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Everyone hears about the word “forex”. But do you actually know what it means? In this article, you shall know about foreign exchange market or forex.
Foreign exchange, in simple terms is the conversion of one currency to another. A currency’s value is determined by many factors like the supply and demand value, or it is determined by the government. The value of one country’s currency is compared with another country’s currency. A currency is shown in terms of another currency like US dollar etc.
A country’s currency value is determined by many factors like trade investment, tourism, and geo political risk. You might be wondering how tourism affects a country’s currency value. Well, when tourists visit another country, they pay for the country’s goods using the currency from where they belong. This brings the currencies from other countries to a country. This greatly affects the forex of a country.
Forex also depends on the foreign companies when they come to seek business with another country. Usually in this case, the foreign company does all the payments in the currency of the local company. This involves conversion of one currency to another. Also, sometimes a company from one country invests its money in another company of some other country. This also involves change of currency as the investment is usually made in the local currency of the other company. This greatly affects the foreign exchange market or the forex.
Globally, forex is handed by the Bank of International Settlements. All the transactions related to it fall under this huge body.
Apart from this, forex is also determined when a party purchases a currency of a country by exchanging an amount of another currency of some other country. This determines the various rates of currency with respect to one currency, like for example US dollar. They simply want to exchange their currency for some other currency.
When a country buys goods from another country, the transactions are made in the currency of their own country. This also brings currency from one country to another. The foreign exchange rates keep fluctuating from time to time because of the changes in the buying and selling rates from one point of time to another. The rates are never constant. The foreign exchange (forex) rate of one currency in a country is determined by a combination of the above mentioned factors.
When there are changes in the business between the companies of one country with another company of some other country, the rates change. Also, when there are changes in the buying and selling of one currency, it affects the forex rates.
Understanding the forex rates of a country is quite a complicated procedure. There are numerous factors which affect it. It is difficult to sum up all of them in a single article. But yeah, a lay man would have got an idea of the idea and the thing going on behind the fluctuations of the forex rates and their determination.
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