The Foreign Exchange Market
If goods are purchased by a citizen of one country, with one currency, from a citizen of another country, with a different currency, the buyer in most cases prefers to make the payment in his or her own currency. This requires an exchange of currencies from that of the buyer to that of the seller. The purchase or sale of any goods from a citizen of one country to a citizen of another will always result in two simultaneous transactions:
1. Physical exchange of the commodity 2. Purchase or sale of a foreign currency
The purchase or sale of the foreign currency affects only one of the parties in the exchange. If an American importer purchases US$100,000 worth of goods from a Japanese manufacturer and the invoice is billed in Japanese yen, the burden falls on
the American importer to purchase Japanese yen to complete the transaction. If the contract is invoiced in U.S. dollars, the Japanese seller is responsible for converting the American dollars that were received into Japanese yen to complete the transaction. The party that has to convert the currency takes the risk that the exchange rate on that date of conversion is favorable to that party.