Foreign Exchange Trading Market & its Importance for an Economy

What is the foreign exchange?

Foreign exchange is the exchange of a particular currency for another. For eg. Swapping of U.S. Dollar for Indian Rupee. Foreign exchange is also known as “Forex”. The value of any country’s currency is decided by its government and it works as per the laws of a country’s economy and demand. The forex market is the largest financial market in the world. The forex market is a global online network, which involves firms, investment companies, foreign exchange brokers & traders and commercial & central banks. Currencies can be bought and sold at any time of the day with the use of electronic networks as the market is open for 24 hours in a day and for 5 days in a week. There are three different kinds of forex markets – the spot market, the futures market and the forward market.

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Importance of a Forex Market

A Forex market or a foreign exchange trade is important as it helps in understanding a country’s economy. The major benefactors of foreign exchange trade markets are travellers, importers and exporters. It helps them to cater to their currency needs. When payments are made via cheques, demand drafts and fund transfers from one country to the other then Forex markets decide on the exchange rates. Based on these exchange rates, money is transferred to the recipient’s account. Forex markets also help banks in regulating inflation rate control. If an economy of a country is affected then central banks can reduce interest rates, which will make the currency unappealing to overseas investors. If the Forex market is not maintained, then the world’s economy will come to a halt. There would not be a proper method to control the exchange rate of money. Foreign exchange markets give traders a lot of flexibility for the trading options.

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