The causes of foreign exchange market
Foreign exchange market refers to the place where foreign exchange is traded, or where different currencies are exchanged with each other. The foreign exchange market exists because:
-Trade and investment
Importers and exporters pay in one currency when they import goods and charge in another currency when they export goods. This means that when they close their accounts, they receive and pay in different currencies. Therefore, they need to convert part of the money they receive into money that can be used to buy goods. Similarly, a company that buys foreign assets must pay in the currency of the country concerned, so it needs to convert its domestic currency into the currency of the country concerned.
The exchange rate between the two currencies will change with the change of supply and demand between the two currencies. A trader can make a profit by buying a currency at one exchange rate and selling it at a more favorable exchange rate. Speculation accounts for about the vast majority of transactions in the foreign exchange market.
Due to the fluctuation of exchange rate between two related currencies, companies with foreign assets (such as factories) may suffer some risks when converting these assets into the national currency. When the value of foreign assets valued in foreign currency remains unchanged for a period of time, if the exchange rate changes and the value of the assets is translated in domestic currency, there will be profits and losses. The company can eliminate this potential profit and loss by hedging. This is the execution of a foreign exchange transaction, the result of which just offsets the gains and losses of foreign currency assets caused by exchange rate changes.