What is Forex
The foreign
exchange market ( Forex, FX, or currency market) is a global decentralized market for the trading
of currencies. The main participants in this market are the larger international
banks. Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the clock,
with the exception of weekends. EBS and Reuters' dealing
3000 are two main interbank FX trading platforms. The foreign exchange
market determines the relative values of different currencies.
The foreign exchange market assists international trade and
investment by enabling currency conversion. For example, it permits a
business in the United States to import goods from the European
Union member states, especially Euro zone Members, and pay Euros, even though its income is
in United States dollars. It also supports direct speculation in the value
of currencies, and the carry trade, speculation based on the interest rate
differential between two currencies.
In a typical foreign exchange transaction, a party purchases
some quantity of one currency by paying some quantity of another currency. The
modern foreign exchange market began forming during the 1970s after three
decades of government restrictions on foreign exchange transactions (the Breton
Woods system of monetary management established the rules for commercial and
financial relations among the world's major industrial states after World War
II), when countries gradually switched to floating exchange
rates from the previous exchange rate regime, which remained fixed as
per the Bretton Woods system.
The foreign exchange market is unique because of the
following characteristics:
·
its huge trading volume representing
the largest asset class in the world leading to high liquidity;
·
its geographical dispersion;
·
its continuous operation: 24 hours a
day except weekends, i.e., trading from 20:15 GMT on Sunday until
22:00 GMT Friday;
·
the variety of factors that
affect exchange rates;
·
the low margins of relative profit
compared with other markets of fixed income; and
·
the use of leverage to
enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to
the ideal of perfect competition,
notwithstanding currency intervention by central
banks. According to the Bank for
International Settlements,[3] as of April 2010, average daily turnover in
global foreign exchange markets is estimated at $3.98 trillion, a growth of
approximately 20% over the $3.21 trillion daily volume as of April 2007. Some
firms specializing on foreign exchange market had put the average daily
turnover in excess of US$4 trillion.[4]
The $3.98 trillion break-down is as follows:
·
$1.490 trillion
in spot transactions
·
$475 billion in outright
forwards
·
$1.765 trillion in foreign
exchange swaps
·
$43 billion currency swaps
·
$207 billion
in options and other products