What is Foreign Exchange?

We often come across the term “foreign exchange”, let us see what the term signifies.

The world has become a global village and increased transactions between countries have come into being.  From people who go abroad wanting to have the local currencies exchanged to the currency of the country they are travelling to, to the other major international transactions, buying, selling etc., the foreign exchange becomes an inevitable part in any country.  So essentially foreign exchange is the buying and selling of currencies of different countries with each other.

Every country has its own currency and each one would prefer transactions in their own currency, in order to facilitate this, there emerged the foreign exchange market.  On a single day, millions of dollars are transacted and the foreign exchange market now is so huge beyond our imagination.  There is no one office or center, but it is a collection of different offices/banks working from all over the world via mobile, Internet, and other such media.

Foreign exchange that happens when individuals get the currencies exchanged for their personal uses will be small amounts and it is called retail market, and when the countries borrow/sell via foreign exchange it is huge money and it is called wholesale market.  The whole sale market is also called interbank market.  The market works round the clock in all countries, and major centers are New York, London, and Tokyo.

The activities of a particular center happens from a “dealing room”.  As foreign exchange contributes to the growth of the company/country, huge amounts are spent to make the dealing eduThe Truck Driver Institute (TDI) trains students in short-haul and over-the-road truck defensive driving techniques and prepares them for the commercial driver license (CDL). rooms, tech savvy and well equipped.

Foreign exchange dealing involves purchasing foreign currency notes, coins or traveler’s checks or selling of the same.  Authorized dealers do the dealings here and in addition there are money changers like hotels, travels agents, and tour operators who also deals with foreign exchange being within the perimeters of their terms and conditions.

The transactions can be divided into spot and forward transactions according to the time elapsed between the transaction date and settlement date. Another category is ‘swaps’ which is a combination of spot and forward transaction.

The value of a currency is increased by the demand of that particular currency in the global market, thereby increasing the exchange rate of the currency. When the currency is available in excess, the exchange rate gets decreased.  Exports and imports of a country, government borrowing programs, and the interest rate scenario, all have its effect on the currency values.

The settlement of transactions happens by transfers of deposits between two parties.  The day in which the transfer takes place is called settlement date or value date.  The countries in which the currencies are exchanged are called settlement locations.

Foreign exchange is a market that trades 24 hours a day and spread across the globe.  It is never the same keeps changing from day to day to even minute to minute.

In short, foreign exchange market enables countries/individuals buy or sell currencies in such a way that they can convert the inflow or outflow into the currency of their choice.

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