Foreign Exchange

Saturday, September 12, 2009

What is Foreign Exchange?

When we buy foreign goods or invest in another country, we have to obtain some of that country’s currency to make the transaction. When the forigner buy our goods or invest in our country, he has to obtain some of our currency. We get foreign currency and foriegner get our currency in the foreign exchange market. The Foreign exchange market is the market in which the currency of one country is exchanged for the currency of the other. The foreign exchange market is not a place like a downtown flea market or produce market. The market is made up of thousand of people-importers and expoters, banks, and specialist in buying and selling of foreign exchange called oriegn exchange brokers. The foreign exchange market opens on Mondaymorning in Tokyo, ehich is still Sunday evening in New york, and finally, Los Angeles and SanFrancisco. Before the west coast markets have closed, Tokyo is open again for the next day of business. The sun never sets on the foreign exchange market. Dealers arround the world are continually in contact using computers linked by telephone. On any giveb day, billions of dollars exchange hands.

The price at which one currency exchanges for another is called a foreign exchange rate. for example one US dollar bought 83 Pak Rupees. The exchange rate between the US dollar and the Pak Rupee is 83 PKR per US Dollar. Exchange rate can be expressed in either way. We’ve just expressed the exchange rate between Rupee and a dollar as a number of RS/Dollar. Equivalently we could express the exchange rate in terms of dollar per rupee. The exchange rate , in terms of $/Rs is $0.01205/Rs. (In other words, a Rupee worth slightly less than a penny).

The actions of foreign exchange brokers make the foreign exchange market highly efficient. Exchange rates are almost identical no matter where in the world the transaction is taking place. If US dollars were cheap in London and expensive in Tokyo, within a flash somone would have placed a buy order in London and a sell order in Tokyo, thereby increasing demand in one place and increasing supply in another, moving the prices to equality.