Foreign Exchange Markets
What is the role of the Foreign Exchange Markets in promoting international trade and investment activities?
The foreign exchange markets, commonly referred to as forex, can be defined as an over-the-counter global marketplace that is often relied upon to determine currencies’ exchange rates across the world. Reported to exceed $5trillion of currency trading daily,parties taking part in the foreign exchange markets have the ability to speculate on currencies, exchange, sell, and buy. Central to forex activities are banks, commercial companies, and those dealing in forex. Also included are central banks, retail forex dealers, investment management firms, investors, and hedge funds. The foreign exchange markets play vital roles.
As regards international trade and investment, the foreign exchange market is considered the backbone. AsLander &Preece (2014) puts it, foreign exchange markets play critical in supporting exports and imports, which are vital elements as far as gaining resources and creating additional demand for goods and services are concerned. It is quite discernible that the ability to trade using more than one currency has enabled companies to have expanded prospects hence inspiring global economic growth. Investors, on the other hand, use the foreign exchange market to diversify their investments. The investors trade currencies on an occasional basis to buy and sell securities and foreign assets. Also, a significant number of investors treat currencies as a trading currency and asset class in an alpha generation.
References
Lander, K. and Preece, R(2014): Finance briefing: Foreign exchange market and why it matters: The impact of rate rigging. Retrieved on June 14thfrom https://www.ft.com/content/a3b9e74c-ba6f-11e3-aeb0-00144feabdc0