Because currencies have to be exchanged in order to conduct foreign trade and business monies are important to most folks all over the world, whether they realize it or not. In case you are residing in the U.S. and need to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). The same goes for traveling. Because it’s not the locally recognized money a French tourist in Egypt can not pay in euros to see the pyramids. As such, the tourist has to change the euros for the local currency, at the current exchange rate, in this event the Egyptian pound.
The necessity to exchange monies is the main reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other marketplaces in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day.
One unique facet of the international market is that there’s no central marketplace for foreign exchange. Instead, money trading is conducted electronically over-the-counter (OTC), which means that all trades occur via computer networks between dealers around the world, rather than on one focused exchange. The market is open twenty-four hours a day, five and a half days per week, and monies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across virtually every time zone. This means that when the trading day in the U.S. endings, the forex market commences afresh in Tokyo and Hong Kong. As such, the forex market may be hugely active any time of the day, with price quotes changing always.
Spot Market and the Futures and Forwards Markets
There are really three ways corporations that institutions and people trade forex: the forwards market the spot market along with the futures market. Because it was available to individual investors for a longer amount of time, previously, the futures market was the most popular place for traders. However, with the arrival of electronic trading, the spot market has seen a tremendous upsurge in action and now surpasses the futures market as the favorite trading market for speculators and individual investors. When people refer to the forex market, they generally are referring to the spot market. The forwards and futures markets tend to be more popular with companies that have to hedge their foreign exchange risks out to a specific date later on.
What is the spot market?
More particularly, the spot market is where currencies are bought and sold based on the present price. That price, determined by supply and demand, is a manifestation of several things, including current rates of interest, economic performance, sentiment towards continuing political scenarios (both locally and globally), in addition to the perception of the future operation of one currency against another. It really is a bilateral transaction by which one party delivers an agreed upon money sum to the counter party and receives a predetermined amount of another currency at the agreed upon exchange rate worth. The resolution is in cash after a position is closed. Though the spot market is normally known as one that deals with transactions in the present (rather than the future), these trades actually take two days for resolution.
Which are the forwards and futures markets?
Unlike the spot market, real monies are not traded by the forwards and futures markets. They deal in contracts that represent a specific cost per unit, claims to a certain money kind plus a future date for settlement.
In the forwards market, contracts are purchased and sold OTC between two parties, who establish the conditions of the agreement between themselves.
In the futures market, futures contracts are purchased and sold based upon settlement date and a typical size on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of components being traded, delivery and settlement dates, and minimum cost increments that cannot be customized. The exchange functions as a counterpart to the dealer, supplying clearance and settlement.
The futures and forwards markets can provide protection against risk when trading currencies. Speculators get involved in these markets also, although as a way to hedge against future exchange rate fluctuations, normally, these markets are used by big international corporations. (For a more in depth introduction to futures, observe Futures Fundamentals.)
Note that you’ll see the terms: FX, forex, foreign-exchange market and money marketplace. These terms are synonymous and all refer to the forex market.