Describe any three sources of demand for foreign exchange. (2024)

FAQs

What are the three sources of demand for foreign exchange? ›

Foreign exchange is demanded for the purpose of: i Payments of international loans. ii Gifts and grants to rest of the world. iii Investment in rest of the world. iv Direct purchases abroad as well as imports from rest of the world.

The demand for foreign-currency denominated assets is in turn affected by the expected returns on those assets, the risks of those assets as well as the liquidity of those assets, all relative to domestic assets.

Types of Foreign Exchange Markets

There are three main forex markets: the spot forex market, the forward forex market, and the futures forex market. Spot Forex Market: The spot market is the immediate exchange of currencies at the current exchange.

Purchase of assets abroad: There is a demand for foreign exchange to make payments for the purchase of assets like land, shares, bonds, etc., abroad. Speculation: When people earn money from the appreciation of currency it is called speculation. For this purpose, they need foreign exchange.

Definition English: Proceeds from the export of goods and services of a country, and the returns from its foreign investments, denominated in convertible currencies.

Answer and Explanation: Sources of demand typically include consumer preferences and prices of substitutes and complimentary products. Preferences mean that a particular product will have higher demand than another. Substitute products can create demand when the price of a particular product goes up.

Imports of goods and services from a foreign country is the source of demand for foreign currency because payments made to the foreign sellers are done in foreign currency.

The foreign exchange market's basic function is to transfer funds or foreign currencies between countries to settle their payments. The market converts one currency into another. The foreign exchange market also provides short-term loans to people or businesses who need to buy things from other countries.

Currencies being traded are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. These represent the U.S. dollar (USD) versus the Canadian dollar (CAD), the Euro (EUR) versus the USD, and the USD versus the Japanese Yen (JPY), respectively.

Where are the three largest foreign exchange markets? ›

Key Takeaways

There is actually no central location for the forex market - it is a distributed electronic marketplace with nodes in financial firms, central banks, and brokerage houses. 24/7 forex trading can be segmented into regional market hours based on peak trading times in New York, London, Sydney, and Tokyo.

For example, households buy imported goods for which they need foreign currency to pay for them. Similarly, wealthy individuals or businesses make investments in foreign countries for which they need foreign currency also.

Demand for a currency is an inflow of money into an economy. Demand for a specific currency in the foreign exchange market is derived from demand for a country's exports of goods and services, and from speculators looking to profit fromchanges in currency values and from currency volatility.

Demand - the demand for the currency that is being exchanged. Supply - the supply of the currency that is being exchanged. Quantity - the quantity of the currency that is being exchanged. Price - some other currency that is being used to buy the currency that is being exchanged.

Investment outflows and repayment of international loans are sources of demand for foreign currency.