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Why Do I Need Foreign Exchange?

There was a time in human civilization that money, whether in coins or in paper, didn't exist. When you needed something, you would have to give up one of your possessions for another's. For example, if a farmer sees a travelling merchant visiting their community to sell some precious and delicate china porcelains, he would have to exchange a portion of his rice for the merchant's china. Such an agreement is called barter where one thing is exchanged for another that were believed to be of the same value.

Of course, this hardly ever happens now as barter, except maybe for e-bay, as it could become a very complicated process in the large-scale. Money has become an effective tool to make businesses and ultimately, our daily lives, easy and simple. When you need a commodity or service, all you need to do is to have the right amount of money in order to have that thing you desire.

Because of globalization and with more countries opening up to the world, it is inevitable that we become more involved with each other. The young Koreans have found it important to see and travel the world with a certain fondness for the beaches in the Southeast Asia. The Americans travel all the time to France and Italy to see the latest fashion and the great landmarks. The Africans are selling their nicely-crafted home designs to the Europeans. All of these are indicative as to how we are all connected, one way or another. However, when you travel, you cannot bring your nation's money alone and expect to live on a foreign land. This is where foreign exchange becomes important to you.

Each nation is represented by its own national currency. The US has the American dollar while the Japanese has the yen, just to name a few. When an American travels to Japan, he would need to exchange his dollars to yen in order to buy things in that country. This is called foreign exchange. In order for him to have a benchmark as to how many yen his dollars could buy, he would need to now the current exchange rate in local banks or money exchange. If it says 1 dollar = 101 yen, it means that his dollar is highly valued and could already buy 101 yen.

If the exchange rate the following day changes and becomes 1 dollar = 100 yen, his dollar had depreciated against the yen and now could buy one yen less than the other day. A depreciation and appreciation of a currency indicates the strength of that particular currency and is always in reference to another currency.

Multiple countries are also doing business with each other and this is another situation where foreign exchange becomes important. When a Filipino exporter exports his mangoes to the US, he does not get paid in pesos but in dollar equivalent. Foreign exchange is an exchange of two national currencies, in this case, the peso and the dollar.

So now we have seen how foreign exchange works and how we are affected by it one way or another. It is not as complicated as how it looks like in the business papers. All you need to do is to have a clear grasp on how the exchange of money happens and you would do just fine.