Capital Flows and the FX Market
Refresher reading access
Introduction
The foreign exchange market, which is the largest trading market in the world, facilitates international trade and capital flows. Numerous participants use this market for a wide variety of financial, business, trade, and hedging purposes. As with any trading market, the foreign exchange market uses various terms and conventions that allow participants to understand quoting mechanisms and the factors affecting pricing and then to conduct trades. International capital flows are the primary determinant of short- to medium-term exchange rate movements, and exchange rate movements affect the trade balance between countries. Given the relative economic stability and objectives of different national governments, countries use a range of exchange rate regimes, which are described in this module. These lessons introduce and expand upon these topics to lay the groundwork for a more detailed understanding of the foreign exchange market.
Learning Outcomes
The candidate should be able to:
- describe the foreign exchange market, including its functions and participants, distinguish between nominal and real exchange rates, and calculate and interpret the percentage change in a currency relative to another currency
- describe exchange rate regimes and explain the effects of exchange rates on countries’ international trade and capital flows
- describe common objectives of capital restrictions imposed by governments
1.25 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.