Forex or foreign exchange deals with the exchange of currencies of various countries. It is a market where the different currencies can be traded across the counters in different centers across the world. The foreign exchange market decides the value of a particular currency of a nation. At these centers, one buys a particular currency by paying the value in terms of another currency. This market is spread across the world and operates on all week days except on week ends. This helps in trading between different countries and in investment because through this facility one businessman to import goods from another country by paying for them in that country’s currency. This also allows people to borrow low value currency and invest in high value currency.

The parties who are involved in this exchange are the banks, investment firms, retail traders etc. Banks are involved in the exchange everyday. They trade on behalf of their customers and for their own banking purpose. Next, commercial houses participate in this exchange because they pay for goods and services from other countries. The exchange rate of the currency of a country changes daily and this daily exchange rate is fixed by the central banks of a nation. The persons or institutions who participate in this exchange speculate on the movement of currency but do not actually take the currency at the end. Finally the most important people who take part in the foreign exchange market are the retail traders. These people largely buy goods from other countries and pay in that currency and their business has an impact on exchange rates.

In this market there is no centralized or specific regulatory authority. Because of this, there is no fixed exchange rate. The exchange rates are different depending on the banks and individuals who are trading. This trading continues throughout the day and throughout the week except on week ends. The factors that determine the exchange rates are economic factors, political conditions in a country and the general market trends. Economic factors include the financial policy of the governments which influences the supply and the rate of money. The budget deficit also influences the rate. If the deficit is more, the exchange market is negative and if the deficit is narrow the market is favorable. The budget of a country influences the currency rate. The political conditions of a country have a great impact on exchange rates. The political instability of a country has an adverse impact on the economy and the currency. If there is political unrest in a country investors move their assets to another country where the conditions are stable and peaceful.

The exchange of currency takes place in several ways. In spot transaction, the currency is exchanged in a short period of two days involving direct cash delivery. In future transactions, the time period is three months the exchange takes place after that period. Thus, foreign exchange is an important financial activity for the promotion of international trade and business.

Samantha Standley is the author of this article on Forex Providers. Find more information about Forex Trading here.