Foreign Exchange Market

Have you ever imagined how foreign exchange market works - Not yet than we are giving you some basics of how this system works. Foreign exchange is basically a trading system of one currency with another currency. Sometimes people are also used the acronym FX. This exchange of currency is always in pair such as EUR/USD or USD/JPY. Now question arises that why we generally feel this kind of system for us There are various circumstances where foreign exchange are necessary.



Need of Foreign Exchange:

1. Consumers generally come into the fray to foreign exchange when they travel one place to another. They either go to bank or a foreign exchange bureau to exchange one currency into another currency.

2. When there is some business which needs to operate from other countries too than this type of foreign exchange system comes into play.

3. Sometimes investors require currency exchange whenever they are doing any foreign investment or any real state investment.

4. All banks i.e. Commercial and Investment Banks trade currencies as a service for their commercial banking, deposit and lending customers base.

The main participants of the foreign exchange market are listed below:

• Commercial banks

• Exchange markets

• Central banks

• Firms engaged in foreign trade transactions

• Investment funds

• Broker companies

• Private persons

Commercial banks play an important role in exchange currency transactions. Other participants of the market have their accounts in the commercial banks which conduct necessary conversion transitions. Banks fulfills the need of market in exchange of distributing and calling money, breaking with it into new banks.

Exchange markets do not have definite space and also do not have definite working hours. with the development of telecommunications most of the leading financial institutions of the world use services of exchange markets directly and via mediators 24 hours a day.

Central banks control the currency exchange rate and regulate the interest investment rate in the national currency. US Central bank , FED has the greatest influence in the foreign exchange market.

Firms which engaged in foreign exchange business have a stable demand of foreign currency and supply. According to rule imposed they do not have direct access to the foreign exchange market. They conduct their business through commercial banks.

Investment funds- These companies, represented by various international investment,



mutual funds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of different countries.

Broker companies bring together buyers and sellers of foreign currency and start a conversion process after dealing with them. According to rule, in the foreign exchange market there is no fee as a per cent on the sum of a transaction, or as a sum agreed in advance. A broker company, which contains sound information about the rates, is a place where the real exchange rate is formed according to closed deals.

Private persons realize a wide range of transactions in the area of foreign trade, tourism, pension, royalities etc. this is also the biggest group involved into such transactions.

Foreign Exchange Rates: relative value between the two currencies is termed as foreign exchange rate. It is the quantity of one currency required to buy or sell one unit of the other currency. There are two common methods to express a foreign exchange rate. The most important method to expresses the amount of any currency is to buy one U.S. dollar. For example, a foreign exchange quote expressed as USD/CND at 1.5300 means that one U.S. dollar can be exchanged for 1.53 Canadian dollars. Another method is just the reverse of first one. Any foreign exchange rate is expressed as a whole number integer followed by four decimal points. In order to purchase some land or to buy a specific products from other firms residing in other countries, you need foreign currency. The Foreign Exchange Market, or "Forex" market, is where the most of buying and selling activity of currencies takes place. The Forex market is by far the largest financial market in the world with trading volumes surpassing USD 1.4 trillion on an average. The very large commercial banks are the major traders in this market.

There are various online resources available through which you can gather information about foreign exchange. Also foreign exchange market is unique because of its volume, liquidity of market, large number of traders , long trading hours and variety of factors that affects foreign exchange rates.

The foreign exchange market was originated in year 1973. Prior to first World War the Foreign exchange markets were stable .After World War I, the Foreign exchange markets increased ten-fold with speculative activity. The biggest counter attack and the removal of the gold standard in 1931 created a serious problem in Foreign exchange market activity. From 1931 till 1973, the Foreign exchange market went through many changes as we observed today.

As there are a lot of advantages of using foreign exchange market for their own purpose but still it has some risk as well. However, for an educated and experienced investor, foreign exchange markets proved to be a great way to diversify your portfolio and enjoy trading gains.