Foreign exchange primarily refers to the conversion of one currency into another. Foreign exchange can be freely floating i.e. flexible or fixed or managed float. In an economy the resides in the absence of any restrictions foreign exchange is determined purely by the laws and dynamics of demand and supply of that specific currency. There are a variety of factors that can influence the demand and supply of any specific currency that is traded in the foreign exchange markets.
Foreign Exchange Market basically refers to the platform where the foreign currencies are dealt in. A currency when pegged or fixed against another currency or a particular any valuable commodity like gold is considered to be fixed foreign exchange market. An economy may have foreign exchange market where the government intervenes once in a while and the currency exchange rate is determined in a secured environment and it does not completely depend upon the supply and demand of the currency. Foreign exchange market is considered to be the one of the most dynamic and liquid market of the world. It is the largest existing, highly volatile market.
Foreign trade and investment today cannot exist without the mechanism of foreign exchange in place in the world. Foreign exchange is handled between banks globally and all the transactions that take place fall under the purview of Bank of international settlements or BIS.
Dealing in Foreign Exchange is no child’s play. It is one of the most professionalized market in the world. Dealing in this market is considered to be a very stressful and risky business. Profit and loss, being two sided of a coin play themselves in a dynamic manner in this market. Hence before one actually deals in foreign exchange or even when one starts dealing in foreign exchange there is a need of some basic knowledge and understanding of the aspects of the market for the traders to trade well. One must have complete knowledge of one’s capabilities to handle risks and losses and should also be aware about his or her need for profit. One must be sure of the decisions made and should make such decisions after proper planning. Emotions should be restrained while dealing. Anger, anxiety and excitement are certain emotions that are often to be restrained. A good trader in foreign exchange should learn from the mistakes made while dealing in the forex markets. Dealing with an authorized dealer, account package and leverage ratio re some other things one must keep in mind.
Foreign Exchange Risk
Foreign exchange market involves risk. Foreign exchange risk basically refers tom the risk that an investment’s value might change due to certain modifications in the value of two different currencies or due to other changes in business environment. Foreign exchange risk is also known as currency risk or exchange rate risk or forex i.e. FX risk.
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