A Brief Overview of Foreign Exchange Market

1. A Brief Overview of Foreign Exchange Market The foreign exchange market is also known as forex or FX. It is a market which runs globally. It involves the transactions of various currencies at current or preset prices among forex traders. It is among the largest business markets in the world. The major players in this market are larger international banks. Some of the major centers of forex trade around the world are London, Sydney, New York, Singapore, Hong Kong and Tokyo. These centers act as anchors of trading and are active 24*5. This market decides the comparative value of diverse currencies. The foreign exchange market is attached with various financial institutions. This market has different levels of functioning. All kinds of financial institutions like banks, insurance companies etc are involved in this trade. Business transactions between affluent foreign traders could involve hundreds of millions of dollars. There are hardly any supervisory entities for regulating the forex market. The forex market is extremely beneficial for world trade and foreign investments, as it enables currency conversion. For example, a member of the European Union can import goods from Australia and make payment in Australian dollars, despite the fact that there currency is Euros, due to the presence of foreign exchange. Forex market also encourages speculation among the various concerned parties.

2. Generally, a transaction in the forex market involves the purchase of one currency by paying in another currency. Some of the major financial instruments in forex market are: Spot This transaction involves the direct exchange of two currencies in a short time frame. It involves a time span of one or two days. Brokers charge a swap fee for this type of forex trade. This is the most popular type of forex transaction. Forward This forex transaction involves the exchange of currencies at a preset future date. That forward date could be a few days or months later. Both parties agree upon a contract in this case. Swap In this type of forex, two parties exchange currencies among themselves periodically. There are no formal contracts in these transactions. Futures This involves a contract among parties ranging up to three months. In this type of forex trade, certain amount of particular currency is exchanged on specific dates. Option In this forex transaction, a trader has the option of undertaking a transaction, but is not under any obligation to exchange a currency on a particular date. Presented By