1.0 Introduction to Foreign Exchange Market
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.
The foreign exchange markets allow the conversion of currencies, where it helps the firms to conduct trade more efficiently across the national boundaries. In addition, firms can shop for low cost financing in capital markets all over the world and then use the foreign exchange market to convert the foreign currency that they got into whatever currency they require. With the foreign exchange nowadays, anyone can go to other country by converting their domestic currency into the foreign currency. The foreign exchange will follow the rate of exchange according to the country's rate. But still, the foreign exchange market is actually dealing with fluctuation where sometimes it has upward and downward movement.
2.0 Function of Foreign Exchange Market
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the payments that a company receives for import and export, as the firms need to pay the other firms using their currency. In addition, foreign exchange also use for the income that will be receives from foreign investments, or the income from licensing agreements with foreign firms may be paid in the foreign currencies.
The second function of foreign exchange for the international business is use the foreign exchange markets when they must pay a foreign company for its product or services in its country’s currency. For example, a company from Malaysia buys components for its car from Japan firms. Japan must be paid in Japan currency, yen, so the Malaysian company must convert money from ringgit into yen to pay them.
The third function is use the foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets. If any firms that wish to invest their money to foreign company, they need to convert their domestic currency first into the foreign currency first then the firms can make investment.
3.0 The Most Active Currencies in Foreign Exchange Markets
The foreign exchange market is the largest and most liquid market in the world because it involves all countries in the world. In...