Essays on Foreign Exchange Market, Theory of Purchasing Power Parity Assignment

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The paper "Foreign Exchange Market, Theory of Purchasing Power Parity " is a good example of finance and accounting assignment. A: In America, the direct quote is typically used in the spot currency market. The value of the American dollar is stated as a single unit of measurement, which is used to compare the value of another foreign currency. In this type of quotation, the United States currency is used as a unit of value, which can be used to purchase another currency. The direct currency quotation is also used to determine which currency is domestic and which is foreign. B: In Europe, a widely traded currency is the dollar.

However, an indirect quote can be used in the currency market (Gallo, 2014). This is whereby the currency in use is stated as the per-unit value of the United States dollar. In this type of quotation, one is able to determine the value of foreign currency in relation to the Euro or dollar. An example of a European currency quote would be CAD 1.3 per USD 1. In this example, it shows that it would take 1.3 Canadian dollars to purchase one United States dollar. C: The Australian currency quotation, similar to that of the United States currency. Question 2 The foreign exchange market is the financial market system where there exist buyers and sellers of foreign currencies.

Some of the main participants include individuals, organizations, brokers of foreign exchange, the central banks, and commercial banks, among others. Here, dealers are able to become intermediaries within the international market and facilitate the buying and selling of currencies from one country to another. The foreign exchange market is commonly referred to as FOREX.

It operates on a global scale and facilitates the transfer of resources and assets through international trade as well. One of the main functions of the foreign exchange market is to transferring of money from one local market to another (Gallo, 2014). This transfer of funds facilitates trade and payments for two or more parties that are operating and interacting in different parts of the world. Another characteristic of funds transfer is that there is the ability to accurately convert the value of one currency to fit the equivalence of another.

On a global scale, currencies come in many different values such that the Japanese Yen is not equivalent to the American dollar of the Euro. As such, the conversion of these currencies facilitates the easier transfer of funds from a local financial account to a foreign one. The function of conversion is particularly important from an economic perspective. For local and international traders, payment of goods and services which have been imported from other countries is first converted by the foreign exchange market before it is charged or credited to another account. The foreign exchange market also performs the function of providing credit for foreign trade.

Within systems of international payments, there exist bills which are provided to individuals or parties, which contain a certain period of maturity. In this case, an individual or party that requires funds to make purchases of international products and services will be able to receive these funds, which they can pay at a later date. This is yet another important function for international trade because it allows business people to make purchases of goods and services within an efficient period, thus keeping their businesses going smoothly.

Lack of this function would lead to many challenges in obtaining goods from other countries, and thus interfere with local industries, and subsequently the larger national economies.

References

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Gallo, C. (2014). The Forex market in practice: a computing approach for automated trading strategies. International Journal of Economics and Management Sciences, 3(169), 1-9.

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