WHAT IS FOREIGN EXCHANGE AND WHAT YOU SHOULD KNOW ABOUT IT?


Foreign exchange can be defined as the transaction that involves the buying and selling of foreign currencies. The marketplace could either be online or on the floor of an exchange. This article is centered on the foreign exchange and the need for an average prospective trader to know What is Forex?

Now let us go back to the rudiments of foreign exchange currency trading;

LEARNING ABOUT FOREIGN EXCHANGE:

As earlier defined, the foreign exchange currency trading is a marketplace where currencies are traded with a view of conducting trade or business. It is usually an act of pairing one currency against the other. For example, you pair the EUR against the USD; it is usually done in this form, EUR/USD.

The purpose for which the trading in two currencies is done could either be for any of two reasons; buying with a view of meeting an import obligation or selling with a view of making a profit when the pairing of the two currencies are done. Largely, I will love to make the example to be that of importation. For example, if you are importing some consignment of items, as an American from India. Your trade partner will bill you in his country’s currency, Indian Rupees. Let us assume that the bill is worth about 50 million Indian Rupees, you will have to convert your currency, American Dollar to buy that amount of money at the prevailing rate foreign exchange so that you can have the item shipped to you.

WHAT DOES EXCHANGE RATE MEAN?

The exchange rate of a given currency is the prevailing ruling rate of a given foreign currency on the day of trade. What you pay at this time is the worth of the exchange rate at your own country’s currency.

WHY IS FOREIGN EXCHANGE SO IMPORTANT?

The tendency is for you to begin to ask yourself questions that why is so much talk about this foreign exchange. Why is it so important? Surely, since there is no country that can operate in isolation, and for the fact that human wants are insatiable, there will always be needed to look outside the four walls of your country for that need. A careful research revealed that the daily volume of foreign exchange currency trading is about $5Trillion. This presupposes to inform us that, foreign exchange market is very voluminous and huge. This is one of the reasons why it is important.

The Great Britain is the largest market for foreign exchange currency transaction, in the entire wide world. Do not forget that, she is the financial capital of the world. In all of the trading with respect to foreign exchange currency transaction, in the Great Britain, 40% of this takes place in London alone. The infrastructures that are available in the United Kingdom are quite encouraging for the trading in foreign exchange currency.

The pivot upon which the international trade and global businesses revolve around is the foreign exchange currency market. To this end, it cannot be underestimated at ensuring that it is allowed to grow. It also plays a vital part in supporting export and as well import from and to any country.

A country that is engaged in manufacturing activities, of either finished goods, agricultural goods, processed and will need to export those goods to other countries of the world will need to be paid in that country’s currency and not another currency. At this point, if there are no foreign buyers of the country’s exportable, then the purpose of production of those items will be useless. The entire citizens of the country may not be able to consume all that have been manufactured locally. In another breadth, the equipment that will be used in the in the production line may not necessarily produce locally in that country that is exporting. So you can see that trading in foreign exchange currencies is highly inevitable for any country of the world. It is by this extension that, the importance of trading in foreign exchange currencies becomes inevitable.

EXAMPLES OF TRADES INVOLVING FOREIGN EXCHANGE


Now, let us take a very critical look at some trades that involve the use of foreign exchange currency. For the purpose of this article, I will like to use the United States of America as an example. Now consider this scenario, you have in hand sufficient information that the value of Euro will in the nearest future increase, and you want to trade in it.

What you will do is to buy as many units as you can afford now so that you will be able to take that advantage ahead of time. If you buy now, and thereafter you sell when the value has increased just as you speculated correctly, what will happen to you is that you have made a profit.

On the other hand, you still have information that the value of Euro will fall in not too distant future time, acting rationally, what you will do then is to sell off the units you have in your hand so that you do not suffer the loss of revenue.

Secondly, another trade that involves foreign exchange currency trading is when there is an international obligation to be met, such as the settlement of an import bill, or receipt of payment for an export product. In the settlement of an import bill, you will have to buy that country’s currency in the foreign exchange currency market at the prevailing ruling rate.

Having gone this far in the explanation, I am sure that you have gotten some ideas on the working of the foreign exchange currency market.