Basics of Forex ForYou

Let’s say, Ramesh wants to buy this new device, which costs $10. On contacting the buyer, he found out that the buyer will only accept USD as his currency of transaction, Ramesh went on google, looked up for the USD/INR rate, found out that currently it was 78.14, did the calculations, and offered the person a sum of Rs. 782. The buyer declined Ramesh’s offer, emphasizing on U.S. Dollar as his only currency of transaction. Completely confused, Ramesh decides to call Suresh, who then tells him about the concept of Foreign Exchange, and why many international buyers/vendors prefer making transactions in U.S. Dollars only.

Foreign Exchange (forex or FX) is the trading of one currency for another. Being the largest, most liquid market in the world, with trillions of dollars changing hands every day, one can swap a currency for another at any foreign exchange market (also known as forex market). The “forex market” is basically an electronic network of banks, brokers, institutions, and individual traders (mostly trading through banks or brokers). Exchange rate is the price of a country’s money in relation to another country’s money. INR/USD, or INR ‘s exchange rate to USD, as of today, stands at 0.013. Meanwhile, its vice versa, that is USD/INR, or USD’s exchange rate to INR, as of today, stands at 78.14. The reason why most of the international vendors/buyers prefer their currency of transaction to be U.S. Dollars is because U.S. Dollar is the strongest, and one of the most stable currencies in the world.

With all the basic concepts cleared, Ramesh decides to procrastinate, and goes to his local bank to get the exchange done with his Rs. 782.00. He finds out that he was handed a little less $10. On inquiring, he finds out that the current USD’s exchange rate is at 80, thus leaving him confused. This was a result of inflation, which we shall discuss in detail in the next blog.