Define foreign exchange? What are foreign exchange transactions and what are the factors influencing on the foreign exchange?

Foreign exchange means:

1.     The currency of the other country.

2.     Is a system where by international payments are made.

3.     It refers to the rate at which banks buys and sells foreign exchange.

“Foreign exchange transactions”

Foreign exchange transactions are usually put into four categories.

1.                 Current transactions:

Current transactions are further divided into two classes.

a.                 Visible trade:

Visible trade is based on the import and export of physical goods.

b.                 Invisible trade:

The transactions which have direct relation with the import and export of goods.

2.                 Capital transactions:

Capital transactions are different from the financial transactions, when a country grants aid or give loans to other country, it will be a capital transaction.

3.                 Short term financial transactions:

If the citizens of one country due to political or economic reasons. Transfer their foreign exchange reserves to other. Country for a short period. It is then said to be a short term financial transactions of a foreign exchange.

4.                 Working balances:

The commercial banks some time keeps their working balance in foreign money in another country for earning higher profit or fear of devaluation in the home currency.

“Factors influencing foreign exchange”

Main factors:

The main factors which influence the movement of foreign. Exchange from one country to another country are as follow:

1.                 Leads and legs:

If a country aspect that change in the rate of exchange is likely to be in his favors, there will be a movement of funds to other country.

Effort will also be made to create delay in the settlement of debits. Payments for the imports will be made before the fall due. On the other hand, if a country fears that a change in the rate of exchange is likely to be unfavorable to it than attempt will be made to secure early payment of debts. Efforts will also be made to make payment to the creditor country before the fall due.

This factor that influence the foreign exchange is known as leads and legs.

2.                 Arbritage:

The demand for and supply of foreign exchange is also influenced by the Arbritage operation which may be, “Stock Arbritage” and “Money Arbritage”.

Arbritage is a process of buying things in one markeet and selling them at the same time in another markeet in order to take advantage of the price difference.

3.                 Political and economic condition:

If there is a political instability and labour unrest in the country, the industrial growth will be adversely affected. There will be a movement of foreign capital outside the country. In case government of the country encourages private enterprises and gives liberal concession, the growth of the exports will be increase and the supply of foreign exchange will also increase.

Seasonal factors:

The rate of foreign exchange is also affected by the seasonal fluctuations in the exports in the exports and imports of goods. The central bank and the other foreign exchange dealers try to smooth down the fluctuations in the rate of foreign exchange by purchasing the foreign exchange when the exports are its peak and sell the help up foreign exchange when the imports are its peak.