Foreign Exchange (Forex)

The trade activities of people are not limited to ordinary goods and services anymore. There was a time when the trade activities of people were limited to people exchanging goods and services mainly for money based on the demands and availability of products. 

You might wonder what led to the trade of products and services. Initially, the concept of trade didn’t exist. While human needs had always been present, the demands of all needs could not be met simply because there never were enough commodities for everyone.

This led to the barter system. The Barter system was a system based on exchange rather than on money. In the barter system, two people exchanged the products they had with someone else for something the other person had and was of use to them.

However, as things changed over time, money was introduced. Gradually, money became an integral part of exchange activities and in this way, the barter system turned into the trade.

What is money and how is it different from a currency?

Money is yet another commodity that is given and accepted in a given socio-economic scenario in return for something. Money is paid as the value of a commodity and is given as well as accepted as a payment for not just goods and services but also for payment of debts, settlement of payments, interest on loans, etc.

Money is a verifiable commodity and a product’s value is determined in terms of money to make payment for it. For example, we say, 5 kg of apples cost Rupees100. 

In this case, the value of 5kg of apple is equal to 100 rupees.

Did you notice the word “rupees” in the above sentence? That “rupees” is a currency.

A currency can therefore be defined as a system of money that prevails in common use. The word’s common use usually refers to the people of a nation.

While money is the common name of the commodity, currency is its name. Each country has its currency and the value of a currency keeps changing. Also, the value of a currency is compared to the value of another country’s currency. You might have heard people talking about the rate of the Dollar, which is the currency of the United States. This refers to how much Indian Rupees equals one Dollar.

What is meant by foreign exchange?

It is a simple concept. The term foreign exchange refers to the trading of one currency for another. 

For example, you can swap the Indian Rupee for Euro. When people trade in currencies of different nations, this is referred to as forex or FX. 

Where does a foreign exchange take place?

Forex takes place in a Foreign exchange market.  The Foreign exchange market is the global market for the trade-in of different currencies. The Foreign exchange market is made up of several different markets and is one of the oldest and original markets of foreign exchange. It is an institution that determines the value of each currency every single day. 

As mentioned above, the value of each currency keeps changing and is not stable. So the value of each currency is determined by this institution. The remaining financial structure is based on the foreign exchange market.

What do you mean by Foreign exchange reserves?

Foreign exchange reserves are cash and reserve assets of various forms such as gold held by a country’s monetary authority or central bank, primarily available to balance the payments of the country. 

Apart from balancing the payments, the foreign exchange reserves are maintained to influence the value of its currency along with maintaining its confidence in the financial markets.

Conclusion

The relative value between two or more currencies is called the foreign exchange rate. Simply put, the rate at which one currency is traded with another is called the exchange rate.

The foreign exchange rate keeps changing and is determined by the foreign exchange market based on several things.

We are sure this article has helped you develop a better understanding of everything related to foreign exchange. Forex is an important part of a country’s economy and requires utmost attention at all times.