<s> A Foreign Exchange Primer
Wiley Finance SeriesThe Simple Rules of Risk: Revisiting the Art of Financial Risk ManagementErik BanksMeasuring Market RiskKevin DowdAn Introduction to Market Risk ManagementKevin DowdBehavioural FinanceJames MontierAsset Management: Equities DemystiﬁedShanta AcharyaAn Introduction to Capital Markets: Products, Strategies, ParticipantsAndrew M ChisholmHedge Funds: Myths and LimitsFrancois-Serge LhabitantThe Manager’s Concise Guide to RiskJihad S NaderSecurities Operations: A guide to trade and position managementMichael SimmonsModeling, Measuring and Hedging Operational RiskMarcelo CruzMonte Carlo Methods in FinancePeter JäckelBuilding and Using Dynamic Interest Rate ModelsKen Kortanek and Vladimir MedvedevStructured Equity Derivatives: The Deﬁnitive Guide to Exotic Options and Structured NotesHarry KatAdvanced Modelling in Finance Using Excel and VBAMary Jackson and Mike StauntonOperational Risk: Measurement and ModellingJack KingAdvance Credit Risk Analysis: Financial Approaches and Mathematical Models to Assess, Price and ManageCredit RiskDidier Cossin and Hugues PirotteDictionary of Financial EngineeringJohn F. MarshallPricing Financial Derivatives: The Finite Difference MethodDomingo A Tavella and Curt RandallInterest Rate ModellingJessica James and Nick WebberVolatility and Correlation in the Pricing of Equity, FX and Interest-Rate OptionsRiccardo RebonatoInterest-Rate Option Models: Understanding, Analysing and Using Models for Exotic Interest-Rate Options(second edition)Riccardo Rebonato
A Foreign Exchange PrimerShani Shamah
Published 2003
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,West Sussex PO19 8SQ, EnglandTelephone
(+44) 1243 779777
Email (for orders and customer service enquiries): cs-books@wiley.co.ukVisit our Home Page on www.wileyeurope.com or www.wiley.comCopyright C Shani ShamahAll Rights Reserved. No part of this publication may be reproduced, stored in a retrieval systemor transmitted in any form or by any means, electronic, mechanical, photocopying, recording,scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 TottenhamCourt Road, London W1T 4LP, UK, without the permission in writing of the Publisher.Requests to the Publisher should be addressed to the Permissions Department, John Wiley &Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailedto permreq@wiley.co.uk, or faxed to (+44) 1243 770620.This publication is designed to provide accurate and authoritative information in regard tothe subject matter covered. It is sold on the understanding that the Publisher is not engagedin rendering professional services. If professional advice or other expert assistance isrequired, the services of a competent professional should be sought.Other Wiley Editorial OfﬁcesJohn Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USAJossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USAWiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, GermanyJohn Wiley & Sons Australia Ltd, 33 Park Road, Milton, Queensland 4064, AustraliaJohn Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books.
Library of Congress Cataloging-in-Publication DataShamah, Shani.A foreign exchange primer / Shani Shamah.p. cm.—(Wiley ﬁnance series)Includes index.ISBN 0-470-85162-7 (cased : alk. paper)1. Foreign exchange futures. 2. Foreign exchange market.
I. Title.
HG3853 .S53 2003332.4 5—dc21
II. Series.
2002191093
British Library Cataloguing in Publication DataA catalogue record for this book is available from the British LibraryISBN 0-470-85162-7Typeset in 10/12pt Times by TechBooks, New Delhi, IndiaPrinted and bound in Great Britain by Antony Rowe, Chippenham, WiltshireThis book is printed on acid-free paper responsibly manufactured from sustainable forestryin which at least two trees are planted for each one used for paper production.
