Openness in Financial Markets
Openness in financial markets allows financial investors to hold both domestic assets
and foreign assets, to diversify their portfolios, to speculate on movements in
foreign interest rates versus domestic interest rates, on movements in exchange
rates, and so on.
Diversify and speculate they do. Given that buying or selling foreign assets implies
buying or selling foreign currency—sometimes called foreign exchange—the volume
of transactions in foreign exchange markets gives us a sense of the importance of international
financial transactions. In 2010, for example, the recorded daily volume of
foreign exchange transactions in the world was $4 trillion, of which 85%—about $3.4
trillion—involved U.S. dollars on one side of the transaction.