Saturday, 5 October 2013

What Is Foreign Exchange?

Foreign Exchange

          Any monitory transaction between people of any two countries, including exchange of one currency for another is known as foreign exchange.
          The term "foreign exchange" demonstrates buying of currency of one country and selling the currency of another country.

Who needs foreign exchange?
  1. Any individual or company engaged with import or export business.
  2. Any investor investing money abroad.
  3. Any person working abroad.
  4. Any tourist who travels another country.
Authorities in foreign exchange market
  1. Central Banks: - The most influential authorities in the foreign market are the central banks of countries involved in foreign exchange market. Central banks always control the factors like supply of money, interest rates and inflation level. Central banks use their reserves of currency to stabilize market conditions.
  2. Banks: - Banks are also the major authorities participating in Forex market. Large transactions are conducted by banks either on their own or on behalf of their customers.
  3. Brokers: - Foreign exchange brokers perform a large amount of business every day and earn their commission for the work they do.
  4. Commercial Organizations: - Commercial companies and organizations are important part of the inter-bank transactions. They need foreign currency to pay for goods or services, they purchase.
  5. Investment Firms: - Investment firms like insurance companies, pension funds, mutual funds are the major players in the Forex market.  They perform on behalf of their investors related to their investment schemes in order to meet the investment goals for the benefit of the investors.
  6. Hedge Funds: - Hedge funds can control billions of dollars in equities and have the capacity of purchasing billions more.  They are also the most powerful authorities in the market.
Exchange Rate
          Exchange rate is the value of any foreign nation's currency in terms of home nation's currency.  It indicates how much one currency worth's against other currency.
          For example an exchange rate Euro vs dollar is 1.36.  This means that 1 Euro worth's the same as 1.36 dollar.
Types of Exchange Rates 
          The basic types of foreign exchange rates are -
  1. Fixed exchange rate: - Fixed rate are the rates fixed by the monitory authorities and are typically set to a per-determined value (e.g., the value of ounce of gold) and are allowed only slight amount of fluctuation.
  2. Floating exchange rate: - In floating exchange rate system currency's value are allowed to be fluctuating according to the foreign exchange market. Floating exchange rate is determined by the market force of supply and demand.  
The problems in foreign exchange
  1. Different countries have different currencies.
  2. There are too many restrictions imposed by the countries on foreign exchange.
  3. There are too many restrictions imposed by the countries on import and export of goods.
  4. All countries have different legal practices and jurisdictions.


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