The foreign exchange market refers to a trading place for foreign exchange trading , or a place where various currencies are exchanged with each other. The foreign exchange market exists because:
- Trade and Investment: Importers and exporters pay in one currency when importing goods and receive another currency when exporting goods. This means that they are paid and paid in different currencies when they close their accounts. Therefore, they need to exchange some of the currency they receive into currency that can be used to buy goods.
- Speculation: The exchange rate between the two currencies will change with the supply and demand of the two currencies. Traders can profit by buying a currency at one exchange rate and selling it at a more favorable rate. Speculation accounts for the vast majority of foreign exchange market transactions.
- Hedging: Due to fluctuations in the exchange rate between the two related currencies, those companies with foreign assets may be exposed to some risk when translating these assets into the domestic currency. When a foreign asset denominated in a foreign currency does not change in value over a period of time, a gain or loss occurs when the value of this asset is translated in the domestic currency if the exchange rate changes. Companies can eliminate this potential gain or loss by hedging.
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