Lesson 1: Foreign exchange and the foreign exchange market

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Foreign exchange

Foreign exchange is a foreign currency or a means of payment used in international settlements expressed in foreign currencies. Article 3 of the "Regulations on Foreign Exchange Administration" promulgated by my country in 1996 stipulates the following specific contents of foreign exchange: Foreign exchange refers to ①Foreign currency. Including banknotes and coins. ② Foreign currency payment voucher. Including bills, bank payment vouchers, postal savings vouchers, etc. ③Foreign currency securities. Including government bonds, corporate bonds, stocks, etc. ④ Special drawing rights, European currency units. ⑤ Other assets denominated in foreign currencies.

Exchange rate and pricing method

The exchange rate, also known as the exchange rate, refers to the price of one country's currency expressed in another country's currency or the ratio between the two countries' currencies.

In the foreign exchange market, the exchange rate is displayed with five digits, such as:

EUR 0.9705
Japanese yen JPY 119.95
British Pound GBP 1.5237
Swiss franc CHF 1.5003

The smallest unit of change in the exchange rate is one point, that is, a change in the last digit, such as:

EUR 0.0001
Japanese Yen JPY 0.01
British Pound GBP 0.0001
Swiss franc CHF 0.0001

According to international practice, three English letters are usually used to represent the currency's name, and the English after the Chinese name above is the English code of the money.

There are two types of exchange rate pricing methods: direct pricing method and indirect pricing method.

(1) Direct price method

The direct pricing method, also called the payable pricing method, uses a particular unit (1, 100, 1000, 10,000) of foreign currency as the standard to calculate how many units of domestic currency should be paid. It is equivalent to calculating how much domestic cash is payable to purchase a particular branch of foreign currency, so it is called the common price method. Most countries in the world, including China, currently use the direct pricing method. In the international foreign exchange market, the Japanese yen, Swiss franc, Canadian dollar, etc., are all directly marked, such as yen 119.05, which means that one dollar is 119.05 yen.

Under the direct pricing method, if a particular unit of foreign currency is converted into domestic cash more than the previous period, it means that the value of the foreign currency has risen or the value of the domestic currency has fallen, which is called an increase in the foreign exchange rate; on the contrary, if you need to use less than the original domestic currency, it can be converted to the same The amount of foreign currency, which means that the value of the foreign currency is falling or the value of the domestic currency is rising, is called a fall in the foreign exchange rate, that is, the value of the foreign currency is directly proportional to the rise and fall of the exchange rate.

(2) Indirect pricing method

The indirect pricing method is also called the receivable pricing method. It is based on a particular unit (such as 1 unit) of the domestic currency as the standard to calculate the receivable units of foreign currency. The euro, pound sterling, Australian dollar, etc., are all indirect pricing methods in the international foreign exchange market. For example, the euro 0.9705 means that one euro is 0.9705 US dollars.

In the indirect pricing method, the amount of domestic currency remains unchanged, and the number of foreign currency changes with the comparison of the value of the domestic currency. If the amount of foreign currency that can be converted for a certain amount of domestic money is less than the previous period, it means that the value of the foreign currency rises and the importance of domestic currency declines, that is, the foreign exchange rate rises; conversely, if the amount of foreign currency that can be converted for a certain amount of domestic money is more than that of the previous period, it indicates that the value of the foreign currency has declined. The increase in the value of the domestic currency means that the exchange rate of foreign exchange falls; that is, the value of the foreign currency is inversely proportional to the rise or fall of the exchange rate.

The quotation in the foreign exchange market is generally a two-way quotation; that is, the bidding party quotes its buying price and selling price simultaneously, and the customer decides the buying and selling direction by himself. The smaller the difference between the buying price and the selling price, the smaller the cost for investors. The quotation spread for inter-bank transactions usually is 2-3 points, and the quotation spreads offered by banks (or dealers) to customers vary greatly depending on each situation. Currently, the quote applies for 3-5 points for foreign margin transactions, and Hong Kong is 6- At 8 o'clock, domestic bank actual transactions range from 10-40 o'clock.

The foreign exchange market

At present, there are many kinds of financial commodity markets in the world. Still, they can be broadly divided into the stock market, interest market (including bonds, commercial paper, etc.), gold market (including gold, platinum, silver), futures market (including grain, cotton, etc.). , Oil, etc.), the options market, and the foreign exchange market.

The foreign exchange market refers to a trading place for foreign exchange transactions or a place where various currencies are exchanged. The foreign exchange market exists because:
Trade and investment

Importers and exporters pay for one currency when importing goods and receive another cash when exporting goods. This means that when they settle accounts, they receive and pay in different currencies. Therefore, they need to convert part of the currency they receive into a currency used to purchase goods. Similarly, a company that buys foreign assets must pay in the cash of the country concerned. Therefore, it needs to convert its currency into the currency of the country concerned.


The exchange rate between the two currencies will change with changes in the supply and demand between the two currencies. A trader buys a currency at one exchange rate and sells that currency at another more favorable exchange rate, making a profit. Speculation roughly accounts for the vast majority of transactions in the foreign exchange market.


Due to exchange rate fluctuations between two related currencies, companies with foreign assets (such as factories) may suffer some risks when converting these assets into the national currency. When the value of a foreign investment denominated in a foreign currency remains unchanged for some time, if the exchange rate changes and the importance of this asset are converted to the domestic currency, a profit and loss will occur. Companies can eliminate this potential profit and loss through hedging. This is the execution of a foreign exchange transaction, and the result of the transaction offsets the profit and loss of foreign currency assets caused by exchange rate changes.

The history of the foreign exchange market as an international capital speculation market is much shorter than that of stocks, gold, futures, and interest markets. However, it has developed rapidly at an alarming rate. Today, the daily trading volume of the foreign exchange market has reached US$1.5 trillion, and its scale has far surpassed other financial commodity markets such as stocks and futures. It has become the world's largest single financial market and speculative market.

Since the birth of the foreign exchange market, the exchange rate volatility in the foreign exchange market has increased. In September 1985, one U.S. dollar was exchanged for 220 yen. In May 1986, one U.S. dollar could only be exchanged for 160 yen. In eight months, the yen appreciated by 27%. In recent years, the foreign exchange market has experienced greater volatility. On September 8, 1992, 1 pound was exchanged for 2.0100 U.S. dollars, and on November 10, 1 pound was exchanged for 1.5080 U.S. dollars. In just two months, the British pound was exchanged against the U.S. dollar. The exchange rate dropped by more than 5,000 points, depreciating by 25%. Not only that, at present, the daily exchange rate volatility in the foreign exchange market is also increasing, and it is common for a day to rise and fall by 2% to 3%. On September 16, 1992, the pound fell from 1.8755 to 1.7850 against the dollar, and the pound fell 5% in one day.

It is precisely because the foreign exchange market has frequent and huge volatility; it has created more opportunities for investors and attracted more and more investors to join the ranks.