Foreign exchange or forex, is the conversion of one country’s currency into another. In a free economy, a country’s currency is valued according to the laws of supply and demand. In other words, a currency’s value can be pegged to another country’s currency, such as the U.S. dollar, or even to a basket of currencies. A country’s currency value may also be set by the country’s government. The most traded currencies in the world are the United States dollar, Euro, Japanese yen, British pound, and Australian dollar. The US dollar remains the key currency, accounting for more than 87% of total daily value traded.
There are various factors which influence the currency value. The factors include various economic, political, and even psychological conditions. The economic factors include a government’s economic policies, trade balances, inflation, and economic growth outlook.
Political conditions also exert a significant impact on the forex rate, as events such as political instability and political conflicts may negatively affect the strength of a currency. The psychology of forex market participants can also influence exchange rates. The value of any particular currency is determined by market forces based on trade, investment, tourism, and geo-political risk. Every time a tourist visits a country, for example, they must pay for goods and services using the currency of the host country.
Therefore, a tourist must exchange the currency of his or her home country for the local currency. Currency exchange of this kind is one of the demand factors for a particular currency. Another important factor of demand occurs when a foreign company seeks to do business with another in a specific country. Usually, the foreign company will have to pay in the local company’s currency. At other times, it may be desirable for an investor from one country to invest in another, and that investment would have to be made in the local currency as well. All of these requirements produce a need for foreign exchange and contribute to the vast size of foreign exchange markets.
Foreign exchange is handled globally between banks and all transactions fall under the auspice of the Bank for International Settlements (BIS). The foreign exchange market is a decentralized and over-the-counter market where all currency exchange trades occur. It is the largest (in terms of trading volume) and the most liquid market in the world. The forex market major trading centres are located in major financial hubs around the world, including New York, London, Frankfurt, Tokyo, Hong Kong, and Sydney. Due to this reason, foreign exchange transactions are executed 24 hours, five days a week (except weekends). Despite the decentralized nature of forex markets, the exchange rates offered in the market are the same among its participants, as arbitrage opportunities can arise otherwise.
The foreign exchange market is probably one of the most accessible financial markets. Market participants range from tourists and amateur traders to large financial institutions (including central banks) and multinational corporations.
Also, the forex market does not only involve a simple conversion of one currency into another. Many large transactions in the market involve the application of a wide variety of financial instruments, including forwards, swaps, options, etc.
Aishwarya Says:
I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.
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