International trade involves an exchange of currencies. When an English Merchant buys goods from a French merchant payment must be made in francs, as the French merchant must meet his expenses in francs. The English merchant must therefore find someone who is willing to sell him francs in exchange for sterling. Such a person can usually be found since other French merchants are at the same time buying English goods and are offering francs in exchange for sterling. In practice, traders do not need to seek out someone who is making an equal and opposite transaction, since the banks keep large stocks of foreign exchange and are willing to buy and sell at the current rate of exchange. Thus an importer would be able to get the foreign exchange he needed at a bank. The bank would replenish its supplies with foreign exchange sold to it by exporters who wanted to have English currency instead of foreign currency.
A foreign exchange transaction need not arise from trade. An English tourist needs foreign currency to spend abroad, and buys it in the normal way from a bank. In principle there is no difference between importing foreign goods and going abroad to consume them there. Foreign currency may also be purchased in order to buy shares in foreign companies; or as a speculation, in the hope that the foreign currency will become m0re valuable after it has been bought.
The existence of regular dealings in foreign exchange results in the establishment of rates of exchange between foreign currencies, in much the same way that dealings in shares establish market prices for the shares. The rate of exchange of a currency is its value in terms of other currencies. Thus at the time of writing about 2.80 dolar can be obtained for 1 euro. In England it is customary to quote the amount.
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