market involves international trade and investment which in turn enables the currency conversion. The foreign exchange market is the factor that allows for trade to happen between countries that do not have the same currency, like China and the United States. When the currency is being traded, it ultimately determines the value of the dollar and of the yuan.
The spot exchange rate is the exchange rate where differing parties "agree to trade two currencies at the present moment" with the value of the currency "usually at or close to the current market rate because of the transactions (Farlex, 2011). The spot exchange rate is the rate that different countries would use to trade goods. For instance, China is the United States's biggest foreign investor- with $1.149 trillion dollars of holdings in the U.S. economy as of April 2011 (Wan, 2011).When China was investing in the United States, with the volatile nature of the markets in general, it is important that a spot exchange rate is established before the investment occurs so that one party can commit to a set amount of cash. "Because spot exchange rates and average rates different, says Martin Brookes of Goldman Sachs, another American investment bank, spot rates would jump to the average...the great the gap, the bigger the currency-market upheaval," asserts an article in The Economist (Begg, 1997). Spot exchange rates have the ability to greatly influence the currency-market, in...
If the spot exchange rate is poor for one country, then it has a negative impact on the overall value.
The forward exchange rate is "the exchange rate set today for a foreign currency transaction with payment or delivery at some future date" (Investor Words, 2011). The forward exchange rate essentially guarantees an exchange rate of currency, despite the result of future conditions that may change the future exchange rate in the future. A changing exchange rate could mean that one of the countries involved in the exchange would be hurt in that they may have to make more of a product if the currency of the country they are trading with has a currency that is valued for more or vice versa, leaving both parties involved in a situation that they had not planned for. To that end, it definitely allows for a certain insurance of sorts against risk. For instance, Business Weekis reporting that "Pioneer Investment Management Ltd. And Western Asset Management Co. are increasing bets on the yuan appreciating the analysts forecast the currency will gain at triple the rate reflected in prices of forwards contract" (Yong and Teso, 2010). Ultimately, for the countries that essentially "locked in" to a price with China with a forward exchange rate will be getting the sweet end of the deal. With the value of the yuan growing, it would mean that their trading partner would either have to pay more for the good or service, essentially investing more for the same thing. These locked in forward exchange rates prevent countries from finding themselves in situations where they were not prepared for, as economies can break apart or build itself up rather quickly leading to a particular volatile currency value.
The exchange rate theories can be classified into…
