Foreign Exchange

A foreign exchange transaction has two cost components. One is the currency exchange rate. This is the amount of one currency required to buy one unit of another currency. The second is the fee charged by an intermediary. Forex traders refer to this as the “spread” charged by forex brokers. For individuals exchanging currency in small amounts to go shopping while traveling, for example the transaction fee is usually in the form of a percentage added to the cost of the currency exchange rate. The brokers generally charge between 50 paise to 75 paise in case of exchanging one dollar.

Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, GDP, unemployment rate, inflation and political stability. Before any major economic data release, there will be an expectation figure expected by economists, Forex market will only respond accordingly if the figure release is far away from the expected figure.

Governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. However, the size and volume of the Forex market makes it impossible for any one entity to drive the market for any length of time.


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