I’m always one to expand my knowledge base so when I hear about something new, I like to learn what I can about it. Now, I’m not too familiar with foreign exchange but I recently heard about it and wanted to dig deeper. I have a basic understanding of foreign exchange just through some of my financial courses, but I wanted to learn more on how corporate foreign exchange banks are used by companies to trade internationally.
Before we can dig into what corporate foreign exchange banks do, we need to understand the basics of foreign exchange. In a nutshell foreign exchange is just what the title says…it’s the exchange of goods and services globally. It consists of currency exchange, so when you travel outside of the country you are participating in foreign exchange. And it deals with exchange on the corporate level.
When you’re trading on an international level, you submit yourself to risk. Actually, anytime you trade or invest you are subject to a certain degree of risk, but it’s certainly on a higher level when it’s foreign. In school I learned about various types of risks, one being currency risk. Currency risk comes when there is a price difference from one currency to another. When you put different currencies together, the exchange rate will fluctuate, leaving the investor at risk for losing value in a given asset.
Of course on a corporate level the stakes are MUCH higher. For the mere fact that more dollars are involved, companies need to do everything they can to mitigate as much risk as possible. They can’t throw money around and hope they hit the jackpot. When companies trade in the foreign market, they have to be cautious. From my research I’ve learned businesses use corporate foreign exchange banks to help them trade internationally by mitigating some of the risk they are exposed to. These banks know and understand the market and they are there to service their clients (the companies).
Not only do these banks serve clients with the risk factor, but they also make the transaction run as smooth as possible. They are experts in the field and act as a liaison in the foreign trade market. As you can imagine, foreign trade can be complicated and complex. The right foreign exchange bank (as with a good financial planner), will find their clients’ needs and execute a plan that is in the best interest of their client.
I’ll admit, I have a lot more to learn on this topic. I’m happy I stretched myself out of my normal topic of conversation and learned something new. I challenge you to learn about something you’ve heard of but don’t quite understand. Knowledge is power…and now I have a basic understanding of corporate foreign exchange banks. Now it’s YOUR turn!
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