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

Market for foreign exchange - Essay Example This 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, according 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 one’s currency. As mentioned above, a currency maybe pegged or valued against a basket 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 intermediate form, the ‘balanced float’ that is characterized by some government control bu t is largely based on the principles of demand and supply. Taking a more realistic view, the value of a country’s 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 country’s currency. For instance, a tourist who visits country A will require country A’s currency to purchase 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.