Contents
Disclaimer
xiii
1 Introduction1.1 The Foreign Exchange Market1.2 Value Terms1.3 Coffee Houses1.4 Spot and Forward Market1.5 Alternative MarketsConcluding Remarks
1111233
PART I: MARKET OVERVIEW
5
2 A Brief History of the Market2.1 The Barter System2.2 The Introduction of Coinage2.3 The Expanding British Empire2.4 The Gold Standard2.5 The Bretton Woods System2.6 The International Monetary Fund and The World Bank2.7 The Dollar Rules OK2.8 Special Drawing Rights2.9 A Dollar Problem2.9.1 The Smithsonian Agreement2.9.2 The Snake2.9.3 The Dirty Float2.10 The EMS and the ERM2.10.1 The European Monetary System2.10.2 The Exchange Rate Mechanism2.11 The European Currency Unit2.12 The Maastricht Treaty2.13 The Treaty of Rome2.14 Economic Reform
777889910101111111112121212131314
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Contents
2.15 A Common Monetary Policy2.16 The Single CurrencyConcluding Remarks
151518
3 Market Overview3.1 Global Market3.2 No Physical Trading Floor3.3 A ‘Perfect’ Market3.4 The Main Instruments3.5 The Dollar’s Role3.6 Widely Traded Currency PairsConcluding Remarks
1919192021212123
4 Major Participants4.1 Governments4.2 Banks4.2.1 Central Banks4.2.2 Trading Banks4.2.3 Commercial Banks4.2.4 Regional or Correspondent Banks4.2.5 Investment and Merchant Banks4.3 Brokering Houses4.4 International Monetary Market4.5 Money Managers4.6 Corporations4.7 Retail Clients4.8 Others4.9 Speculators4.10 Trade and Financial Flows
25252525272727282828292929303031
5 Roles Played5.1 Market Makers5.2 Price Takers5.3 A Number of RolesConcluding Remarks
3333333334
6 Purposes6.1 Transactions6.1.1 Commercial Transactions6.1.2 Funding6.1.3 Hedging6.1.4 Portfolio Investment6.1.5 Personal6.2 Market Making6.3 Foreign Exchange Exposure6.3.1 Transaction Exposure
35353535353636363636
Contents
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6.3.2 Translation Exposure6.3.3 Economic ExposureConcluding Remarks
373737
PART II: FOREIGN EXCHANGE PRODUCTS
39
7 Spot Foreign Exchange7.1 Spot and Reciprocal Rates7.2 European and American Terms7.3 Spot Transactions7.3.1 Bid – Offer Spreads7.3.2 Reading Foreign Exchange Rates7.3.3 Big Figures7.3.4 Spread7.4 Direct versus Brokered Dealing7.5 Cross Rates7.6 Price Determinants7.7 Uses for Spot Transactions7.7.1 Risk Consideration
41414242424344444444454546
8 Forward Contracts8.1 Interest Rate Differentials8.2 Periods8.3 Premium or Discount8.4 Calculations8.4.1 Bids and Offers8.4.2 To add or to Subtract8.5 How are Forwards Quoted?8.6 Forward Cross Rates8.7 Uses of Forwards8.7.1 Risks InvolvedConcluding Remarks
474747474850505051535454
9 Short- and Long-Dated Contracts9.1 Short-Dated Contracts9.2 Interest Rate Differentials9.3 Long-Dated ContractsConcluding Remarks
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10 Broken-Dated Contracts10.1 Calculations10.2 Outright Forwards10.3 A Conversation
59595960
Glossary of Terms for Chapters 7 to 10
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11 Non-Deliverable Forwards11.1 Fixing Methodology11.2 Risk Management Tool11.3 Availability11.4 Examples11.5 Typical Risks Encountered11.6 The Currencies of Emerging Markets11.7 Index-Linked DepositsConcluding Remarks
636363646466676868
12 Foreign Exchange Swaps12.1 The Value of Foreign Exchange Swaps12.2 Calculations12.2.1 Points of Note12.3 Uses of Foreign Exchange SwapsConcluding Remarks
717172737374
13 Currency Swaps13.1 Technique Involved13.2 Interest Payable13.3 Beneﬁts of Currency Swaps13.3.1 FlexibilityConcluding Remarks
757576777777
14 Foreign Exchange Options14.1 Deﬁnitions14.2 Exchange vs Over-the-Counter Options14.3 Application of Foreign Exchange Options14.4 Alternatives to Foreign Exchange Options14.5 Parties and the Risks Involved14.6 Users of Foreign Exchange Options14.7 Hedging versus Speculation14.8 Option Theory14.8.1 Delta14.8.2 Gamma14.8.3 Volatility14.8.4 Time Decay (Theta)14.8.5 American versus European14.9 Pricing Theory14.10 Other Considerations14.10.1 Market Conventions14.10.2 Premium Conversions14.10.3 Settlement14.10.4 RisksConcluding Remarks
