Advantages And Disadvantages Of Foreign Exchange

1. What is Foreign Exchange?

Trade has been carried around the world for centuries, before the invention of money people used to follow barter system that is exchanging one good for another. This was not such a good system because commodities were not of equal value always. So to counter this world moved on to gold and silver based methodology of paying for commodity but the value of these bases fluctuated a lot on the basis of demand and supply. Because of its many advantages money was eventually created for facilitating trade. People eventually accepted money as media of payment but there was an issue that each country issued its own currency, which hampered international trading as purchasing power of each currency differed considerably and was dependent on much currency the country issued. It was just before the World War II 700 representative’s allied nations met up in Bretton Wood, New Hampshire to debate over what would be called Bretton Wood system of international monetary management. In this US dollar replaced the Gold standard and it was the only currency to be backed by the gold which in future lead to the failure of this system as US Treasury did not have sufficient gold to cover all the currency being traded in the world. But out of this came three international agencies to monitor international

Suppose I am an exporter living in India Rupee is the currency in which I can buy local items. I as an exporter export to some person in Great Britain whose local currency is British Pound. When I deliver goods to that person, he/she pays me in GBP which I cannot use to purchase any of the local items. So this currency needs to be converted into Rupee so that I can buy stuff locally. This is the need of FOREX in today’s world simplistically speaking. There are other such issues which lead to the requirement of