This is Part 1 of our introduction into Foreign Currency - Part 2 will cover Laws and Risk Factors - Hope you enjoy the read-
Foreign Currency Definition By Alex Kocic,
Currency is any generally accepted medium of exchange for goods and services in a particular country or region. Today currency normally takes the form of paper notes and coins. Foreign currency is any currency not normally used in a particular region or country.
There are almost 200 currencies worldwide today. Although most countries have their own currency, there are some that adopt another country’s currency as their own. The euro is a common currency in a number of European countries.
Read More Link On Right
Before there was money people would trade, or barter, goods directly—say a certain number of cows for a certain number of tools. This, however, became complicated as the number of goods and services traded grew. That's why a common currency was needed—to help people determine how many tools a cow was worth.
Any durable commodity could be used as currency. Shells, furs, teeth, beaver pelts, dried corn or buckskin (hence the term "buck" for dollar). As Niall Ferguson writes in the "Ascent of Money," the earliest known coins date to 600 B.C. and were found in the Temple of Artemis at Ephesus in modern-day Turkey. First banknotes originated in seventh-century China.
As trade grew between nations that all had their own separate currencies, there was a need to establish foreign exchanges, where foreign currencies could be bought and sold. This came with the birth of the gold standard in 1875. Before that, precious metals such as gold and silver were used for international payments.
Gold standard meant that any currency was backed by gold, measured in ounces. Countries were required to keep large reserves of gold to back the demand for currency. The price of an ounce of gold was set for each currency and the difference in price between two currencies became their exchange rate.
Bretton Woods System
The gold standard was abolished with the outbreak of World War I in Europe and in July 1945 replaced by the Bretton Woods system, in which the U.S. dollar, as the only currency backed by gold, became the ultimate exchange currency. It was replaced in the early 1970s by the current system of floating exchange rates in which currencies are not tied to one another or to gold.
Considerations for Tourists
Whether you have an importing or exporting business, or simply plan to make a tourist trip abroad, there are a couple of important foreign currency considerations. Tourists should buy their foreign currency before they travel, which is usually a bit cheaper than buying it on arrival. For larger purchases or other expenses while abroad, it is better to use a credit card, since most credit card issuers use their own exchange rate, usually slightly lower then the rates abroad, when they bill you.
Considerations for Businesses
Businesses that buy or sell goods abroad can incur significant losses due to exchange rate fluctuations between the time of purchase and time of payment. They should talk to their bank about hedging against foreign currency rises.
Foreign Currency Definition | LINK
What Is Foreign Currency Valuation? By Corr S. Pondent,
Currency values change from time to time depending on market factors. If you have any kind of exposure to foreign currencies, you will need to be aware of foreign currency valuation.
Foreign currency valuation refers to the value of a foreign currency in terms of the local currency, for instance the U.S. dollar vs. the Canadian dollar. This defines how many Canadian dollars you will get for your U.S. dollar. The higher the value of the U.S. dollar vs. the Canadian dollar, the higher your purchasing power will be in Canadian dollars.
There are everyday situations in which you are likely to be affected by foreign currency valuations. If the value of the U.S. dollar goes down vs. the Canadian dollar, businesses that buy raw materials from Canada might see their costs go up. In that case, you might end up paying more for their goods.
Businesses manage their foreign currency risk exposure to guard against changes in foreign currency values. They don't want to end up paying more than they expected for imports or receiving less money than they expected for goods they export. There are various contracts that allow them to do this.
What Is Foreign Currency Valuation? | LINK
How to Find the Value of Foreign Currency By Carter McBride,
Each foreign currency has a different value compared to United States dollars. The amount of one foreign currency equaling one dollar is the foreign currency exchange rate. This can also be inverted where the rate shows how much of a U.S. dollar equals one unit in another currency. By using the foreign currency exchange rate, people can find the value of a foreign currency. Foreign currencies is either used in another country or in speculative trading
1 Determine the currency you want to find the value of. For example, an investor wants to know the value of the euro in relation to the U.S. dollar.
2 Determine how much of the currency you want to find the value of in another currency. In the example, the investor wants to know the worth of 200 euros in U.S. dollars (USD).
3 Search for "Amount of Currency 1 to Currency 2" in Yahoo!, Bing, or Google. Like a regular search, these will bring up various websites, but unlike a regular search, each search engine will convert the one currency to another currency using current exchange rates.
Replace Amount with the amount you want to convert. Replace Currency 1 with the currency you are converting and replace Currency 2 with the currency you are converting to. In the example, type "200 euros to USD."
Each search engine will return a result that looks like "200 euros = 247.7400 U.S. dollars." So 200 euros has the same worth of $247.74.
How to Find the Value of Foreign Currency | LINK
What Is a Foreign Exchange Swap? By Harris Krumme,
What Is a Foreign Exchange Swap?
Euro bills and coins are among foreign currencies that might be involved in a swap.
Both national central banks and large commercial banks use foreign exchange swaps to ensure they have appropriate amounts of widely used currencies on hand. The banks use the currency obtained in swaps to make loans to other banks or to exchange money for bank customers requiring a certain currency.
Swaps have long been available to banks and used during periods of economic stress.
For instance, in May 2010 United States Federal Reserve established foreign exchange swap lines with several other central banks. The swaps were used to ensure the foreign central banks had enough dollars to loan to banks in their country when concerns over the Greek debt crisis were mounting. Swaps were also used during 2008 and 2009 to combat the severe recession gripping most economies.
Any central bank can execute a currency swap with another central bank, though in recent years the actions have most commonly been executed by central banks in nations with large economies, such as the United States, Japan, Great Britain, Switzerland and Canada. The European Central Bank, which handles monetary policy for nations using the euro, also participates in swaps.
Swap agreements can run indefinitely or can be set with a specific time frame. The May 2010 agreements are set to expire in January 2011 but can be extended if one party believes the swaps are still needed. Past agreements have varied in length. The swaps can be established at any time. Participating banks agree to return the appropriate amount of currency to the other party when the swap expires.
What Is a Foreign Exchange Swap? | LINK