Sunday, May 15, 2011

International Finance Business Relating to Forex

I haven't been posting lately because things have been super busy in my life especially with Finals coming up. I've been studying like crazy hoping to get past this semester on the Dean's List again. I've decided that it is time to post something about international business finance because I feel that this is one of the most important aspect of finance and money today. So why is overseas financial investments so important? For one reason, long-run overseas investments earn higher returns than those obtainable in domestic capital markets. A second reason is that these investments reduce portfolio risk through international diversification. For example, the Eurodollar market is now larger than any domestic financial market, and the firms in the United States are increasingly turning to this market for funds. The increase in world trade and investment activity is reflected in the recent globalization of financial markets.

One important concept of international financing is exchange rates. A country's relative economic strengths, trade balance, balance of payments, and level of monetary activity are important determinants of exchange rates. These rates are important because they determine what a person is able to afford. Think about it this way. If the Euro is strong, it will boost American exports because American goods become much more affordable. On the other hand, if the Euro is weak, American exports will suffer because American goods become more expensive.

As one can see, international finance business is important and is very much relevant to the foreign exchange markets. As stated before, the foreign exchange market is organized as an over-the-counter market. Basically, it is a network of telephone and computer connections among banks, foreign exchange dealers, and brokers. The foreign exchange market operates at three levels: 1) customers buy and sell foreign exchange through their banks. 2) banks buy and sell foreign exchange from other banks in the same commercial center. 3) banks buy and sell foreign exchanges from banks in commercial centers in other countries.

So what does determine exchange rates? Exchange rates are affected by two things and they are foreign investors and speculators. Demand for the U.S. dollar will increase because foreigners need to convert, thus, dollar will appreciate. As for speculators, if the U.S. dollar is undervalued, speculators can buy into the dollar. As a result the demand for the U.S. dollar will increase, thus, value of the U.S. dollar will also increase.

I strongly feel that understanding international business finance is important for any traders on the foreign exchange market. With this understanding, traders are more aware of why currency rates move a certain way.