The global foreign exchange market is the biggest market in the world. The nearly USD 2 trillion daily turnover exceeds the combined turnover of the entire world''s stock and bond markets.
There are many reasons for the popularity of foreign exchange trading, but among the most important are the high liquidity 24 hours a day and the very low dealing costs associated with trading. The market is so large that a handful of players can never influence its outcome.
Introduction Of Forex
Forex, or Foreign Exchange, is the simultaneous exchange of one country's currency for that of another. Traders in the FOREX market wish to purchase or sell one currency for another with the hope of making a profit when the value of the currencies changes in favor of the investor, whether from market news or events that take place in the world.
The foreign exchange (FX or FOREX) market is the market where exchange rates are determined. Exchange rates are the mechanisms by which world currencies are tied together in the global marketplace, providing the price of one currency in terms of another.
For example, the U.S. dollar/Euro exchange rate is the price of a Euro expressed in U.S. dollars. On March 11, 2006 this exchange rate was 1.19 U.S. dollars per Euro, or, in market notation, 1.19 USD/Euro.
An exchange rate is just a price. The price of a liter of milk, for example, is Indian Rs 20, or 20 INR/milk, using the above exchange rate market notation. When we price exchange rates, the denominator refers specifically to one unit of a currency.
Like in any other market, demand and supply determine the price of a currency. At any point in time, in a given country, the exchange rate is determined by the interaction of the demand for foreign currency and the corresponding supply of foreign currency. Thus, the exchange rate is an equilibrium price determined by supply and demand considerations.
Forex - The Retail Forex Market
The foreign exchange market is the generic term for the worldwide institutions that exist to exchange or trade the currencies of different countries. It is loosely organized in two tiers: the retail tier and the wholesale tier.
The retail tier is where the small agents buy and sell foreign exchange. The wholesale tier is an informal, geographically dispersed, network of about 1200 banks and currency brokerage firms that deal with each other and with large corporations.
The foreign exchange market is open 24 hours a day, split over three time zones. Computer screens continuously show exchange rate prices. A trader enters a price for the USD/CHF exchange rate on her machine, and can then receive messages from anywhere in the world from people willing to meet that price. It does not matter to her whether the counterparties are sitting in London, Mumbai, or, in New York.
The 24-hour Inter-bank market literally follows the sun around the world, moving from major banking centers of the United States to Australia, New Zealand to the Far East, to Europe then back to the United States.
The foreign exchange market has no physical venue where traders meet to deal in currencies. When the financial press and economic textbooks talk about the foreign exchange market they refer to the wholesale tier.
The Forex market has become the world''s largest financial market, with over $2.0 trillion USD being traded on a daily basis. It is part of the bank-to-bank currency market known as the Inter-bank market.