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Everything you need to know about Foreign Exchange

Updated on June 11, 2016

Forex

Foreign Exchange

Every country has its own currency. It is this currency which aids in the trade. The currencies have different local rates. No two rates of two different currencies match. In order to have smooth financial system, the currency of any country is assigned a value against the currency of the other one. The rates convert one currency into another. The process of converting the rates is known as Foreign exchange, or Forex, according to the principles of free economy, the demand and supply determines the value of any currency. To be more accurate, the value of a currency can be fixed against any other currency like the dollar, or Euro or it can be against number of currencies in a basket. The government of a country also haste right to fix the value of his currency. The currencies can have fluctuations if they float freely against the currencies of other countries.

There are several market forces that have a direct impact on the value of a currency. These forces rely on trade, tourism, investment, and the risk factors emerging from the geo political situations, for example, consider, tourism. During his visit the tourist has to pay for the services he is getting. For this he makes the payment in the currency of the host country. To do so, he converts the money he brings from his native land. In such situation the exchange has taken place as a result of the demand. Similar is the situation for any company which has interest in investing in some other country. The payments cannot be in the motherland currency but actually in the local currency. All such events need foreign exchange. The growth of the foreign exchange is also because of this reason. The Bank of International Settlements determines the laws and obligations dealing with transactions involving the foreign exchange.

Apparently, the first image that comes to mind is that the Forex market is a place with several counters and a clerk behind it to take the local the visitors’ money and replace it with local money, but it is much more than only this phenomenon. It is the market which is the hub of deciding the rates and prices to be available for the financial institutions.

In this context, The Economist's Guide to Financial Markets defines foreign exchange as a global decentralized financial assistance to serve while trading. It caters all sorts of customers, including the buyers and sellers, not just for few hours but round the clock, for the whole week.

According to the analysis of the famous, The Economist, foreign exchange market is no doubt the largest market. No other market shows the business reaching so high that its turnover per day reaches US$1.9 trillion, The Bank for International Settlements claims that in April the average daily turnover was $3.98 trillion as of April 2010. To be precise the market shows amazing turnovers. The key element in this regard is the liquidity it gives to the world trade. Hence, Forex creates a system which runs the global finances very smoothly.

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