797980818484858787878888898990919192939393
Contents
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15 Picturing Proﬁt and Loss of Options15.1 Long Call15.2 Short Call15.3 Long Put15.4 Short Put15.5 Long Straddle15.6 Short Straddle15.7 Long Strangle15.8 Short Strangle15.9 Bull Spread15.10 Bear Spread15.11 Long Butterﬂy15.12 Short Butterﬂy15.13 Long Condor15.14 Short Condor15.15 Call Ratio Spread15.16 Put Ratio Spread15.17 Barriers
95959697979899100100101102102103104105105106107
Glossary of Terms for Chapters 14 and 15
109
16 Foreign Exchange Futures16.1 Two-Sided Risk16.2 Exchange Members16.3 Clearing Corporation16.3.1 Major Exchanges16.4 Quoting Currency Futures16.5 Ticks and Delivery Months16.6 Contract SpeciﬁcationsConcluding Remarks
113113114114114115115115116
17 Exchange for Physical17.1 Examples17.1.1 Example 117.1.2 Example 217.2 Point of the ExerciseConcluding Remarks
117117117117118118
PART III: ESSENTIAL KNOWLEDGE
119
18 Foreign Exchange Dealing Rooms18.1 Composition of a Dealing Room18.1.1 Spot Dealers18.1.2 Forward Dealers18.1.3 Money-market Dealers
121121121121121
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Contents
18.2
18.1.4 Treasury Product Dealers18.1.5 Corporate Dealers18.1.6 Research Personnel18.1.7 Position ClerksBack Ofﬁce
121122123123123
19 Managing the Relationship with an Institution19.1 Role of the Adviser19.2 Client–Adviser Relationship19.3 Marketing Process
125125127127
20 Foreign Exchange Dealings20.1 Asking for a Quote20.2 Examples20.2.1 Example 120.2.2 Example 220.3 A Matter of Seconds20.4 Information Needed20.5 Forward AskingConcluding Remarks
129129129129130131131131131
21 Foreign Exchange Market Orders21.1 Market Orders21.2 At Best Orders21.3 Stop Orders21.4 Discretionary Price OrderConcluding Remarks
133133133133134134
Glossary of Terms for Chapter 21
135
22 Electronic Foreign Exchange Trading22.1 Days Gone By22.2 The Environment Today22.3 Internet Revolution22.3.1 Internet Trading Platforms22.4 What Else to Expect?Concluding Remarks
137137137138138139139
23 Margin Trading23.1 Understand How Margin Works23.2 Simple Example23.3 Recognize the Risks23.4 General Margin Rules23.5 Margin Calls in Volatile MarketsConcluding Remarks
141141142142142142143
Contents
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PART IV: FUNDAMENTALS AND TECHNICAL ANALYSIS
145
24 Fundamental versus Technical Approaches24.1 Fundamental Approach24.1.1 Subjective Interpretation24.2 Technical ApproachConcluding Remarks
147147148149149
25 Fundamental Analysis25.1 Purchasing Power Parity25.2 Interest Rate Parity25.3 Balance of Payments Model25.4 Asset Market Model25.5 Economic Inﬂuences on the Market25.5.1 Consumer Price Index25.5.2 Durable Goods Orders25.5.3 Gross Domestic Product25.5.4 Housing Starts25.5.5 Payroll/employment25.5.6 Producer Price Index25.5.7 Retail Sales25.5.8 Trade BalanceConcluding Remarks
151151151151152152152152153153153153153154154
26 Key Factors Impacting Currencies26.1 Factors Affecting the Yen against the Dollar26.2 Factors Affecting the Swiss Franc against the Dollar26.3 Factors Affecting the Euro against the Dollar26.4 Factors Affecting sterling against the Dollar26.5 Factors Affecting the American Dollar
155155156157158159
27 Technical Analysis27.1 Assumptions27.2 The Basic Theories27.2.1 Fibanacci Retracement27.2.2 Elliot Wave27.3 What to Look For27.4 Drawing Lines27.5 Head-and-Shoulders Formation27.6 Formation Patterns27.6.1 The Symmetrical Triangle27.6.2 The Descending Triangle27.6.3 The Right-angle Triangle27.6.4 The Wedge
163163164164164164165165167167167168168
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27.6.5 The Channel27.6.6 Flags and Pennants27.7 Examples27.8 Technical Indicators27.8.1 Relative Strength Index27.8.2 Moving Average27.8.3 Bollinger Bands27.8.4 Moving Average Convergence Divergence27.8.5 StochasticsConcluding Remarks
