Forex (Forex, FX, or foreign exchange market) is a global decentralized market for trading currencies. The Forex market is the largest, most liquid market in the world with an average trading volume exceeding 1.9 trillion USD per day, which includes all the world's currencies.
🏦 The participants in the Forex market
As such, there is no Central platform for currency exchange, trading is conducted through a broker. Major international banks are the main participants in this market. Financial centers are located all over the world, they serve as anchors of trade and connect a wide range of different types of buyers and sellers around the clock, with the exception of weekends. Electronic brokerage services (ECUS) and Reuters 3000 Xtra represent the two main interbank currency trading platforms. The foreign exchange market determines the relative values of various currencies Forex is the largest market in the world in terms of the total value of money traded, and any person, firm, or country can participate in this market.
🏫 Features and mode of operation of Forex
The Forex market is open 24 hours a day, five days a week, and currencies are traded all over the world. The main financial centers are London, new York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
The foreign exchange market operates through financial institutions and operates on several levels. Behind the scenes, banks turn to financial companies known as "dealers", which are much smaller in number and actively participate in a large number of foreign exchange trades. Most dealers are foreign exchange banks, so behind the scenes this market is sometimes referred to as the "interbank market", although some insurance companies and other types of financial firms are also involved. Transactions between currency dealers can reach large volumes, even up to hundreds of millions of dollars. Due to the issue of sovereignty, with the participation of two currencies, Forex is a weak (if at all) controlling entity that regulates its actions.
The foreign exchange market facilitates international trade and investment by enabling currency conversion. For example, it promotes business development in the United States by allowing you to import goods from member countries of the European Union, including members of the Euro zone, and pay in Euro currency, while still receiving income in US dollars. It also supports direct speculation in the value of currencies, and speculation the foreign exchange assets based on the difference in interest rates between two currencies.
In a typical currency transaction, a party purchases a certain amount of one currency by paying a certain amount of another currency. The modern foreign exchange market began to take shape in the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton woods monetary policy system, which established rules for commercial and financial relations between the world's largest industrial States after world war II), when countries gradually switched to floating exchange rates from the previous fixed exchange rate regime that was present in the Bretton woods system.
🏪 Market characteristics
the Foreign exchange market is unique in having the following characteristics:
- with its huge trading volume, it represents the largest asset class in the world, leading to high liquidity;
- its geographical disparity;
- its continuous operation: 24 hours a day, except weekends, that is, trading from 22:00 GMT on Sunday (Sydney) to 22:00 GMT on Friday (new York);
- a variety of factors that affect currency exchange rates;
- low relative profit margins compared to other fixed income markets, as well
- as the use of leverage to regulate profit and loss margins and account size.
For this reason, it was seen as the market closest to the ideal of perfect competition, despite the currency interventions of Central banks.
📈 Exchange trading statistics
According to the Bank for international settlements, preliminary global results provided by Central banks in 2013 based on a three-year review of the market for freely convertible currencies and market activity in OTC derivatives show that in April 2013, trading in foreign exchange markets covered an average of USD 5,300 trillion per day. This is compared to USD 4.0 trillion in April 2010 and USD 3.3 trillion in April 2007. In April 2013, the most actively traded instruments were currency exchange swaps, which amounted to 2.2 trillion USD per day, followed by spot transactions, which amounted to 2.2 trillion USD per day.
According to the Bank for international settlements, as of April 2010, the average daily turnover of the global currency market is estimated at 3.980 trillion USD, which is approximately 20% more than the daily volume of 3.210 trillion USD as of April 2007. Some firms specializing in the foreign exchange market showed an average daily turnover of more than 4 trillion USD. The statistics of 3.98 trillion USD are as follows:
- 1.490 trillion USD is made up of spot transactions;
- 475 billion USD is made up of forward contracts;
- 1.765 trillion USD is made up of currency exchange swaps
- 43 billion USD are currency swaps
- 207 billion USD are options and other products.