Understanding Foreign Currency Exchange Rates A Little Deeper
One important thing you should understand about forex is that the
market can be highly volatile. If you are new with forex, it would be
good to focus on a few major currencies first before dealing with a
variety of currency rates.
Why does these happen? Well, foreign currency exchange rates are actually tied in to many different factors--both public and private. On the public scenario, the government itself and the relevant finance regulating departments are accountable for changes in the value. They affect the influx of rates and the cashflow that comes in. Sometimes, even the indirect events that the government ensues may have a drastic impact on forex rates (i.e. war, instability in governance). As for the private sector, this would include the banks and other lending institutions. Their business performance may directly affect currency rates and therefore cause changes to occur in the forex market.
Aside from these two primary reasons, it is also good to note that there are four major functions that foreign currency exchanges rates play. This four reasons are the main causes of the business in the first place. More than just seeing forex as a profitable business, it's good to consider the fact that the rates are actually a worldwide need since countries need to transact with each other and they would only be able to do so through the use of facilitating a currency exchange:
Reason 1 - Companies see exchange rates as a way of earning passive income and protecting their business. Large corporations are already run by a multitude of processes and since they mostly have satellite offices in differing countries, they would need to monitor financial conditions within these environments too. Countries wherein exchange rates are high may result them to convert their currencies where in an influx is expected to occur.
Reason 2 - Another business position is that companies would opt to exchange their underused currencies for investment in a foreign land which may have a huge business potential at the moment. Most of these large corporations would certainly have dormant accounts that are left untouched and would use them if they see fit.
Reason 3 - Supplier transactions offshore may also inevitably require businesses to exchange their home currencies to facilitate the payment process. There are times when exchanging currencies will prove to be more practical rather than paying in the home currency towards the foreign supplier.
Reason 4 - From a recipient's point of view, it's also likely for businesses to accept payments in foreign currencies. As such, they would need to convert these into their home currency so that they could use it accordingly.
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