168168169171172172172172173173
Glossary of Terms for Chapters 24 to 27
175
28 Final Remarks28.1 And What of the Future?
177178
Index
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DisclaimerThis publication is for information purposes only and contains advice, recommendations and/oropinions that may be used as the basis for trading.The publication should not be construed as solicitation or as offering advice for the purposesof the purchase or sale of any ﬁnancial product. The information and opinions contained withinthis publication were considered to be valid when published.The charts, additional examples and pictures have been kindly supplied by MMS,4castweb.com and IFX Markets Ltd.While MMS, 4castweb.com and IFX Markets Ltd have attempted to be as accurate as possiblewith the information presented here, they do not guarantee its accuracy or completeness andmake no warranties of merchantability or ﬁtness for a particular purpose. In no event shall theybe liable for direct, indirect or incidental, special or consequential damages resulting fromthe information herein regardless of whether such damages were foreseen or unforeseen. Anyopinions expressed in this publication are given in good faith, but are subject to change withoutnotice.Please note: All rates and ﬁgures used in the examples are for illustrative purposes only. Thecontents are copyright Shani Shamah 2003 and should not be used or distributed without theauthor’s prior agreement.
1Introduction1.1 THE FOREIGN EXCHANGE MARKETThis is by far the largest market in the world, with an estimated $1.6 trillion average dailyturnover. It is distinguished from the commodity or equity markets by having no ﬁxed base.In other words, the foreign exchange market exists at the end of a telephone, the Internet orother means of instant communication; it is not located in a building, nor is it limited by ﬁxedtrading hours. The foreign exchange market is truly a 24-hour global trading system. It knowsno barriers and trading activity in general moves with the sun from one major ﬁnancial centre tothe next. The foreign exchange market is an over-the-counter market where buyers and sellersconduct business.The foreign exchange market is a global network of buyers and sellers of currencies.Foreign exchange or FX or Forex comprises all claims to foreign currency payableabroad, whether consisting of funds held in foreign currency with banks abroad, orbills or cheques payable abroad; i.e. it is the exchange of one currency for another.A foreign exchange transaction is a contract to exchange one currency for anothercurrency at an agreed rate on an agreed date.
1.2 VALUE TERMSThroughout history, one person has traded with another, sometimes to obtain desired rawmaterials by barter, sometimes to sell ﬁnished products for money, and sometimes to buyand sell commodities or goods for no other reason than to make a proﬁt from the transactionsinvolved. The pre-historic ‘bartering’ of goods and the use of cowrie shells or similar objects ofvalue as payment eventually gave way, approximately 4000 years ago, to the use of coins struckin precious metals. Even in those far-off days, there was international trade and payments weresettled in any coinage that was acceptable to both parties. Early Greek coins, which werealmost universally accepted in the then known world, were soon given values in terms of theirmodels, and a price for any raw material or ﬁnished goods could be quoted in value terms ofeither Greek originals or other nations’ copies.The ﬁrst forward foreign exchange transactions can be traced back to the money-changersin Lombardy in the 1500s. Foreign exchange, as we know it today, has its roots in the GoldStandard, which was introduced in 1880. It was a system of ﬁxed exchange rates in relation togold and the absence of any exchange controls.
1.3 COFFEE HOUSESBanking and ﬁnancial markets closer to those of today were started in the coffee houses ofEuropean ﬁnancial centres, such as the City of London. In the seventeenth century these coffee
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A Foreign Exchange Primer
houses became the meeting places not only of merchants seeking to trade their ﬁnished goods,but also of those who bought and sold solely for proﬁt. It is the City of London’s dominationof these early markets that saw it maturing through the powerful late Victorian era, and it wasstrong enough to survive two world wars and the depression of the 1930s.
