Money has been an important factor in terms of trade and industry. It has been used not only to sustain a family unit but also as a means to a country’s economic stability. Although different currencies are used throughout the world, money has much taken an intermediary role in global finance which as its name implies; money throughout the world is traded and exchanged. To better understand the wheels of global finance, one has to first understand international monetary system and the foreign exchange market.
The international monetary system has evolved throughout history.
It has been long-existing in the past in the form of trading of different civilizations. The trading between gold and silver coins in the past has been its initiation (Eichengreen, 2000, p. 3). It is also begun through the exchange of goods of merchants throughout the world. In connection, the modern world now recognizes currencies of different denominations from the euro to the yen. The monetary system of a given territory is usually issued by a set of authorities such as the mint of earlier England where it is directed by the monarchies of the given territory.
Conversely, the international monetary system in itself is the organization of currencies used in the foreign exchange market. The different monetary systems of individual countries with their respective central banks are the heart of the foreign exchange market. Although the worth of each currency is dissimilar with another, each is a part and can be used to trade with other currencies. In ancient history, exchange rates were based on the monetary system of coins which were the prevalent commodity money at that time.
The worth of a coin was based on the worth of the coin’s composition. For example, gold coin is far greater than a copper coin. Coins were traded depending on the elements it was made of. Presently, due to the development of the international monetary fund and the global finance trade, currencies are priced by the country where they are from. The stability of the different factors that affect a country’s status determines the worth the currency has. Nevertheless, the gold standard is still recognized in the present trade industry.
The trading of one currency with another is a simple representation of the foreign exchange market. In the international sense, thus, the foreign exchange market is the trading center of currencies around the world. In the business world, it is considered the largest financial market including a broad range of participants from individual persons to governments, banks, and companies. The average input in the said industry is found to be estimated to more than three trillion US dollars every day (BIS). The foreign exchange market is unlike the stock market.
More trade is accessible to others who have more to risk. In the foreign exchange market, risks are not avoided due to the constantly changing status of each currency. Furthermore, national central banks throughout the world can somehow determine and alter the exchange rates. As has been mentioned earlier, the stability of a given monetary system depends on the country’s condition. The currency can be affected by many factors occurring in the country or the many happenings that take place at the given territory.
Such factors are economic and political conditions of the country and market psychology brought about by the major competitors in the market. As the economic status becomes more stable, the currency increases its exchange rate. Moreover, political issues can affect the currency’s stability negatively or positively depending on the concerned political matter. In market psychology, some patterns are utilized by traders using price charts and so, affect the foreign exchange market (Cross, 1998, p.113).
The international monetary system and the foreign exchange rate determine the global finance trade, which are the heart of the global trade in money unlike commercial and other business establishments where goods and services are components. Although companies that are involved in the foreign exchange market usually have goods and services to trade, in the foreign exchange market, their money is their asset.
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