Introduction
Currency trading means the exchange of one currency for another currency by Nations in the foreign exchange market. Currency trading can be called foreign exchange which is also abbreviated as Forex. It is usually carried out at foreign exchange markets and the main goal of the participants is to gain profits (Tim Parker, 2019). Usually when someone is moving from one country to another, currency trading is considered useful. Foreign exchange is considered the world’s greatest and most profitable business since about $2 trillion is traded each day (Tim Parker, 2019). The traders in the foreign markets are usually trade makers and brokers who trade on behalf of investors. However, banks are also very important dealers in the foreign exchange market. Currency trading occurs when there is buying and selling of one country’s currency for another country’s currency (Tim Parker, 2019). As per the argument, I say currency trading plays a positive role in the global economy. The reason for this stand is backed up by the three positive roles of currency trading which are; the Transfer function, the credit function and the hedging function (Tim Parker, 2019).
Currency trading in foreign exchange markets is used in Transfer function. This is the most valuable and important role of currency trading in the financial markets of the economy (Ozdemir & Gumussoy, 2017). Currency trading helps to exchange the funds from the foreign money to the indigenous kind of currencies. The exchange of currencies helps to settle debts, fresh payments and encourage both international trade and home trade in an economy which is comprised of investors from different countries. Such payments can be made through instruments of credit. These instruments of credit may include the following; telephone transfers, foreign exchange bills, bank drafts among other forms of payments. Also, transfer of currencies does not need many brokerage funds and fees for exchange. Some brokers in the currency trading gain profits through commission as bidding the amount in different currencies. This helps to motivate investors or traders across countries to carry out efficient market exchange to yield more profits. For instance, when the business man from India gets goods from United States of America, the transactions are made in US dollars. But when converting Rupee for India, the payments need to be converted to dollars by the use of FOREX (Ozdemir & Gumussoy, 2017). With this foreign exchange, the transfer of goods and services is smoothened rather than depending on one currency.
Furthermore, currency trading facilitates credit function. Credit function involves the offering of short-term credit to the business men especially the importers. Short-term credit offers helps alter the flow of goods and services by the importers and exporters in the transaction process. Most of the importers require credits in order to fund the purchases in foreign markets. This can be seen by the example from Britain and America, if a company from England is in need of machineries from United States of America, a company can pay its purchases through giving bill of exchange in another market which commonly known for the three months for maturity (Ndungo et al, 2016). As the credit circulates all over the economy, goods and services cannot be intermediated without another means of gold and silver. This does not save transportation costs while trading across the orders of the countries. Several authorities have estimated that over 90% of the national’s businesses are being done on credit. For the case f estimating the purpose of credit in the world, nations assume that nothing can exit in an economy without credit. Therefore, economies should adopt to use several other means of exchange in transactions especially in businesses done around the globe. Each and every purchase requires immediate transaction in for any substitute of payment (Ndungo et al, 2016). This estimation would require using the modern business for more times as previously it was in usage of metal than the availability of supply. Thus, this brings clearly the value of credit in trading of the currency.
Hedging function; it is a responsibility of the foreign exchange market to hedge the risks involved in the foreign exchange. Usually traders in foreign exchange get scared of currency rate fluctuations. Any fluctuation in the exchange rate leads to a loss or a gain for the respective traders (Tim Parker, 2019). This is now the major reason as to why the FOREX provides the solutions by hedging the expected liabilities while exchanging for forward contracts (Tim Parker, 2019). Hedging can be applied in minimizing short term risks for the long term investors and traders and also helping traders go through hard market conditions. A forward contract in this means a contract between the buyer and the seller of currency in a foreign exchange market to buy and sell currency for another currency within a specified time in the future period. The period agreed is usually three or less days and no money is allowed to be exchanged at the contract time. Through this contract, changes in the exchange market are minimized. This makes the presence of the exchange market and the hedging function important and raising the role of currency trading in the global economy.
Conclusion
In conclusion, trade currency has got various good than harm towards the development of the national’s development. Trading of the currency as seen earlier provides transfer of finances across the businesses done across the borders, facilitates the importation of goods and services by the importers by the use of credits and also hedging for the purpose of making profits from international businesses. It is therefore concluded that, the economy without the currency trading is a dead one since currency exchange among different countries and businessmen creates a sense of Growth Domestic Products of the economies.
References
Ndungo, M.J, Tobias, O. & Florence, M. (2016). Effect of Credit Access Function on Financial Performance of Sacco’s in Kenya. International Journal of Finance and Accounting. Retrieved from: https://pdfs.semanticscholar.org/363f/09e54b6d5b987212331a52319fd0ba4880b2.pdf
Ozdemir, A.A. & Gumussoy, S. (2017). Transfer Function Estimation in System Identification Toolbox via Vector Fitting. Retrieved from: https://www.sciencedirect.com/science/article/pii/S2405896317315045
Tim Parker.(2019). The Basics of Currency Trading. Retrieved from: https://www.investopedia.com/financial-edge/0412/the-basics-of-currency-trading.aspx.
