Discuss how foreign exchange transactions between international banks are settled.

The foreign exchange (FX) market encompasses the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, and trading in foreign currency options and futures contracts.

Please discuss the following questions:

1. Discuss how foreign exchange transactions between international banks are settled.

2. Why does most interbank currency trading worldwide involve the U.S. dollar? Do you believe that the dollar may no longer be considered the international reserve currency? Please discuss your reasons.

3. Banks find it necessary to accommodate their clients needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a clients forward transaction?

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