Introduction to the Foreign Exchange Market
- Foreign Exchange Market, otherwise known as the Forex market or the currencies market, is a global marketplace where currencies are traded on an international level.
- It tends to determine the exchange rate of currencies via trade and speculation in currency pairs.
- It is the largest financial global market.
- It aids to provide international liquidity and relative, preferable stability.
Understanding Foreign Exchange Market
The Forex market is the largest in volume of trade and value. In 2019, the daily trade value reached up to $6.6 trillion, within one day. Not only is it a marketplace for exchange and speculation, it is also an avenue for settling international transactions.
These markets are made up of banks and central banks of various countries, commercial dealers, investment management firms, hedge fund managers etc. These markets enhance international stability by being open to be able to transact at every hour during the weekdays, thereby influencing liquidity availability in markets.
Highlights of Foreign Exchange Market
Currencies are always traded in pairs, therefore the determined value is always relative to the other. Due to this, currency conversion is possible and made convenient on the forex market.
The Forex market works by providing a price for the global markets to initiate transactions. It helps to purchase one currency using another currency. The relative value changes with this trade.
Market factors are not the sole and only factors that sway the exchange rates of the currencies. Time Zones, trade value and volume etc. are some other factors.
Floating factors are the key drivers of the change in exchange rates. A currency is either free floating or fixed floating in the global market. A free floating currency sways the market forces of supply and demand. A fixed floating currency is pegged to another basket of currencies or a standard to determine the currency’s relative value.
