In our fast growing global economy, which at the moment is experiencing a set back due to the recent global economic crisis, trade is still an inevitable occurrence. Different civilizations have been trading since time immemorial even without the use of money. Now that the use of fiat currency has been established, different countries and economies were also able to create their own currency, because of the growing demand not only in terms of goods with the export and export, but with the use of the currencies as well.
Due to the global outlook of most companies, a lot of businesses decided to bring their operations in foreign lands. These are what we call multinational companies now. There are a lot of reasons to put up business in another country. This is also the reason why forex broker is in demand right now because of the good exchange rate in the market. Either to reach a wider expanse of market, or to lower down costs due to macro-economic concerns like ease of doing business in another country, cheaper labor or highly skilled workers, these has an implied need for foreign currency.
To pay foreign debt or pay for foreign goods, companies are now very concerned on the movement in terms of the value of the domestic currency where they are operating, apart from the currency in their own countries. Because of these, a lot of derivatives where created to further enhance foreign currency trading. Companies don’t just buy goods; they also buy currencies to be able to prepare for future obligations, or to protect future income especially for those who are selling within the countries where they decide to put up business in.
One good example of these derivatives would be currency forward contracts. These are long-term contracts that companies and individuals enter into to temper the risk of the volatility of a certain foreign currency. Two parties enter into a contract to buy and sell a foreign currency in a future date, using the current futures rate. Futures rate should be identified from that of a spot rate where the latter is the rate to be used if the trade is done as of the moment.
Financial institutions have invented more of these kinds of derivatives to limit the risks that people dealing with foreign currencies have to burden as a part of doing business. This goes to show how important foreign currency is as an agent of trade in the whole global market place. And as an offshoot of this, there are now a lot of sophisticated financial products available in the