Forex: Why Foreign Exchange Exists
The concept underlying foreign exchange has existed for almost as long as mankind--- from the earliest civilizations, when the cultivators of crops learned that they could barter their produce for the skins and game gathered by the hunters.
This early commerce between neighbors grew into trade that spanned borders and oceans as merchants exchanged silks, spices, precious metals, food and other commodities.
As trade became increasingly formalized, specific mediums of exchange became recognized--- that is, the value of traded goods became related to certain quantities of durable commodities, precious metals, or in the case of some island societies, even seashells. Thus, currencies evolved, each with a value which could be measured against others.
It was inevitable, with the expansion of international commercial dealings in modern times and the importance of being able to transfer value from one country to another., that the varying 'worth' of currencies would take on increasing importance. As currencies crossed borders, their 'exchange' value could have a crucial effect on the merchants' returns from transactions.
In a larger context though, as trading economies became more interdependent, the fortunes of one country's currency could affect the prosperity of other countries. Merchants came to realize also that that the differing values hid a potential advantage: profits could be made not only from traded goods, but from the 'foreign exchange'--- that paid for them.
Foreign exchange was no tame animal, however. It could be unpredictable and dangerous, and attempts to exploit it could lead to large financial losses.
It was the need to try to harness these characteristics of currencies, and to take the best possible advantage of them, that led to the evolution of the foreign exchange markets of today--- a highly sophisticated industry involving governments and business, with dealers juggling volatile exchange rates for profit or protection and trading money round the world and round the clock as a commodity in its own right.
Despite its apparent complexity, foreign exchange--- 'forex' --- affects almost everyone to some degree. For example, understanding the exchange rate between the Australian dollar and the United States dollar can help us make judgments about whether a proposed purchase is a 'good value'.
What also differentiates the foreign exchange market from other markets is its unique and important position at the center of the international payments system. Because of this, it is vital that nothing should be allowed to occur in foreign exchange markets that could jeopardize or call into question the reliability and integrity of that system. The international payments facilities available to traders and investors must be efficient, reliable and risk-free. This demands high standards of competence and integrity from foreign exchange traders, and requires the institutions which employ the traders to maintain equally high standards of soundness management, operating procedures and risk positions.
