INTRODUCTION
Almost every nation has its own national currency or monetary unit—its dollar, its peso, its rupee—used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for “foreign exchange” transactions—exchanges of one currency for another.
Markets go back a long time—in English law, the concept was recognized as early as the 11th century—and it is interesting to compare today’s foreign exchange market with historical concepts. More than one hundred years ago, Alfred Marshall wrote that “a perfect market is a district, small or large, in which there are many buyers and many sellers, all so keenly on the alert and so well acquainted in one another’s affairs that the price of a commodity is always practically the same for the whole of the district.”
Today’s over-the-counter global market in foreign exchange meets many of the standards that classical economists expected of a smoothly functioning and effective market. There are many buyers and many sellers. Entry by new participants is generally not too difficult. The over-the-counter market is certainly not confined to a single geographical area as the classical standards required. However, with the advance of technology, information is dispersed quickly and efficiently around the globe, with vast amounts of information on political and economic developments affecting exchange rates. As in commodity markets, identical products are being t ...