Welcome to Professorsavings.com, we teach finance basics.
Today’s lesson, what is The Foreign Exchange Market is known as the FOREX market, currency trading market or just FX.
Keeping it simple.
It is a market where participants buy, sell and exchange currencies; it facilities the trade of trillions of dollars worth of transactions every day.
There is no central location. Instead, money is traded through a network of international dealers and brokers.
Businesses use the FOREX market when they’re buying products from other countries.
Let take an example.
supposed a U.S. company Professor Savings Inc. wants to buy an airplane from the China.
The airplane is transferred from the China to the U.S. and the U.S. company has to convert U.S. dollars to Yuan or RMB to pay for the transaction.
The U.S. company uses the FOREX market to convert dollars to Yuan at the current exchange rate.
FOREX traders will buy currencies that they think will increase in value and sell currencies they think will decrease in value.
So how is it different from a stock?
Currency evaluation is relative to other currencies and that’s why the price is given in relation to a second currency.
So what effects the change in exchange rate?
Import and exports trade terms, interest rates, political stability, and policy.
There are many factors that contribute to a change and exchange rate including monetary.