Foreign-Exchange Market

a special sphere of economic relations under capitalism, associated with operations (purchase, sale, and exchange) involving foreign currency and documents of payment in foreign currency (checks, bills of exchange, telegraph and postal money orders, and letters of credit). The world foreign-exchange market, formed through correspondence ties among banks of various countries, is a mechanism of international monetary calculations linked with foreign trade, investments, tourism, and other business and cultural relations. In many capitalist countries, the sale and purchase of foreign exchange is also carried out on the stock exchange by brokers and dealers.

There are two kinds of foreign-exchange markets: “free” (in countries without currency restrictions) and “unfree” (where such restrictions are set and foreign-exchange operations are possible only by permission of authorized organizations at an official rate of exchange). In countries with currency limitations, illegal, “black” foreign-exchange markets often arise.

The operations of foreign-exchange markets can be divided into “cash on hand,” stipulating the immediate exchange of foreign currency for its equivalent in national currency; “fixed date,” allowing, by agreement of the parties concerned, the exchange of foreign currency for its equivalent in one to three months or so at an official exchange rate stipulated upon arranging the transaction; “swap,” combining two kinds of transactions—"cash” (by purchase or sale of foreign currency) and “fixed date” (by sale or purchase of the same currency; since the rate of exchange for these transactions is fixed at the moment the transaction is concluded, the participants guarantee themselves against any possible change which may happen with the continuous fluctuations of exchange rates characteristic of the currency markets in capitalist countries); and “arbitrage,” under which the initiator of the transaction uses the difference in currency exchange rates and credit rates of interest over a definite period of time, in various foreign-exchange markets, in order to obtain a profit.

In socialist countries, under conditions of planned economic relations and the “foreign-exchange monopoly,” all currency operations are carried out solely by state banks, at the official exchange rates. There are no unregulated foreign-exchange markets in socialist countries.