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Forex markets are among the most active markets in the world in terms of dollar volume.
The participants include large banks, multinational corporations, governments, and speculators.
Individual traders comprise a very small part of this market.
Because of the volatility in the price of foreign currency, losses can accrue very rapidly, wiping out an investor’s down payment in short order.
This is the exchange rate (expressed as dollars per euro) times the relative price of the two currencies in terms of their ability to purchase units of the market basket (euros per goods unit divided by dollars per goods unit).
If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power parity (PPP) would hold for the exchange rate and GDP deflators (price levels) of the two countries, and the real exchange rate would always equal 1.
There are various ways to measure RER. Thus the real exchange rate is the exchange rate times the relative prices of a market basket of goods in the two countries.
For example, the purchasing power of the US dollar relative to that of the euro is the dollar price of a euro (dollars per euro) times the euro price of one unit of the market basket (euros/goods unit) divided by the dollar price of the market basket (dollars per goods unit), and hence is dimensionless.
Instead, they typically close out their buy or sell commitments and calculate net gains or losses based on price changes in that currency relative to the dollar over time.
Even if a company expects to be paid in its own currency, it must assess the risk that the buyer may not be able to pay the full amount due to currency fluctuations.