The foreign exchange market [STARTS AT 0:14] DAVID HOMBURG: Every day euros are being exchanged for dollars, dollars for yens, and yens for euros. This represents part of the exchanges done on a market called foreign exchange market. But how is this market organized? How are exchange rates between the different currencies set? This is a foreign exchange market explained in plain English. By Fabienne Deville. John and Mary are going to spend the weekend in London. They estimate the amount of their expenses at 300 euros. As Great Britain is not part of the Eurozone, they have to buy British pounds. They go to the bank to exchange 300 euros for British pounds. At the time of the transaction, 1 euro is 0.8661 pounds. John and Mary will get 259 pound 83 for their 300 euros. Amount free of brokerage fees. This by sale transaction took place on the foreign exchange market. Behind this transaction there is Peter. Peter works at Scrooge bank as a trader. Every day he gets British pound buying requests, and euro buying requests. As for all goods, price here and the exchange rate of a currency, is set by supply and demand. If the request of English pounds goes up against euros, an imbalance is created, and the British pounds exchange rate increases. The British pound will get stronger compared to the euro. Watch out. Tourists are not the only actors on the foreign exchange market. Goods and services companies, states, investors, and even speculators act on the For-X And so supply and demand is not the only item affecting the currency rate. Other items also take place to work out currency rates. Current interest rates, the political situation of countries, economic indicators such as the gross domestic product, inflation rate, et cetera. Be careful. This is only true in a floating rate system. A notion to be discovered further in this course. To summarize, the foreign exchange market is made up by the set of buy/sales and loan/borrow transactions in currencies. [MUSIC PLAYING]