1.4 SPOT AND FORWARD MARKETToday, foreign exchange is an integral part of our daily lives. Without foreign exchange,international trade would not be possible. For example, a Swiss watchmaker will incur expensesin Swiss francs. When the company wants to sell the watches, they want to receive Swiss francsto meet those expenses. However, if they sell to an English merchant, the English company willwant to pay in sterling, the home currency. In between, a transaction has to occur that convertsone currency into the other. That transaction is undertaken in the foreign exchange market.However, foreign exchange does not only involve trade. Trade, today, is only a small part ofthe foreign exchange market; movements of international capital seeking the most proﬁtablehome for the shortest term dominates.The main participants in the foreign exchange market are:
r commercial banksr commercial organizationsr brokersr International Monetary Market (IMM)r speculatorsr central banksr fundsr money managersr investors.Most participants transact in foreign currency, not only for immediate delivery but also forsettlement at speciﬁc times in the future. By using the forward markets, the participant canA spot transaction is where delivery of the currencies is two business days from thetrade date (except the Canadian dollar, which is one day).A forward transaction is any transaction that settles on a date beyond spot.determine today the currency equivalent of future foreign currency ﬂows by transferring therisk of currency ﬂuctuations (hedging or covering foreign currency exposure). The marketparticipants on the other side of any trade must either have exactly opposite hedging needs orbe willing to take a speculative position. The most common method used by participants whentransacting in either spot or forward foreign currency is to deal directly with a bank, althoughInternet trading is currently making impressive inroads.These banks usually have large foreign exchange sales and trading departments that notonly handle the requests from their clients but also take positions to make trading proﬁts andbalance foreign currency positions arising from other bank business. Typical transactions inthe bank market range from $1 million to $500 million, although banks will handle smalleramounts as requested by their clients at slightly less favourable terms.
Introduction
3
1.5 ALTERNATIVE MARKETSIn addition to the spot and forward markets, other markets have been developed that are gainingacceptance. Foreign currency future contracts provide an alternative to the forward market andhave been designed for dealing with major currencies. These contracts have the advantages ofA currency future obligates its owner to purchase a speciﬁed asset at a speciﬁedexercise price on the contract maturity date.smaller contract sizes and a high degree of liquidity for small transactions. The disadvantagesinclude the inﬂexibility of standardized contract sizes, maturities, and higher costs on largetransactions. Options on both currency futures and on spot currency are also available. AnotherAn option gives the owner the right but not the obligation to buy or sell a speciﬁedquantity of a currency at a speciﬁed rate on or before a speciﬁed date.technique that is used to provide long-dated forward cover of foreign currency exposure,especially against the currency ﬂow of foreign currency debt, is a foreign currency swap.A foreign currency swap is where two currencies are exchanged for an agreed periodof time and re-exchanged at maturity at the same exchange rate.
CONCLUDING REMARKSIn summary, activity in the foreign exchange market remains predominately the domain ofthe large professional players – for example, major international banks, such as Citibank, J.P.Morgan, HSBC, and Deutsche Bank. However, with liquidity and the advent of Internet trading,plus the availability of margin trading, this 24-hour market is accessible to any person with therelevant knowledge and experience. Nevertheless, a very disciplined approach to trading mustbe followed, as proﬁt opportunities and potential loss are equal and opposite.
Part IMarket Overview
2A Brief History of the MarketForeign exchange is the medium through which international debt is both valued and settled.It is also a means of evaluating one country’s worth in terms of another’s and, depending oncircumstances, can therefore exist as a store of value.Between 9000 and 6000 BC cattle (cows, sheep, camels) were used as the ﬁrst andoldest form of money.
