This is the 2nd part of financial products is a supply and amount of foreign currencies (Here’s a link to 1st Article)
Foreign currencies or forex are currencies that are used in other countries or regions. The euro is an example of a currency of a monetary union where several countries have agreed to use the same currency. The buying and selling of forex is done on the foreign exchange market, possible sources of forex transactions are payments and receipts as a result of international investing or borrowing and lending.
They can also be the result of the trading of goods and services. Let’s do an example, suppose that the US government borrows money to cover a budget deficit, and a potential investor can be the European pension fund. The pension fund will need to buy U.S. dollars by selling its euros to be able to lend dollars to the US government. Let’s do another example, let’s say a Dutch producer sells his products to an American company that will pay U.S. dollars since the Dutch as expenses will be in euros exports or wants to sell the dollars at the occurring exchange rate known as the spot rate to receive euros to pay for its expenses.
Now, let’s add another aspect of forex market risk. Suppose that the Dutch exporter, a US client from the previous example, agreed to a delivery of goods. The payment of U.S. dollars occurs one month from today, This creates a possible problem for a Dutch producer if the dollar decreases in value during the coming month. The Dutch producer can buy fewer euros by selling the received dollars and surface in exchange rate loss or forex loss. At the same time, if a dollar increases in value, the producer has an exchange rate profit, so this means that the producer is exposed to exchange rate fluctuations of the year against the dollar and may experience a loss, the historic euro-dollar exchange rate fluctuations illustrated in this graph are a good indication of the basis for a currency market risk assessments.
It shows the historic development of the value of one euro and the U.S. dollar since 1999. In October 2001, the euro had a value of approximately 82 US dollar cents. However, in July 2008, the euro value had increased to one U.S. dollar and sixty cents, almost double its value compared to 2001. Now this proves that the euro-dollar exchange rate changes can be fast and unpredictable. Future forex receipts and payments create exposure to changing exchange rates with potential substantial negative results. Luckily, there is a possibility to transfer this foreign exchange rate risk by selling it to a risk buyer. These risk transfers can be easily made by using the third traded product category on the financial markets to buy and sell risk by derivatives.
