Macroeconomics › Section P · Exchange rates and international capital flows › Topic P.1
How the foreign exchange market works
Every time a firm sells abroad, a tourist travels or an investor buys a foreign bond, one currency has to be swapped for another. The price of that swap, the exchange rate, is set in the largest market on Earth, and the tools of demand and supply explain it.
In this topic
- Why currencies must be swapped
- Reading an exchange rate
- A market of extraordinary size
- Demand and supply come in pairs
- Direct and portfolio investment
- Appreciation and depreciation
- Worked example: one machine, two prices
- Hedging against currency risk
- Worked example: locking in a rate
- Winners and losers from a stronger dollar
- Common mistakes to avoid
- Key takeaways
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