Video Transcript: Foreign Exchange Markets

Hi, welcome back. In this video, we're going to discuss how supply and demand  impact foreign exchange markets. Foreign exchange has no centralized market.  Instead, a foreign exchange market exists wherever the trade of two foreign  currencies are taking place. It is open 24 hours a day, five days a week. This  foreign exchange market exists to ease investment and trade. The primary  trading centers are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney,  and Singapore. All levels of traders, from central banks to speculators, trade  currencies with one another. Right. So we're going to talk about how supply and  demand impact the trade of currencies, right? And we'll see how a finite amount  amount of cash, right, in one currency can lead to a maybe a decrease in the  currency exchange rate, right? Because the supply is not as great as the  demand, right? So in this example that we're going to discuss, we'll talk about  how this currency is converted and then an open sale transaction on the market. So for instance, let's discuss the Chinese yuan, right? Is equal to, for example,  right simplicity reasons right. We'll use 10 yuan versus 1 US dollar right. So we  have 10 Chinese yuan equals 1US dollar right. Okay, so now let's say this let's  say person A, okay, has 1000 yuan, okay, right, and they want to convert this,  right? They want to convert their yuan, they want to convert it, right, into dollars.  Okay. Now in this market, right, we have three players, right. So let's say person B here, okay, has $100 100 U.S. dollars that they want to convert to yuan, right? They want to convert to yuan, and person C has $100 and they want to convert  into yuan. Can you see the dilemma forming, right? Can you see the dilemma  forming? So. 100 times 10 is 1000 So let's look at this: 100 times 10, right? So  they have $100 and they want to convert to yuan. You can get 10 yuan for $1  right? So how many yuans do they want? They want 1000 yuan, right? That is  their demand. They want 1000 yuan. So let's say U.S. dollar demand, right? So  now the same goes here. They have $100. They want to convert to yuan, right?  They also want 1000 yuan, right? But let's say the only person that has any  yuan in the market only has 1000 yuan. What happens, right? So $200 now  needs to be converted. $200 needs to be converted into yuan, right? Needs to  be converted into yuan. Okay, so then 1000 yuan needs to be converted into  dollars. Okay, now because both of person B and C both want 1000 yuan, right? What happens next in the market, right? So let's say person A with a 1,000  yuan, right, offers to sell 100 yuan for $10 right? So he sold 100 yuan for $10  right? So person B will take 100 yuan, right? Right, for $10 Okay. and he and  person B, they accept this offer, fair price, right? So now, what happens next?  So next, you'll see that person A, right, offers to. Sell 90 yuan. Okay, I'm sorry.  Person B accepts right, and then offers to sell 90 yuan for $10 right. Person A  accepts the new quoted price of 9 yuans, right? Because this is an open  exchange, and they are bartering back and forth for bidding the price right based on the current supply right. So because the supply has decreased of yuan, but  the demand has stayed the same for yuan, but the supply of yuans has now 

shrunk right because he offered 100 yuans. Right now, because there's less  supply, now person A can sell 90 yuan. Right for $9 Right, so. I'm sorry. Can sell  90 yuan for $10 right? So the value of the dollar demanded just went up  because the because the supply of the yuan went down.