How Does a Dollar Payment Become Renminbi? Understanding FX Transaction Types, Infrastructure and Exchange Rate Formation
Starting from an exporter that needs to convert a US dollar payment, this article explains the tiered structure of the FX market and the difference between OTC and exchange trading. It walks through the processes and uses of spot, forwards, FX swaps, cross-currency swaps and options, shows what drives exchange rates over the long run and how prices are quoted minute by minute, and uses China's interbank FX market and bank-to-customer market to explain the trading, clearing and settlement chain, the division of regulatory roles, and how FX trading relates to cross-border payments.