Forex History
Foreign currency has been traded for quite some time but did not have the ability to be freely traded due to economic conditions and foreign policies. It wasn't until the 1970s that foreign currency was able to be traded more freely, as it became more controlled by the simple economic forces of supply and demand rather than the strict regulations imposed in the past. The technology boom in the 1980s further contributed to the growth of the foreign exchange market, trading about $70 billion worth of currency each day. Since then, the foreign exchange market has flourished and skyrocketed to over $4 trillion in daily trades. One of the major catalysts for this raise in daily trade volume was the introduction of the Euro currency in 1999, which united many European countries by using one currency, increasing not only the liquidity of the Euro but it's value as well.
Advantages
* Unlike the stock market, the foreign exchange market offers trading 24 hours a day (with the exception of the weekends; starting 5pm EST on Sunday into 4pm EST Friday.)
* It is the most liquid financial market in the entire world.
* Leverage (using borrowed funds or debt) can be used.
* Little to none "insider information" into the foreign exchange markets. Exchange rate fluctuations are actually caused by economic conditions.
* It is said to be very close to a market with ideal "perfect competition" allowing entry and exit into the market without any barriers.
Key Players
There are five basic major players in the FOREX market; Central Banks, Banks, Commercial Companies, Investment Firms, and Foreign Exchange Brokers.
National Central Banks play a very important role in the foreign exchange market, as they are the entity that attempts to stabilize the market by using their vast supply of foreign exchange reserves. These banks attempt to control the money supply, and interest rates. The central banks often have target interest rates for their currencies.
Banks deal with clients who do large amounts of trading and offer smaller trading fees due to the large volume, however most of the trading is still done by their brokers for the bank's own account.
Commercial Companies use the foreign exchange market to pay for goods and services. Smaller amounts are traded in comparison to Banks and these trades have very little effect on the short-term market rates. However, this type of foreign trade is an important factor when considering the long-term growth of a countries exchange rate.
Investment Firms use the foreign exchange market to purchase foreign securities primarily for accounts that are managed by the firm. They do this to diversify a client's portfolio with the intention of generating profit while minimizing risk. One of the common types of investments made by these firms for their clients are Pension Funds.
Foreign Exchange Brokers are non-bank exchange companies that offer foreign exchange and international payments to both individuals and companies. They offer currency exchange with physical delivery of the currency that is usually deposited into a bank account.
Factors Affecting Exchange Rates
As stated earlier, the exchange rate is determined primarily on the concept of supply and demand. The following are some of the economic conditions that can affect the supply and demand of a nation's currency.
Government budget deficits and surpluses: The market usually reacts negatively to large or increasing government budget deficits, and positively to decreasing budget deficits.
Balance of trade: The trade flow between countries illustrates the demand for goods and services. This is a good indicator of the demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy and can be either negative or positive depending on the situation.
Inflation rates: A currency will lose value if there is a high level of inflation in the country or if inflation levels seem to be rising. This is because inflation decreases the currency's purchasing power and along with it, the demand for that currency. But a currency may sometimes strengthen when inflation rises because the central bank may raise short-term interest rates in order to control inflation.
Economic growth and health: Gross Domestic Product (GDP), employment rates and other economic indicators can show the levels of a country's economic growth and health. Generally, the more healthy a country's economy is, the higher the demand and the currency value will be.
Types of FOREX trades and contracts
A Spot transaction is typically a two-day delivery transaction with the exception of the Canadian dollar, which is done in only one day. This trade is an exchange between two currencies and has the shortest time frame, involving cash rather than a contract.
A Forward transaction is one in which money does not actually become exchanged until an agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are. This is a contract transaction and can be for a few days, months or even years.
A Futures contract is a forward transaction with a standardized contract size and maturity dates where the amount of currency, exact date, and rate are agreed upon. These contracts are usually for the duration of 3 months and are inclusive of any interest amounts.
A Swap is the most common type of forward transaction that you will encounter. This is when two entities exchange currencies for a predetermined amount of time and agree to reverse the transaction at the end. These have no standardized contracts and are not traded through an exchange.
An Option is a contract where the owner has the right but not the obligation to exchange money from one currency into another at a predetermined exchange rate on a specified date. For instance, if the currency can be converted for a higher rate elsewhere than specified in the option, the owner can refuse to exercise their right to use the option and exchange this currency for the current rate. The FOREX options market is the largest and most liquid for options of any kind in the world.
Exchange-traded funds are open ended investment companies that can be traded at any time throughout the day. These companies act much like a US stock market index.
This article was written Stephen D. Sandecki of iTalkCash an Investment Forum ran by Certus Corporate Services. Please feel free to visit our Forex Forum.
