Of the many financial abbreviations that are finding their way into modern business parlance, Forex is among the most exciting. The volume of trade in Forex globally is on the rise – according to a 2019 estimate, the daily trading volume is in the trillions of dollars.
What is Forex?
The Forex market allows for national currencies to be exchanged globally. It’s critical for businesses who operate internationally, since trade across national boundaries requires swapping one currency for another. Every time you make a purchase from a foreign business, you’re actually dealing in foreign exchange. For example, if you’re buying tens of thousands of potentiometers from a Chinese electronics firm for your line of electric guitars, then you’ll need to exchange your pounds sterling for the Chinese Yuan before the transaction completes.
Of course, most of this process goes completely under the radar, and you won’t be aware that it’s actually happening. But it still has significant implications, since it allows for enormous efficiency savings. For example, if you know that you’re going to be making purchases in a given currency in the future, then you might make the swap ahead of time, when the currency in questions is at its weakest against the pound. When a currency crashes, it might be time to buy – before the market corrects again.
Forex concerns might influence your choice of partner. If one of your overseas suppliers is based in a currency with a booming currency, then you might find that your supply chain is interrupted. Making a switch could therefore save you a great deal.
Exchange Rates Aren’t Static
The most interest you take in Forex markets, the more you’ll realise that exchange rates are influenced by a whole range of outside conditions, political and social. A single election (or referendum) can see a currency surging one way or the other. A savvy Forex trader might look at future events, and try to second-guess what the markets are going to do in response. This strategy naturally carries a little bit of risk – which is why competent traders are so well-renumerated. You might hire a professional outsider to develop the optimum strategy for your particular circumstances.
Banks take a Cut
The bank or broker which facilitates a forex transaction will take a slice of the final amount that you pay. Therefore it’s worth shopping around for the best deal, and buying in bulk when the rates are competitive.