Foreign Exchange Market
The foreign exchange market is a global currency market where participants can be able to speculate, exchange, buy, and sell currencies. The market is basically decentralized hence money is traded through a network of international brokers and dealers. However, the major participants of foreign exchange are financial institutions all over the world although other established commercial companies and investment management organizations engage in it as well. Business organizations use the forex market when they are buying products from other countries. For instance, when a company based in the United States decides to purchase a plane engine from the United Kingdom; the engine is then transferred to the U.S and the U.S Company has to convert US dollars into British Pounds in order to pay for the purchased engine. The conversion is done through the forex market at the current exchange rate that fluctuates now and then. Speculators in the market normally tend to buy currencies that they anticipate will increase in value and sell those they expect to decrease in value(Williams, 2006).
The forex market, however, has its pros and cons to the participants. 24-hour trading is one of the biggest advantages as currencies are able to be traded all round-the-clock during the weekdays. Also, global businesses have the advantage of online currency exchange as the market is available on the online market platform, hence, they can transact from the comfort of their own homes. A global business stands to benefit from high leverage found in the market whereby small investments can lead to abnormal profits. However, there is a chance to lose especially due to the fact that currency rates fluctuate round-the-clock. Therefore, since it is easy to make big gains in a short time, it can be possible to lose bigtime, as well. Other drawbacks that affect the market and bound to affect global businesses is common failure of online trading, scammers that may steal participants’ identity, and market volatility(Introduction to global business: Understanding the international, 2014).
Introduction to global business: Understanding the international. (2014). New York: Cengage learning.
Williams, R. G. (2006). The money changers: A guided tour through global currency markets. Hong Kong: Hong Kong University Press.