Ask the Institute

DATE: April 22, 2013

QUESTION:

Can you explain the role of the foreign exchange market and the service it provides to the world's economy?

ANSWER:
The foreign exchange market, commonly called Forex, is where the currencies of different countries are bought and sold, or exchanged. Since large international companies do business in many countries, it’s essential for them to convert the value of purchases and sales in foreign countries to their home currency.

The home currency of a US-based company is obviously the US dollar. So, if a US-based company does business in Germany, for example, the company needs to convert Euros, the currency of Germany, into US dollars. As a result of this need, the concept of a currency pair was developed. A currency pair refers to the process by which the relative value of two currencies is defined. To learn more about the foreign exchange market, view this week's segment of "Ask the Institute."