If there is one thing that will help a nation, a bank or any institution to buy currencies of other nations easily, it will be the foreign exchange market. The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another.
The example set forth by Forex Academy explains why the foreign exchange market is so good, it permits a U.S. business to import European goods and pay Euros, even though the business’s income is in U.S. dollars. It makes trade among every nation very easy because it enables a nation to use the currency of the country that they would avail products and services from. That way, trading and investment among nations will have a well executed system. That is made possible by the foreign exchange market.
In a typical foreign Stock exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.
The process seems to be very simple but it really greatly helps nations to continue trading with other nations without experiencing any problems in terms of finances. It helps in making the flow of trade very natural and thus prevents the onset of some major problems such as conflict in the monetary unit of different nations. There are also some factors that make this market unique. To name some, we have:
- its trading volumes,
- the extreme liquidity of the market,
- its geographical dispersion,
- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
- the variety of factors that affect exchange rates.
- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- the use of leverage
The foreign exchange market is really helpful among us all because it helps in making the flow of international business flow in such a way that it gives every nation the privilege and the right to participate in it.