Foreign Exchange Market

Categories: Forex, International

Think: A supermarket of bartered-for groceries, only instead of trading three ketchup bottles for one Life cereal, you're trading so many yen for so many euro.

A FOREX market is just that: a place to trade international currencies. These currencies are valued against one another and can vary in relative strength based on all the normative factors. The foreign exchange market is “in the cloud,” so to speak, and doesn’t have a physical location. When one country buys something from another, the foreign exchange market uses current currency exchange rates to change one currency into another, so that the transaction can be completed.

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Finance: How does foreign exchange work?11 Views

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Finance allah shmoop how does foreign exchange work All right

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Well there's risk when you buy and sell goods and

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services outside of the u s that isn't there when

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you buy and sell goods inside the u s your

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smoothies and absence a major chain of a thousand smoothie

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shops you buy a million bananas a year the customers

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believe that they have a peel you buy all of

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them plantains actually these little guys from uganda and just

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agreed to pay in ugandan shillings One u s dollar

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buys about four thousand ugandan shillings and that's a lot

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of bananas You take the risk on the foreign exchange

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currency because well you don't like hedging your bets you're

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just going to take the risk if the currency moves

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up or down it's on you horse at another way

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Yeah if you were nervous about relative currency valuation fluctuations

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well you could be a kind of currency life insurance

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in paying a ten or twenty percent premium above where

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the relative currencies air trading today that for thousands of

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one thing and you could sleep pretty well at night

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knowing that your rates were fixed like you're basically paying

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Someone else to take the risk of uganda suddenly getting

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its financial act together in its currency skyrocketing so that

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a u s dollars only buys you three thousand or

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two thousand ugandan shillings or things go the other way

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But you don't like buying insurance You know how nice

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the jets are that insurance executives fly and you know

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about warren buffett He didn't get there for free so

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you didn't had you didn't do anything to worry about

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currency but then all of a sudden china decides to

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adopt uganda as its new financial partner agreeing toe underwrite

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all of uganda's debts basically in return for well uganda

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Yeah they liked owning uganda way better weather and they

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also got the highly prized you r l uganda dot

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com So then almost literally overnight the ugandan shilling becomes

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highly more valued under the deeply respected and feared auspices

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of the chinese banking system So instead of a dollar

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buying you for thousand schillings while now a u s

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dollar only buys you one thousand so your cost of

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bananas just went from four hundred bucks a ton to

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sixteen hundred bucks and the marginal cost of those banana

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Plantain Things in your shakes went from thirty cents over

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a dollar twenty and with profit margin per shake it

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only two fifty to start with twelve new profit margins

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suddenly dropped almost in half Eventually you'll have to find

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another banana supplier or raise prices or figure out a

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substitute But well for now it looks like this Foreign 00:02:29.253 --> [endTime] exchange deals Profits will get eating

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