Understanding What Foreign Exchange or Forex Is in Business

“In the business world, foreign exchange (forex) is a familiar thing. With foreign exchange, transactions between countries can be carried out easily and smoothly. Make sure you understand what forex is so you can make good use of it.”

Foreign currency or what is often abbreviated as forex refers to foreign currency traded on the foreign exchange market . This currency can be used by individuals, entities or countries in carrying out international transactions.

Forex involves exchanging currencies from different countries that are used for a variety of purposes, from international travel to investing. If you plan to invest in foreign currency, CIMB Niaga’s Foreign Exchange product, which is available in 14 currencies, could be the right choice. As a consideration for investing in foreign currency, let’s look at the discussion below.

What is Forex?

Foreign exchange (FX) is a currency conversion used in international trade and transactions. Forex is traded globally through the foreign exchange market ( FX market ), which is one of the largest financial markets in the world.

The foreign exchange market is a place for buying and selling currencies between countries. This market operates continuously 24 hours every day and connects market players from all over the world.

Foreign exchange transactions can be carried out in various forms, such as cash (spot) buying and selling , forward buying and selling , futures buying and selling , swap buying and selling , and option buying and selling.

Forex Functions

As a legal means of payment, foreign exchange has many functions to support international transactions such as the following:

  • International trade payment tool

Foreign currency is currency that is recognized internationally. With foreign exchange, two countries that use different currencies can carry out trade transactions without having to exchange currencies first. 

  • Facilitate international trade transactions

One of the main functions of foreign exchange is as a means of payment in international trade. When a country trades with another country, both countries must use the same currency. 

Therefore, foreign exchange is needed to bridge currency differences between countries.

  • Investment

Apart from functioning as an exchange rate in international trade, foreign exchange can also be used for investment. Many investors engage in currency trading to make profits by buying forex when the price is low and selling it when the price soars high.

Utilizing foreign exchange as an investment instrument will be profitable for your business, considering that foreign currency exchange rates tend to strengthen every year. You can choose a foreign exchange account, forex trading , or foreign exchange futures as a foreign exchange investment instrument.

  • Reduce the risk of loss

Another function of foreign exchange is for hedging or reducing the risk of loss due to exchange rate fluctuations. With foreign exchange, you can protect the value of your assets from the risk of changes in exchange rates.

Types of Forex 

Forex can be divided into two types, namely physical forex and non-physical forex.

  • Physical currency

Physical currency is foreign money in the form of metal or paper. Physical currency is usually used for transactions that require cash, such as when traveling abroad or making transactions abroad. 

In a physical foreign exchange transaction, the seller will hand over foreign money to the buyer and the buyer will hand over rupiah money to the seller.

Examples of physical currency are physical money in United States dollars (USD), euros (EUR), Japanese yen (JPY), and British pounds sterling (GBP). You can get currency at banks, money changers , or other places that provide foreign exchange buying and selling services.

  • Non-physical foreign currency

Types of non-physical foreign currency are foreign money in the form of securities such as money orders and checks. Non-physical currency is usually used in non-cash transactions, such as bill payments or interbank transfers to pay for product imports.

Non-physical foreign exchange is considered more practical and efficient, because there is no need to carry large amounts of physical money. Examples of non-physical foreign currency include money orders, checks and foreign currency deposits.

Factors Affecting Foreign Exchange Values

Foreign exchange rates can change at any time which is influenced by various factors including:

  • Inflation

Inflation is a general increase in prices. The occurrence of inflation can have a major impact on the value of a country’s currency and the exchange rate of its foreign currency with other currencies. 

A low inflation rate does not guarantee a good exchange rate, but a very high inflation rate will likely have a negative impact. High inflation can cause the value of a country’s currency to decrease. 

  • Demand and supply

The main factors that influence the value of foreign exchange are supply and demand. If demand for a currency is higher than supply, then the value of that currency will strengthen.

Conversely, if the supply of a currency is higher than the demand, then the value of the currency will weaken.

  • Economic growth

High economic growth can increase the value of a country’s currency. This is because people’s purchasing power will increase, thus attracting investors to invest their capital in that country.

  • government policy

Government policies can also influence foreign exchange values. For example, a government policy to devalue its currency can cause the currency’s exchange rate to fall. This is done to encourage exports and increase the competitiveness of domestic products.

By understanding what foreign exchange is, you will be wiser in using and managing the currency. Interested in using forex as an investment instrument? You need to choose a trusted foreign exchange provider, such as CIMB Niaga Foreign Exchange for example. 

CIMB Niaga offers easy and convenient foreign exchange transaction services for your business needs. With CIMB Niaga Foreign Exchange , you will experience various attractive benefits such as the following:

  1. Buying and selling foreign exchange
  2. Transfer facilities to all countries in the world
  3. Competitive foreign currency exchange rates
  4. Active monitoring of FX Market movements by G7 desk.

CIMB Niaga Foreign Exchange is available in a choice of 14 currencies including Euro, Pound Sterling, US Dollar, Australian Dollar, New Zealand Dollar, Hong Kong Dollar, Canadian Dollar, Singapore Dollar, Swiss Franc, Renminbi, Malaysian Ringgit, Thai Bath , SAR, and Yen. Visit this page for more info.

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