MAN-372 W/A 5
Running head: FOREIGN EXCHANGE RATES AND THE ROLE IT PLAYS
Foreign Exchange Rates and the Role It Plays
Thomas Edison State College
International Management MAN-372-OL009
What is the Foreign Exchange Market?
The foreign exchange market is a market for converting the currency of one country into that of another country. It is based on an exchange rate which is simply the rate at which one currency is converted into another. Without the foreign exchange market, international trade and international investment on the scale that we see today would be impossible; companies would have no resort to barter. The foreign exchange market is the lubricant that enables companies based in countries that use different currencies to trade with each other. Foreign exchange markets are made of banks, commercial companies, central banks, investment management firms, hedge funds, and retail Forex brokers and investors. The Forex market is considered to be the largest financial market in the world.
The functions of the foreign exchange market
The foreign exchange market serves two main functions. To convert the currency of one country in to the currency of another and to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates. The basic function of a foreign exchange market is to facilitate the conversion of one currency into another, i.e., to accomplish transfers of purchasing power between two countries. This transfer of purchasing power is effected through a variety of credit instruments, such as telegraphic transfers, bank drafts, and foreign bills. In performing the transfer function, the foreign exchange market carries out payments internationally by clearing debts in both directions simultaneously, analogous to domestic clearings. Another function of the foreign exchange market is to provide credit, both national and international, to promote foreign trade. A third function of the
Foreign Exchange Rates and the Role It Plays
Thomas Edison State College
International Management MAN-372-OL009
What is the Foreign Exchange Market?
The foreign exchange market is a market for converting the currency of one country into that of another country. It is based on an exchange rate which is simply the rate at which one currency is converted into another. Without the foreign exchange market, international trade and international investment on the scale that we see today would be impossible; companies would have no resort to barter. The foreign exchange market is the lubricant that enables companies based in countries that use different currencies to trade with each other. Foreign exchange markets are made of banks, commercial companies, central banks, investment management firms, hedge funds, and retail Forex brokers and investors. The Forex market is considered to be the largest financial market in the world.
The functions of the foreign exchange market
The foreign exchange market serves two main functions. To convert the currency of one country in to the currency of another and to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates. The basic function of a foreign exchange market is to facilitate the conversion of one currency into another, i.e., to accomplish transfers of purchasing power between two countries. This transfer of purchasing power is effected through a variety of credit instruments, such as telegraphic transfers, bank drafts, and foreign bills. In performing the transfer function, the foreign exchange market carries out payments internationally by clearing debts in both directions simultaneously, analogous to domestic clearings. Another function of the foreign exchange market is to provide credit, both national and international, to promote foreign trade. A third function of the
References: Hill, W.L. C. (2013). International Business Competing in the Global Marketplace. 9th ed. New York, NY. The McGraw-Hill Co. Jordan. L. (February, 15, 2010). The Complex Nature of the Spot Exchange Rate. Retrieved from www.exinearticles.com Purchasing Power Parity Theory of Exchange Rate. (October, 13,2010). Retrieved from www.economywatch.comWhat are the Functions of the Foreign Exchange Market?. (Janunary, 27, 2012). Retrieved from www.preservearticles.com