Foreign Exchange market in UK



Foreign Exchange Market in UK

Introduction

Foreign exchange is a type of exchange through international currencies for global trading. It is run by financial centers, which work as anchors between all available sellers and buyers. This foreign exchange market determines the value of currency. Foreign exchange market helps to convert currency and helps the market to perform international trade. The modern foreign exchange was reborn in 1970's after three decades before which it was placed on a halt as countries were using floating exchange rates. The daily amount of foreign exchange market trading is more than one trillion US dollar as estimated by the Bank if International Settlements in 1992.

Discussion

The foreign exchange market works as a mechanism, by which a person is able to provide or attain credit for all transaction including international trade. One can also transfer purchasing power from one country to the other and also helps to minimize foreign exchange risk exposure. In international transactions, the transfer of purchasing power is very much important as there are parties in countries holding different national currencies (www.colorado.edu). These different parties present in a country wants to deal with their own currency that they are holding, but this cannot happen as transactions are invoiced in only one type of currency. In case of provision of credit, the movement of goods between one country to the other requires time, the stock in transit therefore need to be financed. Hedging facilities are even provided by the foreign exchange market which transfers foreign exchange risk to someone else. The foreign exchange market functions on two tiers, which consists of wholesale market and interbank, retail market or client. Large sums are involved in individual transactions in the interbank market; these are multiples of a million US dollar or in the same value to other currencies. Here, specific amounts of contracts take place between the client and the bank. Both, foreign exchange dealers including nonbank and bank operate in clients market and interbank. They usually buy foreign exchange at a relatively low price at a bid and then sell it back at a higher price to profit themselves. The foreign exchange market is contributed by the competitions held worldwide amongst the dealers as it aids to the narrowing of the spread between bid and ask. .In United Kingdom (UK), the transaction in foreign exchange market is comparatively quite high and an example in ...