Theforeign exchange market is a structure where money from variouscountries is exchanged. By utilizing the foreign exchange market,firms can obtain and provide credit for international transactionsit is mostly used to finance the transit of goods between countries.It helps in the minimization of foreign exchange risk by providing“hedging” facilities that transfer the risk to another firm.Since the international markets involve many countries and allbusinesses want to deal with their national currency, the transfer ofpurchasing power is a service provided because operations can only bedone in a single currency. (Nassimi, Asfaranjan, Keshvarsima, &Baradari, 2014).
Whena country’s currency strengthens, it hurts the profitability ofsome businesses that operate on a global scale. This is because thecompany’s domestic product becomes more expensive making it lesscompetitive in the international markets. The American ExpressCompany on July 2015 reported a 1.4-percent drop in shares due to a3.7-percent fall in its second-quarter earnings, this fall in shareswas caused by the strengthening of the U.S. dollar. The foreignexchange market is very volatile, and the price shifts can betriggered by factors such as a change in political dynamics, economiccycles, supply, and demand (HarvardEntrepreneurships, 2016).According to Cox and Albanese (2015), the currency of oil producingcountries weakened due to the fall in crude oil prices.
Theforeign exchange markets provide traders with flexibility. There isno limit to the amount of money that can be used for trading, andbecause the market is open 24/7. It is also transparent because nocountry or Central Bank that can rig the prices for an extendedperiod. The variety of trading option is a bonus since firms cantrade in hundreds of currency pairs there is also a choice of spottrades or future agreements (HarvardEntrepreneurships, 2016).
Cox, J.,& Albanese, C. (2015, July 21). Oil-sensitive currencies hitby commodity slump. The Wall Street Journal. Retrieved fromhttp://www.wsj.com/articles/oil-sensitive-currencies-hit-by-commodity-slump-1437491919
HarvardEntrepreneurships.(2016, July 24). 7 risks and benefits of foreign exchange | financialand business resources, ideas, tips. Retrieved fromhttp://www.harvardentrepreneurship.org/363/7-risks-and-benefits-of-foreign-exchange.html
Nassimi, M.,Asfaranjan, Y. S., Keshvarsima, A., & Baradari, F.(2014). Trading in the foreign exchange market (Forex): A study onpurchase intention. International Journal of Scientific andResearch Publication, 4(3), 1-10. Retrieved fromhttp://www.ijsrp.org/research-paper-0314/ijsrp-p2722.pdf