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Trading in Foreign Exchange Analysis

I need help analyzing about "Trading in Foreign Exchange"! What does it mean when someone say's I'm "Trading in Foreign Exchange"? What's the benefit of Trading in Foreign Exchange? Why companies Trade in Foreign Exchange? What are some of the advantages/disadvantages about Trading in Foreign Exchange?

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Trading in foreign exchange simply means importers, exporters, tourists, and governments buy and sell currencies in the foreign exchange market. For example, when a U.S. car dealership imports Nissan vehicles from Japan, payment will probably be made in Japanese yen. The importer buys yen (through its bank) in the foreign exchange market, much as one buys common stocks on the New York Stock Exchange. The foreign exchange market consists of a network of brokers and banks based in New York, London, Tokyo, and other financial centers. These trades are done by computer and telephone.

Two factors in the foreign exchange market can be beneficial and advantageous. They are spot rate and forward exchange rate. Spot rate is the effective exchange rate of a foreign currency for delivery on the current day. Forward exchange rate is an agreed-upon price at which two currencies will be exchanged at some future date. The spot rate allows traders in the foreign market to exchange currencies today at a rate that may be cheaper than a rate 30 days from today. Similarly, traders can agree to an exchange rate that is cheaper today and sign the contract today, but money will be delivered within 30 days.

Companies trade in the foreign exchange market for higher returns on the investment. The one factor that illustrates how a company benefits from returns on their investment in the foreign market is the interest rate parity. Interest rate parity specifies that investors should expect to earn the same return in all countries after adjusting for risk. The overall return will be higher than the investment's stated return if the currency in which your investment is denominated appreciates relative to your home currency. For example, if the shoes cost $140 in the Unites States, importers/exporters could purchase them in the Unites ...

Solution Summary

The trading in foreign exchange analysis is examined. The advantages and disadvantages about trading in foreign exchanges are provided.

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