Market for foreign exchange Essay Example | Topics and Well Written Essays - 1000 words

Market for overseas exchange - Essay ExampleThis research will begin with the definition of the foreign exchange market as one of the financial markets that is characterized by buyers and sellers of assets called currencies. It has traditionally performed the role of converting one currency into another. It is consistent with the principles of market economy laid down by Adam Smith, consort to which the value or price of a currency is determined by the market forces of demand and supply. The terms pegged and float are often discussed when dealing with foreign exchange markets and are means of determining the levels of controls on ones currency. As mentioned above, a currency maybe pegged or valued against a hoop of other currencies or maybe left to the market forces of demand of supply in what is known as free float. In between the two, however, lies an medium form, the balanced float that is characterized by some government control but is largely based on the principles of demand and supply. Taking a more graphic view, the value of a countrys currency is determined by the interplay of several factors including the economic, political, geographic environment. Tourism also positively affects the value of the currency by increasing demand for the countrys currency. For instance, a tourist who visits country A will require country As currency to obtain any goods and/or services in that country. Holding everything else constant, this shall result in an increase in demand for that currency, thus, bidding up its price.