As Globalisation increased in the past decades globally, it has become necessary to study International Financial Management and has become important in various fields like import, export, and even non-residents Indians, brokers, banks, tourists, and international investors. Business firms have also started to lend and raise money in both domestic and international markets.
The emergence of the forex market
The market wherein transactions at the international level take place is called the Forex or Foreign Exchange Market. In Forex, the transactions include buying and selling various currencies of different countries. It is present worldwide, with the largest centres being in London, New York, Tokyo, Hongkong, Frankfurt, and Singapore.
In the forex markets, the major players are banks, and they deal with business firms and trade-related transactions and investors along with Central Banks and other commercial banks, which is called Interbank trade.
The rate of exchange in Forex
In forex trading online, the rate at which a country’s currency is exchanged (i.e., bought or sold) with another country’s currency is called the Forex rate. For instance, the exchange rate between the Indian rupee and the Australian dollar is Rs. 49 as of 1st September 2011. This depicts that for one AUD, it costs Rs 49, or one rupee is sold or exchanged for 0.0204 AUD.
Factors that affect the Forex
For trading, first, you need to create a forex demo account. The trade of products can be taken as a reason for the high demand and supply of foreign currencies. When a nation’s imports are high, foreign currency demand will also be high and vice versa.
- Capital movements:
FDI or Foreign Direct Investments are important in influencing the Forex market rate of exchange. As the capital inflow is enormous within the nation where the FDI is injected, it results in financial and economic benefits for the domestic country. In contrast, a huge capital surge will result in the devaluation of the domestic country.
When there is a speculation of the currency value to fall, individuals sell the currency and begin to purchase different currencies in the Forex market in the hope for it to appreciate. This selling of stock of previous currency and it leading to decrease in the value and enthusiasm of other currencies is the counter effect.
- National Government policies
When the central bank of a certain nation assumes a part in the event in which the fixed exchange rate framework, it causes to influence the Forex market. This behavior of the Central Bank impacts the Forex rate of exchange with the purchase and sale of bills and different currencies in the market.
- Balance of payments
A solid currency is prompted when an excess of an installment is yet to be determined, and similarly, a shortage of the same would depict a frail currency. When the current record is deficient, it shows that the nation is spending more on foreign trade than it is acquiring, and therefore the nation is getting capital from foreign resources to make up for the shortage.
In conclusion, a nation requires more foreign currency than it achieves through fair deals, and it supplies its own greater amount of currency than foreigners demand its items. However, we should know that an overabundance demand for foreign currency has an inverted relationship with the nation’s exchange rate in the Forex market.