Foreign Exchange Markets Introduction

 Is the main driving force of global economic market, foreign exchange, is undoubtedly an essential element for the country. But for all countries with different currencies in trade with each other, the system of exchange rates between their currencies is necessary, this system is formally known as foreign exchange or currency exchange.In early days, the system of exchange is supported entirely by amounts of gold held in the vault in the country. But this system is no longer appropriate now because of inflation and thus the value of a currency today is determined by market forces alone.

To determine the value of the currency exchange rate, two types of system used as a floating currency and floating exchange rate related currency.For, its value is determined by supply and demand on the world market, where supply and demand is bound by all these factors such as foreign investment, inflation and ratios of imports and exports. Usually this system is taken from the most advance countries like UK, USA and Canada. All these countries are similar, when the market is mature and stable in an economic sense. These countries chose to practice the system owing to the land on which the floating exchange rate has proved more effective than the related exchange rate.

     The reason is because of floating exchange rates that the market will re-adjust rates in real time to delineate the actual inflation and other economic forces. But each has its own system fault and that makes the system of floating exchange rates. For example, if a country characterized by economic instability due to various reasons such as political issues, a system of floating exchange rates would dampen investment because of the high risk of suffering from inflation or a sudden crash in the exchange rate decline. Another form of the exchange rate is known to be linked exchange rate. It is a system where the value of the rate fixed by the government of the country, not supply and demand in the market. This system is called linked exchange rate as the value of the currency is pegged to another currency. As a result, the value of the currency that does not change, as opposed to a floating currency. 

    The working principle behind this system is quite complicated when the government of the country will be fixed exchange rate criterion of their currency, and where there is demand for a currency by increasing the rate that the government should be free enough that currency market to meet this demand. However, there is a fatal disadvantage of this system, which if linked exchange rate is not controlled properly, may panic in a country and as a result, people are early to exchange money in a more stable currency. When this happens, then that overflow from the side of the currency market will reduce the value of the exchange rate and ultimately, their currency will be worthless. Therefore, only those who developed and developing countries will practice this method as a tool for controlling inflation rate.However, the truth is that most countries which are not fully practice a floating exchange rate or exchange rate criterion related method reality.

 

      Instead, they use a hybrid system called floating peg. Sailing club is a combination of two systems in one country, usually a fixed rate for their U. S. dollars and then they will constantly review peg rate to remain in accordance with the actual market value. Foreign currency, or commonly known as FOREX, is the largest and most prolific financial market because each day more than 1 trillion value of the currency exchange takes place between investors, speculators and countries. From this we can deduce that the actual mechanism behind the world of foreign currency is much more complex than what we perhaps already know, and that the information described above are only the tip of the iceberg.