Foreign exchange markets are the largest markets in the world and always remain volatile in nature. In such a market, where cross currency buying and selling occurs and funds move from one country to another, one can face risk every time when one enters and trades in the market. Usually exchange rates are determined through the flow of capital between countries, rate of inflation, interest rates and the confidence on the economy of the respective country. Along with government support to the currency, speculations on the government policy could also determine the exchange rate in the market. Traders buy and sell currencies like commodities to make some profits at the end of the day. Traders can only gain when the value of the currency they are dealing with changes in their favor.
The law of demand and supply determines the exchange rate of any currency. When the demand of a particular currency is more than its supply, the cost of the currency in terms of other currencies will increase and vice-versa. This is known as floating exchange rate. Some countries follow fixed exchange rate where the value of the respected currency can only be determined by the respective government.
An investor with as low as $250 investment can go to the forex market, while as per the Securities and Exchange Commission (SEC) rules, an investor has to invest a minimum $25000 in cash or in equity market on any given day. Hence, many s opine that forex market is superior to equity market. Though the forex market has an advantage over the equity market, there are many risks involved. Future cash flows, which are receivable in foreign currency, are always uncertain which might depreciate before it is received and converted into domestic currency and vice versa. This ever fluctuating foreign exchange market not only impacts export and import of firms but also puts a lot of pressure on the institutions and individual investors that have assets in foreign currencies
|
