Foreign exchange market.
The Foreign exchange market is an over-the-counter global decentralized market for the trading of various currencies. This marketplace determines international exchange rates for each currency traded. It includes all points of purchase, sale and trading of currencies in current or negotiated prices. All traders are members of an exchange dealer network.
The main functions of the Foreign exchange market are to facilitate economic activities of payment, transfer and communication of monies in the global market. Financial institutions, individuals, central banks and other financial institutions make money through foreign exchange. A wide range of financial products are traded on this market, including forex options, stock options, interest rates, bonds and commodities. Major components that determine the prices of these financial products are: exchange rate (R), spot rate (S), time value of money (T), index of foreign exchange rates (I get) and cross rate (X-ref).
In the Foreign exchange market, there is one type of currency that is used as payment, collateral for another. This is the foreign currency. A speculator who has access to the market can speculate on the movements of the currency rates and earn profits by making bets on the exchanges. Speculators can buy or sell a specific amount of foreign currency with the purpose of exchanging it into a different currency. This trading is done through banks or brokers who have access to the foreign exchange market.
The movement of foreign exchange market is highly affected by the political, economic and social circumstances affecting a country. Some factors such as interest rates, inflation, trade tensions and emergency situations can result to the fluctuation of foreign exchange rates. Speculation, which is the name of the process of earning money through the change in the price values of the foreign exchange currencies, is one of the major activities of the foreign exchange market. The other factors that determine foreign exchange rates are political stability and inflation. If there is inflation, the foreign exchange market will be affected. It is believed that foreign currency intervention helps in stabilizing the Forex rates.
Trading in the Foreign exchange market started after the Bretton Woods system collapsed in the early 1970's. In the early years, the foreign exchange market was based on three currencies; the U.S. dollar, the British pound and the Eurodollar. These currencies were assigned a specific rate in international trade. The most widely traded currency was the U.S. dollar which was able to maintain its high level compared to the other two currencies. However, with the rapid advancement of technology and changing social conditions, the foreign exchange market has been restructuring itself by providing new and improved trading platforms.
The main target of the foreign exchange markets is to make money. However, this is not the only aim of the foreign exchange markets. The central banks also want to increase the value of the national money. In order to increase the value of the national money, the central bank's purchase foreign currencies and sell them. In this process, the central banks earn interest. On the other hand, foreign exchange markets help decrease the value of the domestic currency, if the value of the foreign currency drops.
As we know, the foreign exchange markets are open twenty-four hours a day. This helps the foreign currency traders in the selling and buying of their currency at the same time. In this way, the traders benefit from the fluctuations of the foreign currency markets.
There are various forex markets out there. Basically, the forex markets include three different types of markets namely; spot markets, forward markets, and swap markets. The Forex traders buy or sell currencies based on their price and position in these markets. It is very important for you to learn more about these financial markets before you decide to invest in the foreign exchange business.