“Forex” and “Foreign Exchange” are redirected here. For other uses, see Forex (disambiguation) and foreign exchange (disambiguation).
The forex and foreign exchange market (forex, forex, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market sets the foreign exchange rates for each currency. It includes all aspects of buying, selling and exchanging currencies at current or specified prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.
The main participants in this market (Forex” and “Foreign Exchange Market“)
The main Participants in this market are the largest global banks. Financial centers around the world act as bases for trading among a wide variety of multiple types of buyers and sellers around the clock, excluding weekends. Since currencies are always traded in pairs, the foreign exchange market does not determine the absolute value of a currency but rather determines its relative value by setting the market price of one currency if payment is made for another. For example: 1 USD equals X CAD, CHF, JPY, etc.
The foreign exchange market operates through financial institutions and operates on several levels. Behind the scenes, banks are turning to a smaller number of financial firms known as “dealers”, who are involved in large amounts of forex trading. Most of the foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market” (although a few insurance companies and other types of financial firms are involved). The deals between forex traders can be quite large, involving hundreds of millions of dollars. Because of the issue of sovereignty when dealing with two currencies, Forex has little (if any) supervisory entity that regulates its actions.
The foreign exchange market assists international trade and investments by enabling currency conversion. For example, a company in the United States is allowed to import goods from European Union member states, especially eurozone members, and pay in euros, even though its income is in U.S. dollars. It also supports direct speculation and valuation regarding the value of currencies and speculation in the carry trade, based on the differential interest rate between two currencies.
In a typical foreign exchange transaction, a party buys a certain amount of one currency by paying a certain amount of another currency.
The modern foreign exchange market began to take shape during the 1970s. This came after three decades of government restrictions on foreign exchange transactions under the Bretton Woods System of Monetary Management, which set the rules for commercial and financial relations among the world’s major industrial nations after World War II. The countries gradually switched to floating exchange rates from the previous exchange rate system, which remained fixed according to the Bretton Woods system.
The foreign exchange market is unique due to the following characteristics:
- Its huge trading volume, which is the largest asset class in the world resulting in high liquidity;
- Its continuous operation: 24 hours a day excluding weekends, i.e. trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT on Friday (New York);
A variety of factors affect exchange rates;
- Low relative profit margins compared to other fixed income markets; And
- Use of leverage to enhance profit and loss margins and in relation to account size.
As such, it has been referred to as the market closest to the perfect competition model, despite central bank intervention in the currency.
According to the Bank for International Settlements, preliminary global results of the 2019 central bank’s triennial survey of foreign exchange and OTC derivatives market activity show that trading in foreign exchange markets averaged $6.6 trillion per day in April 2019. That’s up from $5.1 trillion Dollars in April 2016. Measured by value, more forex swaps were traded than any other instrument in April 2019, at $3.2 trillion per day, followed by spot trading at $2 trillion.
The collapse of $6.6 trillion was as follows:
$2 trillion in instant transactions
$1 trillion in futures
$3.2 trillion in foreign currency swaps
108 billion dollars in currency swaps
$294 billion in options and other products
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