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The Cash Foreign Exchange Market
Trading the Foreign Currency Market
What is FOREX
FOREX?
FOREX = (
eign
change market)
FOREX is an international foreign exchange market,
where money is sold and bought freely.
In its present condition FOREX was launched in the
seventies, when free exchange rates were
introduced,
and only the participants of the market determine the
price of one currency against the other proceeding
from demand and supply.
What is FOREX?
The forex market is not a physical place.
The foreign exchange market, or FX market,
is a network of financial institutions and
brokers in which individuals, businesses,
banks,
and governments
and exchange
sell the is
The simplest
definition ofbuy
foreign
currencies
of different
the changing
of onecountries.
currency to another.
They do so in order to conduct international
trade, invest in foreign countries, or speculate
on currency price changes". (Federal Reserve
Bank of New York)
The Foreign Exchange market is the largest
financial market and most liquid in the world.
In September The
1992Forex
The Wall
Street
Journal estimated
market
is huge
the trading volume at $1 trillion per day.
In comparison
daily trading
volume
Today,toit the
is believed
to have
grownaverages
The
ForeignofExchange
market
is :
in excess
$1.5 trillion
per day.
According to the IMF, on the whole the volume is over 1 trillion
5dollars
times athe
volume
of some
the U.S.
Treasury
Bond
market
day,
and on
days
it reaches
3 trillions.
($300 billion/day)
About 5% of daily turnover is from companies and governments
that buy or sell products and services
and in a foreign country or must
convert
foreign
currencies
150 times
the profits
volumemade
of theinentire
U.S.
equity market
into their
currency.
($10domestic
billion/day).
The other 95% is trading for profit, or speculation.
All currencies are not created equal.
Every FX transaction involves a pair of currencies,
(e.g. USD/CAD or EUR/USD).
The four largest centres
Only London
7 primary(32%),
currencies
US Dollar
USD,
New
York (18%),
Euro(8%)
EUR,
Tokyo
and
British
Pound(7%)
GBP,
Singapore
Japanese Yen JPY
Swiss
account for about
twoFranc,
thirdsCHF
of total FX trading
Canadian
Dollar CAD
volumes.
and Australian Dollar AUD. are
heavily traded.
Of these, the USD is the overwhelming leader,
involved on one side or other of 87% of all
transactions.
Superior Liquidity
With a daily trading volume that is 50x larger than the
New York Stock Exchange, there are always
broker/dealers willing
to buy or sell currencies in the FX markets.
The liquidity of this market, especially that of the
major currencies, helps ensure price stability.
Traders can almost always open or close a
position at a fair market price.
The working hours of the markets
Exchange markets work all the time.
Their work in the calendar twenty-four-hour period
is started in the Far East, in New Zealand (Wellington),
passing the time zones in Sydney,
Tokyo,
Hong Kong,
Singapore,
Moscow,
Frankfurt-on-Main,
London,
finishing the day in New York and Los Angeles
Participants of a foreign exchange market
The main participants of
a foreign exchange market are:
Commercial banks
Exchange markets
Central banks
Firms that conduct foreign trade transactions
Investment funds
Broker companies
What determines the value of a currency?
The simple answer is "supply and demand".
But what influences supply and demand?
Interest rates
“Interest rate differentials between countries are one of the main factors
that determine exchange rates.
Inflation/money supply
if the central bank prints more money inflation goes up and the exchange
rate (the price of the currency) goes down.
Balance of trade
The more other countries want your exports, the stronger your exchange
rate. The more you rely on imports, the weaker your exchange rate
because you have to sell your currency to pay for someone else’s goods.
Government budget deficits/surpluses.
If the government runs a deficit, it has to borrow money (by selling
bonds). If it can’t borrow it all from its own citizens, it must sell to foreign
investors. That means selling more of its currency, driving the price down.
The Cash Foreign Exchange Market
Trading the Foreign Currency Market