Why do we need a Foreign Exchange market?

Foreign Exchange Market
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Foreign Exchange Market
A foreign exchange (forex) market refers to the place where selling and buying of other currencies occurs. In other words, it is a market that allows individuals and organizations to purchase or sell different currencies. For instance, a person can buy Japanese yens using dollars from the United States of America (USA) or Sterling pounds. A forex market is vital since it facilitates global money transfer, enables nations to gain purchasing powers, offers credit for the international trade, and provides hedging facilities.
People and countries need a forex market to gain purchasing power. Without a foreign exchange market, individuals cannot trade with others from different nations. However, by exchanging a currency to another makes it easy to buy and sell products abroad. In a day, over $5 trillion are exchanged in a forex market (Lander & Preece, 2014). Besides, the primary components of a forex market include commercial financial institutions, the central bank, brokers, and tourists, exporters, immigrants, and exporters. Brokers are the link between the central bank and other banking organizations. Commercial banks act as clearinghouses that give exchange rates daily. The Federal Reserve is the forex market custodian and the lender of last resort. Tourists, exporters, and immigrants are the people who buy or sell their currencies to obtain those of a different country. Consequently, a forex market fosters capital mobility and international trade.
A forex market enhances global money transfer and the provision of credit. For example, someone in the USA can send money to a person in Japan. When sending the money, an individual in the USA can use dollars, while the receiver might get it in the currency of his or her choice. However, the person from Japan ought to convert the dollars into yens so that one can use them to buy things or pay for specific services. When it comes to the provision of credit, exporters and importers benefit from it since they can get a post or pre-shipment loan. For this reason, it become...