This is the Definition, Function, and Types of Foreign Exchange Markets

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Foreign exchange rates are categorized as indicators or parameters that are commonly used by individuals and state agencies to conduct economic transactions.

Most people already know about foreign exchange rates. However, did you know that the foreign exchange rate has two terms? Here’s the review.

Understanding foreign exchange rates

Foreign exchange rates have two different terms, namely exchange rates and foreign exchange. The exchange rate is a term that is often used in the financial sector which is better known as the exchange rate.

In general, the exchange rate is the price value of a currency that can be measured against the value of another currency and can be bought or exchanged.

Meanwhile, foreign exchange, or what is known as foreign exchange is a foreign currency that is recognized and accepted by other countries.

Usually, foreign exchange can be used as a legal tender when you make inter-economic transactions, both international and international trade.

Get to know the function of the foreign exchange rate

Along with the times from various parts of the world, especially in the current economic field, the trade sector has also developed so that many other countries also carry out international trade.

Therefore, in the international trade arena, a tool is needed to exchange world currencies and that tool is the foreign exchange rate.

The foreign exchange rate has three functions that you need to know. The three functions are a medium of exchange and international payment, a tool for controlling exchange rates, and a tool for facilitating international trade.

For more details, see the review of the three functions of foreign exchange rates below:

As a medium of exchange & international payment

In general, all transactions require a medium of exchange such as money. Therefore, in the world of international trade, both goods, and services, the medium of exchange that is often used is the foreign exchange rate.

For example, when you want to make an international payment when importing a vehicle from Japan, the majority of the currency that needs to be paid to Japanese people is in Yen.

As a means of controlling the exchange rate

Usually, the currency exchange rate owned by a country will continue to change over time.

To control these changes, foreign exchange rates are needed. The use of foreign exchange rates in a country is believed to be able to control currency exchange rates more easily.

For example, when you want to see the exchange rate of Rupiah to USD, then the value of the rupiah exchange rate can be seen whether it is going down or rising.

In other words, the foreign exchange rate can be a benchmark for maintaining the stability of a country’s currency value.

As a tool to facilitate international trade

In the arena of international trade, smooth transactions are needed so that it does not take much time.

Therefore, this foreign exchange rate is very appropriate to use in order to facilitate international trade transactions so that the buying and selling process runs without any problems.

In general, every other country only wants to make transactions in the world of international trade at foreign exchange rates.

For example, the foreign exchange rate that is often used in international trade is the US dollar. Why is that? Because US dollars are claimed to be very easy to exchange into other countries currencies.

Market types of foreign exchange rates

In addition to the understanding and function of the foreign exchange rate, you also need to know the types of the foreign exchange market. The following are the types of markets for foreign exchange rates.

Spot Market

The spot market is a market that provides fast currency exchange transaction services at banks and money chargers. Making transactions on the spot market will usually run when you want to go on vacation abroad.

Forward Market

Then there is the forward market, which is a market that provides services for purchasing foreign currency by contract. Usually, with the contract value, the purchase price of the currency in the market can reach millions of US dollars.

Currency Options Market

The market is a market that serves trading or buying and selling on a contract basis (Currency Option). As is known, Currency Option contracts are divided into two groups, namely Currency Call and Currency Put.

Currency Futures Market

Unlike the Currency Options market, this futures market is a market that caters to trading with Currency Futures contracts. Only by using this one contract, you can ensure the standard volume of a certain exchange rate that can be exchanged.

In addition to market types, foreign exchange rates also have several types of transactions such as spot transactions, the value today, value tomorrow, spot value, and forward transactions.

A trader certainly needs to know the currency exchange rate before trading.