Reasons for the emergence of the foreign exchange market

　　foreign exchangeThe market refers to a trading place engaged in foreign exchange trading, or a place where different currencies exchange with each other. The reason why the foreign exchange market exists is because:

　　- Trade and Investment

Importers and exporters pay in one currency when importing goods and charge in another currency when exporting goods. This means that when they settle their accounts, they receive and pay in different currencies. Therefore, they need to exchange some of the currency they receive for currencies that can be used to purchase goods. Similarly, a company that purchases foreign assets must make payments in the currency of the host country, so it needs to convert its domestic currency into the currency of the host country.

　　- Speculation

The exchange rate between two currencies will vary with the changes in supply and demand between these two currencies. A trader can make a profit by buying a currency at one exchange rate and selling it at another more favorable exchange rate. Speculation accounts for the vast majority of foreign exchange market transactions.

　　- hedging

Due to fluctuations in exchange rates between two related currencies, companies with foreign assets (such as factories) may face some risks when converting these assets into their domestic currency. When the value of foreign assets denominated in foreign currency remains unchanged for a period of time, if there is a change in exchange rate, the conversion of the value of the asset in domestic currency will result in profit or loss. Companies can eliminate this potential gain or loss through hedging. This is to execute aForeign exchange transactionsThe transaction results just offset the gains and losses of foreign currency assets generated by exchange rate fluctuations.