Motivation

The growing complexity of many real-world problems is one of the biggest challenges of our time. Complexity is also one of the factors influencing decision making in the area of international finance which has taken on great significance over the last decade. As the result of structural shifts in the world economy and in the international financial system, the foreign exchange market has been profoundly transformed, not only in size, but also in coverage, architecture, and mode of operation.

• 1. A basic change in the international monetary system from the fixed exchange rate requirements of Bretton Woods that existed until the early 1970s to the floating exchange rate system of today.

• 2. A tidal wave of financial deregulation throughout the world, with massive elimination of government controls and restrictions in nearly all countries, resulting in greater freedom for national and international financial transactions, and in greatly increased competition among financial institutions, both within and across national borders.

• 3. A fundamental move towards institutionalization and internationalization of savings and investment, with funds managers and institutions having vastly larger sums available, which they are investing and diversifying across borders and currencies in novel ways.

• 4. A broadening and deepening trend towards international trade liberalization, within a framework of multilateral trade agreements, such as the Tokyo and the Uruguay Rounds of the General Agreement on Tariffs and Trade, the North American Free Trade Agreement and U.S. bilateral trade initiatives with China, Japan, India and the European Union.

• 5. Major advances in technology, making possible instantaneous real-time transmission of vast amounts of market information worldwide, immediate and sophisticated manipulation of that information in order to identify and exploit market opportunities, and rapid and reliable execution of financial transactions.

• 6. Breakthroughs in the theory and practice of finance, resulting not only in the development of new financial instruments and derivative products, but also in advances in thinking that have changed market participants’ understanding of the financial system and their techniques for operating within it.

he interplay of these forces, feeding off each other in a dynamic and synergistic way, led to an environment where foreign exchange trading increased rapidly. With world-wide daily trading at approximately three trillion US Dollars [39], the Foreign Exchange market is by far the largest and most liquid market in the world, where liquidity refers to currencies’ ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.