Foreign Exchange Market (2017 Update)

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Foreign Exchange Market

Conditions for Establishment of Foreign Market

Conditions for establishing foreign exchange markets are similar to the conditions for the organization and functioning of the money market. Indisputable three basic preconditions for the existence and functioning of the foreign exchange markets:

  1. Convertibility of currencies.
  2. Adequate monetary reserves and rational policy for the handling of them by the central bank.
  3. A balanced long term balance of payments.

It is also necessary to the existence of free competition. This competition is between commercial banks and the possibility of short term investments in the country. In addition to that, those abroad in the form of securities to higher amounts and periods of 3 to 13 months. There needs to be an organized exchange market with certain rules of trading on which are traded just called. Available foreign currency to the national money can emerge as a free currency convertibility is necessary domestic currency. Furthermore, to bar its softest variant, convertibility of foreign legal entities and individuals.

Supply and demand of foreign currencies usually never balance in shorter intervals.

Therefore, the maintenance of exchange rates within a certain range with the intervention of the central bank is very important for postponing and functioning of the free foreign exchange market.

This administrative measures such as the freezing of courses do not come into consideration. Because if the demand for foreign currency is higher than supply then it is certain that the exchange rates reach the top spot. Furthermore, have time to open the questions of determining the priority needs for payments abroad. Therefore the question of criteria for the elimination of excess demand. Such measures are incompatible with a free foreign exchange market.

The general approach to the problems of the foreign exchange market

The foreign exchange market is a place to meet supply and demand, and performs buying and selling foreign currencies. It is not physically or spatially limited but there is everywhere is exchanged valuta.To were major financial centers such as New York, London, Paris, Frankfurt and they play a decisive role in the education of price-currency purchase and sale of foreign exchange rates.

The main purpose of the foreign exchange market is to enable and facilitate international trade and international capital movements. Today, for all international financial markets can be said that the foreign exchange market. On this unstructured markets business expansion is enormous, so the daily trading volume estimated at over 1,600 billion dollars.

Foreign exchange is arranged set of relationships in which the through organized financial system face supply and demand of foreign exchange. This leads to the formation of foreign exchange rates, as the price of foreign exchange, from which it carries out the purchase or sale of foreign currency.

Basic Need of Foreign Currency

The basic need for the purchase of foreign currency usually comes from business transactions between residents of different countries, and that is the need of payment in foreign currency. But the largest number of purchases and sales of foreign currency on the interbank market comes from the following reasons:

  1. Hedging, or the purchase and sale of foreign exchange in order to minimize the chance of the risk of loss due to changes in the value of the exchange rate, relative to the base currency and
  2. Speculation, or holding certain currencies in the portfolio with the expectation of an increase in the exchange rate in order to realize profits

Buying and selling of foreign currency or foreign exchange, is conducted according to the established exchange rates. The motives are varied:

  1. Provision of certain currencies in order to fulfill certain obligations to foreign creditors.
  2. Replacement of one foreign currency to another in order to protect from exchange rate differences.
  3. That the realization of foreign exchange earnings, adjustment of supply and demand of foreign exchange regulation and foreign exchange is done through central bank intervention. This is done in the market of short term deposits and loans and foreign securities. In addition to that, medium or long term loans as well. This is done practically international exchange of capital

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