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The Cash Foreign Exchange Market

Trading the Foreign Currency Market

FOREX ( eign change market)

What is FOREX?FOREX

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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.

The forex market is not a physical place.

What is FOREX?

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, or FX market, is a network of financial institutions and brokers in which individuals, businesses, banks, and governments buy and sell the currencies of different countries. The simplest definition of foreign exchange is

the changing of one currency to another.

The Foreign Exchange market is the largest financial market and most liquid in the world.

The Forex market is huge

In comparison to the daily trading volume averages The Foreign Exchange market is :

5 times the volume of the U.S. Treasury Bond market ($300 billion/day)

and 150 times the volume of the entire U.S. equity market

($10 billion/day).

In September 1992 The Wall Street Journal estimated the trading volume at $1 trillion per day.

Today, it is believed to have grown in excess of $1.5 trillion per day.

According to the IMF, on the whole the volume is over 1 trillion dollars a day, and on some days it reaches 3 trillions.

About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must

convert profits made in foreign currencies into their domestic currency.

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). Only 7 primary currencies

US Dollar USD, Euro EUR,

British Pound GBP, Japanese Yen JPY Swiss Franc, CHF

Canadian Dollar CAD 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.

The four largest centres London (32%),

New York (18%), Tokyo (8%) andSingapore (7%)

account for about two thirds of total FX trading volumes.

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

Commercial banks Exchange markets

Central banks Firms that conduct foreign trade transactions

Investment funds Broker companies

Participants of a foreign exchange market

The main participants of a foreign exchange market are:

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 supplyif the central bank prints more money inflation goes up and the exchange rate (the price of the currency) goes down.

Balance of tradeThe 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