Having a good understanding of foreign exchange functions, although it does not seem to be of direct help to personal foreign exchange investment , is actually very helpful to the execution of the entire trading plan and the thinking of investors. What are the functions of foreign exchange margin trading?
What are the functions of foreign exchange margin trading?
- Valuation scale function
As a scale for calculating and measuring the value of all commodities, foreign exchange is performing the function of a valuation scale. Foreign exchange as a measure of valuation can obviously only be foreign currencies included in foreign exchange. The foreign currency performs the function of the valuation scale, which is to express the value of the measured commodity as the price of the foreign currency
If a country’s import and export commodities are denominated in foreign currencies, it means that they will eventually be settled in foreign currencies, which will cause problems of exchange between the local currency and the foreign currency or between the foreign currency denominated and settled and other foreign currencies, which results in foreign exchange risks . This is different from the foreign exchange margin trading conducted by individual investors. The reason for foreign exchange margin trading is to make profits by relying on the difference between different currencies , rather than using it to buy goods or services, which needs to be distinguished by investors.
- The function of purchasing means
As a means of purchasing imported goods and services (there are exceptions for purchasing domestic goods and services), foreign exchange is performing the function of a means of purchasing. The function of how much purchasing power a certain amount of foreign exchange has when it is used as a means of purchase mainly depends on two situations:
First, when purchasing in the foreign currency issuing country, it depends on the price level of that country.
Second, when purchasing in a country other than the issuing country of the foreign currency, it depends on the exchange rate between the foreign currency and the currency of the country where the foreign currency is purchased . The latter may generate foreign exchange risk. The foreign exchange margin trading we conduct itself is a trading method, but its trading is completed through the foreign exchange trading platform provided by the bank or foreign exchange dealer . In this way, there is an essential difference with international trade settlement.
Foreign exchange margin trading as an investment method needs to be distinguished from the process of foreign exchange exchange and settlement between countries. We take this model as the object of the transaction, and the transaction object of international foreign exchange transactions is often physical commodities or remuneration paid to labor.