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foreign exchange

foreign exchange, methods and instruments used to adjust the payment of debts between two nations that employ different currency systems. A nation's balance of payments has an important effect on the exchange rate of its currency. Bills of exchange, drafts, checks, and telegraphic orders are the principal means of payment in international transactions. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the relative supply and demand of the currencies in the foreign exchange market. Buying or selling foreign currency in order to profit from sudden changes in the rate of exchange is known as arbitrage. The chief demand for foreign exchange within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies purchasing goods and services abroad, and travelers. Exchange rates were traditionally fixed under the gold standard and later by international agreements, but in 1973 the major industrial nations of the West adopted a system of "floating" rates that allowed for fluctuation within a limited range. The currencies of Western nations are generally allowed to fluctuate freely, although central banks will intervene in the foreign exchange markets in an attempt to control excessive or undesirable appreciation or depreciation.

See S. W. Arndt et al., ed., Exchange Rates, Trade and the U.S. Economy (1985); N. Abuaf and S. Schoess, Foreign-Exchange Exposure Management (1988).

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foreign exchange

foreign exchange Buying and selling national currencies. All currencies have an underlying value relative to the value of gold, registered with the International Monetary Fund (IMF). This value may deviate, and governments can control the amount of deviation by tactical trading on foreign exchange markets. Speculators may trade on foreign exchange markets in the hope of profiting from short-term fluctuations in the value, an activity known as arbitrage. International commercial companies and financial institutions also buy and sell foreign currencies.

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foreign exchange

for·eign ex·change • n. the currency of other countries. ∎  an institution or system for dealing in such currency.

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