As a registered representative, you will also need to be familiar with the currency market and its risks. Most market economies have floating exchange rates that are determined by supply and demand. Other nations have fixed exchange rates that are set by government policy.
Fixed rates are not as prevalent as they once were because developing nations are now generally less focused on protecting their homegrown industries from imported goods and more focused on joining international agreements that favor free trade. Exchange rate controls, like all trade restrictions, have fallen out of vogue; currently, the People's Republic of
The Role of the Central Bank
Many countries, including the
In some nations, central banks are also chartered to occasionally revalue their currency after a bout of hyperinflation. For example, let's say a currency called the Swobovian hypo has an exchange rate of 5 hypos to the U.S. dollar. Now imagine that Swobovia, which only recently reformed its institutions and became a market economy, has just experienced a period of hyperinflation as part of its transition. Suddenly, a dollar buys 500 hypos, not a mere 5. As this figure starts to stabilize, the Swobovian central bank might declare that every 100 hypos is now worth 1 "new hypo". After this revaluation, the exchange rate will be back to where it has been historically.
The Third and Fourth Markets
There are two derivatives of the secondary market of which you need to be aware:
- The third market is a term used to describe the over-the-counter, negotiated-price trading of exchange-traded securities among institutional investors. Although broker-dealers participate in the third market on their own accounts, this is not an arena in which the typical investor plays.
- The fourth market involves the direct trading of large blocks of securities via an off-exchange electronic network. The most widely recognized fourth market portal is Institutional Networks, or Instinet.
The Securities Investor Protection Corp. (SIPC)
InvestingA government using a fixed exchange rate has linked the value of its currency to the value of another country’s currency, or the price of gold.
TradingDevaluation and revaluation are official changes in the value of a nation’s currency in relation to other currencies. The terms are generally used to refer to officially sanctioned changes in ...
InvestingCentral banks and financial institutions hold large amounts of foreign money as their reserve currency.
InsightsThey print money, they control inflation, and much, much more. All you need to know about central banks is here.
TradingBaffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
TradingStruggling to get a grasp on exchange rates? Here's what you need to know.
TradingA currency crisis comes from a decline in the value of a country’s currency.
TradingFloating exchange rate is the exchange rate between two currencies at any given time.
TradingThe forex market has a lot of unique attributes that may come as a surprise for new traders.