2.1 THE BARTER SYSTEMThroughout history, people have traded for various reasons: sometimes to obtain desired rawmaterials by barter; sometimes to sell ﬁnished products for money; and sometimes to buy andsell commodities or other goods for no other reason than to try to proﬁt from the transactioninvolved. For example, a farmer might need grain to make bread while another farmer mighthave a need for meat. They would, therefore, have the opportunity to agree terms, wherebyone farmer could exchange his grain for the cow on offer from the other farmer. The bartersystem, in fact, provided a means for people to obtain the goods they needed as long as theyhad goods or services that were required by other people.This system worked quite well and, even today, barter, as a system of exchange, remainsin use throughout the world and sometimes in quite a sophisticated way. For example, duringthe cold war when the Russian rouble was not an exchangeable currency, the only way thatRussia could obtain a much-needed commodity, such as wheat, was to arrange to obtain itfrom another country in exchange for a different commodity. Due to bad harvests in Russia,wheat was in short supply, while America had a surplus. America also had a shortage ofoil, which was in excess in Russia. Thus Russia delivered oil to America in exchange forwheat.Although the barter system worked quiet well, it was not perfect. For instance it lacked:
r Convertibility – What is the value of a cow? In other words, what could a cow convert into?r Portability – How easy is it to carry a cow around?r Divisibility – If a cow is deemed to be worth three pigs, how much of a cow would one pigbe worth?It was the introduction of paper money – which had the three characteristics lacking in thebarter system – that allowed the development of international commerce as we know it today.
2.2 THE INTRODUCTION OF COINAGEApproximately 4000 years ago, pre-historic bartering of goods or similar objects of valueas payment eventually gave way to the use of coins struck in precious metals. An important
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A Foreign Exchange Primer
concept of early money was that it was fully backed by a reserve of gold and was convertibleto gold (or silver) at the holder’s request.Even in those days, there was international trade and payments were settled in such coinage aswas acceptable to both parties. Early Greek coins were almost universally accepted in the thenknown world; in fact, many Athenian designs were frequently mimicked, proving the coinage’spopularity in design as well as acceptability.Cowries (shells) were viewed as money in 1200 BC.The ﬁrst metal money and coins appeared in China in 1000 BC. The coins were madeof base metals, often containing holes so that they could be put together like a chain.The ﬁrst paper bank notes appeared in China in 800 AD and, as a result, currencyexchange started between some countries.
2.3 THE EXPANDING BRITISH EMPIRESkipping through time, some banking and ﬁnancial markets nearer to those we know todaybegan in the coffee houses of European ﬁnancial centres. In the seventeenth century thesecoffee houses became the meeting places of merchants wishing to trade their ﬁnished productsand of the entrepreneurs of the day. Soon after the Battle of Waterloo, during the nineteenthcentury, foreign trade from the expanding British Empire – and the ﬁnance required to fuel theindustrial revolution – increased the size and frequency of international monetary transfers.For various reasons, a substitute for the large-scale transfer of coins or bullion had to be found(the ‘Dick Turpin’ era) and the bill of exchange for commercial purposes and its personalaccount equivalent, the cheque, were both born. At this time, London was building itself areputation as the world’s capital for trade and ﬁnance, and the City became a natural centre forthe negotiation of all such instruments, including foreign-drawn bills of exchange.
2.4 THE GOLD STANDARDGold was ofﬁcially made the standard value in England in the nineteenth century.The value of paper money was tied directly to gold reserves in America.Foreign exchange, as we know it today, has its roots in the Gold Standard, which was introduced in 1880. The main features were a system of ﬁxed exchange rates in relation to goldand the absence of any exchange controls. Under the Gold Standard, a country with a balance of payments deﬁcit had to surrender gold, thus reducing the volume of currency in thecountry, leading to deﬂation. The opposite occurred to a country with a balance of paymentssurplus.Thus the Gold Standard ensured the soundness of each country’s paper money and, ultimately, controlled inﬂation as well. For example, when holders of paper money in Americafound the value of their dollar holdings falling in terms of gold, they could exchange dollarsfor gold. This had the effect of reducing the amount of dollars in circulation. Inevitably, as thesupply of dollars fell, its value stabilized and then rose. Thus, the exchange of dollars for gold
A Brief History of the Market
9
reserves was reversed. As long as the discipline of linking each currency’s value to the valueof gold was maintained, the simple laws of supply and demand would dictate both currencyvaluation and the economics of the country.The Gold Standard of exchange sounded ideal:
r inﬂation was low;r currency values were linked to a universally recognized store of value;r interest rates were low, meaning that inﬂation was virtually non-existent.The Gold Standard survived until the outbreak of World War I, after which foreign exchange,as we know it today, really began. Currencies were convertible into either gold or silver, butthe main currencies for trading purposes were the British pound and, to a lesser extent, theAmerican dollar. The amounts were relatively small by today’s transactions, and the trad