Foreign currency has been traded for quite some time but did not have the ability to be freely traded due to economic conditions and foreign policies. It wasn't until the 1970s that foreign currency was able to be traded more freely, as it became more controlled by the simple economic forces of supply and demand rather than the strict regulations imposed in the past. The technology boom in the 1980s further contributed to the growth of the foreign exchange market, trading about $70 billion worth of currency each day. Since then, the foreign exchange market has flourished and skyrocketed to over $4 trillion in daily trades. One of the major catalysts for this raise in daily trade volume was the introduction of the Euro currency in 1999, which united many European countries by using one currency, increasing not only the liquidity of the Euro but it's value as well.
Advantages
* Unlike the stock market, the foreign exchange market offers trading 24 hours a day (with the exception of the weekends; starting 5pm EST on Sunday into 4pm EST Friday.)
* It is the most liquid financial market in the entire world.
* Leverage (using borrowed funds or debt) can be used.
* Little to none "insider information" into the foreign exchange markets. Exchange rate fluctuations are actually caused by economic conditions.
* It is said to be very close to a market with ideal "perfect competition" allowing entry and exit into the market without any barriers.
Key Players
There are five basic major players in the FOREX market; Central Banks, Banks, Commercial Companies, Investment Firms, and Foreign Exchange Brokers.
National Central Banks play a very important role in the foreign exchange market, as they are the entity that attempts to stabilize the market by using their vast supply of foreign exchange reserves. These banks attempt to control the money supply, and interest rates. The central banks often have target interest rates for their currencies.
Banks deal with clients who do large amounts of trading and offer smaller trading fees due to the large volume, however most of the trading is still done by their brokers for the bank's own account.
Commercial Companies use the foreign exchange market to pay for goods and services. Smaller amounts are traded in comparison to Banks and these trades have very little effect on the short-term market rates. However, this type of foreign trade is an important factor when considering the long-term growth of a countries exchange rate.
Investment Firms use the foreign exchange market to purchase foreign securities primarily for accounts that are managed by the firm. They do this to diversify a client's portfolio with the intention of generating profit while minimizing risk. One of the common types of investments made by these firms for their clients are Pension Funds.
Foreign Exchange Brokers are non-bank exchange companies that offer foreign exchange and international payments to both individuals and companies. They offer currency exchange with physical delivery of the currency that is usually deposited into a bank account.
Factors Affecting Exchange Rates
As stated earlier, the exchange rate is determined primarily on the concept of supply and demand. The following are some of the economic conditions that can affect the supply and demand of a nation's currency.
Government budget deficits and surpluses: The market usually reacts negatively to large or increasing government budget deficits, and positively to decreasing budget deficits.
Balance of trade: The trade flow between countries illustrates the demand for goods and services. This is a good indicator of the demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy and can be either negative or positive depending on the situation.
Inflation rates: A currency will lose value if there is a high level of inflation in the country or if inflation levels seem to be rising. This is because inflation decreases the currency's purchasing power and along with it, the demand for that currency. But a currency may sometimes strengthen when inflation rises because the central bank may raise short-term interest rates in order to control inflation.
Economic growth and health: Gross Domestic Product (GDP), employment rates and other economic indicators can show the levels of a country's economic growth and health. Generally, the more healthy a country's economy is, the higher the demand and the currency value will be.
Types of FOREX trades and contracts
A Spot transaction is typically a two-day delivery transaction with the exception of the Canadian dollar, which is done in only one day. This trade is an exchange between two currencies and has the shortest time frame, involving cash rather than a contract.
A Forward transaction is one in which money does not actually become exchanged until an agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are. This is a contract transaction and can be for a few days, months or even years.
A Futures contract is a forward transaction with a standardized contract size and maturity dates where the amount of currency, exact date, and rate are agreed upon. These contracts are usually for the duration of 3 months and are inclusive of any interest amounts.
A Swap is the most common type of forward transaction that you will encounter. This is when two entities exchange currencies for a predetermined amount of time and agree to reverse the transaction at the end. These have no standardized contracts and are not traded through an exchange.
An Option is a contract where the owner has the right but not the obligation to exchange money from one currency into another at a predetermined exchange rate on a specified date. For instance, if the currency can be converted for a higher rate elsewhere than specified in the option, the owner can refuse to exercise their right to use the option and exchange this currency for the current rate. The FOREX options market is the largest and most liquid for options of any kind in the world.
Exchange-traded funds are open ended investment companies that can be traded at any time throughout the day. These companies act much like a US stock market index.
This article was written Stephen D. Sandecki of iTalkCash an Investment Forum ran by Certus Corporate Services. Please feel free to visit our Forex Forum.
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