The foreign exchange market is called Forex, it is the place where currencies are traded. As we know currencies are important commodity to live in this world. Currencies are essential to be exchanged in order to conduct foreign trade and business. If people living in US want to buy any commodity from France, they have to pay the French for the commodity in euros (EUR). Thus, the U.S. importer will have to exchange the equivalent value of U.S. dollars (USD) into euros. While traveling the tourists too need to exchange the currency of their home country with that of local currency they are visiting.
The prime cause of forex market’s existence is the need to exchange currencies. Forex is the largest, most liquid financial market in the world. Forex market is larger than the stock market, with an average traded value of around U.S. $2,000 billion per day. There is no central market place for foreign exchange, as currency trading is done electronically over- the-counter (OTC). Each and every transaction take place over the computer networks between traders spread all around the world. The forex market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney and mostly across all the time zones. Thus, it might be that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. Obviously the forex market can be extremely active any time of the day, with price quotes changing persistently.
There are three ways that individuals, corporations and institutions can trade forex. They are
. The spot market,
. The forward market and
. The futures market
Among all the markets the forex trading in the spot market has always been the largest market as spot market is the underlying real asset that the forwards and futures markets are based on. With the introduction of electronic trading, the spot market has observed a gigantic flow in activity. The forex spot market now exceeds the futures market as the favored trading market for individual investors and speculators. Usually the reference to forex market means we are talking about the spot market. Spot market particularly is where currencies are bought and sold as per the current price. The price is determined by the supply and demand reflecting many things like current interest rates, economic performance, local as well as international political situations and also perception of the future performance of one currency against the other. Thus, a deal finalized here is called as a spot deal. It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value.
Unlike the spot market the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement. In case of the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets.
