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SENSE AND CHARACTERISTICS OF FOREIGN EXCHANGE MARKET


Foreign exchange market is a system of sustainable economic and organizational relationships related to transactions of purchase and sale of foreign currencies. In institutional terms, foreign exchange market is a combination of banks, brokerage firms, TNCs, financial institutions and others, which are linked by the network of modern communications, and conduct transactions on currency exchange and payment documents in foreign currencies, providing the operation of currency market mechanisms.

The factors that contributed to the formation and further development of foreign exchange market are:

• deepening of international economic relations;

• widespread of credit in international transaction;

• increasing of concentration and centralization of bank capital, development of correspondent relations between banks in different countries, the spread of practice of keeping accounts in foreign currency;

• improving communication means - telegraph, telephone, telex, which simplified the contacts between the foreign exchange market and reduced the degree of currency and credit risks;

• development of information technology, high-speed messaging on exchange rates, banks, the state of their correspondent accounts, the trends in the economy and politics and so on.

Subjects of foreign exchange market are: public institutions (especially among them are the central banks and treasuries of various countries); legal entities and individuals in different countries, which conduct foreign activities; commercial banking institutions that serve the external relations of their clients; multinational banks; currency exchange and foreign exchange departments of commodity and stock exchanges and others.

Functions of foreign exchange market are:

• implementation of monetary policy;

• forming the supply and demand on foreign currencies;

• ensuring international payments;

• regulating exchange rates;

• insurance of foreign currency and credit risks;

•diversification of foreign currency reserves of banks, enterprises and governments;

• ensuring the effective functioning of the global credit and financial markets;

• combination of world currency, credit and financial markets.

 

Fig.6.1. Foreign exchange markets and their structure

 

Depending on the scale, nature of foreign exchange and currencies used, foreign exchange markets are divided into international, regional and national.

Depending on the entities that operate on them there are interbank market and stock market. In the interbank market (which in turn is divided into brokerage and direct markets) operations are carried out by banks by means of communication technologies, and this form of the foreign exchange market is the most widespread (it accounts for about 90% of all foreign agreements). As for the stock market, its subjects are representatives of the central banks of the countries, who fix the exchange rates of foreign currencies, which are the benchmark for all subjects of the national currency market.

 

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DEVELOPMENT OF WORLD MONETARY SYSTEM | TYPES OF CURRENCY TRANSACTIONS

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