Foreign Exchange Market
The following article provides information regarding the foreign exchange market.
Globally, different currencies are traded for one another in the foreign exchange market (Forex). It is held to be the biggest financial market in the world, and which is closest to the ideal of "perfect competition" held by all the economists. The traders in include currency speculators, banks, central banks, governments, multinational corporations, and other financial organizations.
Features
The forex market is characterized by:
Huge trading volumes
24 hour trading
Geographical diversity
Liquidity
Large variety and number of traders
The trading volumes exceed billions of dollars, and the market is open throughout the day, as currency is traded across the globe. This geographical diversity is the reason that a large variety of traders exist in this market. Also, the capability of different platforms such as Internet trading, creates a diverse trader base in this market. Trade in this market consists of currency or foreign exchange also creates a very high amount of liquidity.
The main feature includes the absence of a central marketplace for trading purposes. As such, the trade is carried out OTC or "Over The Counter". Depending upon the kind of foreign exchange or currency instrument that is being traded, and the kind of trade being conducted, the prices vary. For example, the price for buying currency notes would be different from the price for buying checks. Similarly, a buy transaction exchange rate will differ from a sell transaction exchange rate.
The Top 5 currencies that are traded in this market are:
US Dollar (USD)
Eurozone Euro (EUR)
Japanese Yen (JPY)
British Pound Sterling (GBP)
Swiss Franc (CHF)
Currency rates are always expressed in terms of another currency, which is popular and more stable than the former one. For example, the exchange rate of the Indian Rupee is always expressed in comparison with the USD.
Factors Affecting Trade
Due to its particular features, forex rates and trading are primarily the result of the demand and supply functions of the currency.
Other than this view, the forex market is also affected by factors, which can be broadly classified into:
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