The
FX market is a worldwide electronic market, open 24 hrs a day. It has
no central meeting point - the participants (mainly banks) are linked
electronically by phone, telex, information screens etc.
Foreign currencies
are exchanged at a price that changes every second. There are many factors
that cause changes in exchange rates, including economic trends &
interest rates.
Similar to
Commodities (last month's Money Matters topic), currencies can also increase
or decrease in price depending on how many people want them. e.g, if the
whole world wants Playstations from Japan, there will be a huge demand
for the Yen, so the price of Yen will go up.
Banks make money by buying currency at a lower price & selling at
a higher price. This is called an “FX Spread”...
Next time
you're going away (or even just passing your local bank), have a look
at the Bureau de Change to see the difference in rates for 'buying' and
'selling' currency... you can even explain why to your mum & dad!
By
Rabab Abedi.
Rabab has spent 8 years working in investment banking, at Lazard Brother,
Morgan Stanley and Hawkpoint Capital
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