Foreign Exchange Market Overview
Foreign Exchange Market also known as FOREX (for Foreign Exchange) is the largest market in the world. In contrast to stock markets, which have a specific geographical location, there is only one foreign exchange market. Transactions in foreign currency is the OTC, both in Paris and London, New York or Tokyo. Given the time difference between different financial markets, the foreign exchange market operates continuously, 24/24 Sunday evening to Friday evening. Thus, any time, it is always possible for an operator to buy the euro, the dollar or any other currency.
The average daily volume of transactions on the foreign exchange market is three times the volume of all futures markets and global actions combined. In 2007, it was equivalent to 3500 billion dollars were traded daily on the foreign exchange market. Volumes have grown very rapidly in the late 90s with the creation of the euro and the development of broadband Internet has made access to this market a lot easier for investors, that they are institutions or individuals.
The media used in the foreign exchange market, are outside the bank notes, bills of exchange and especially cross-border interchange fees. It is in this latter case, send an order to debit an account denominated in a currency X to credit another account simultaneously denominated Y. It is possible to treat more than 170 pairs of different currencies on the foreign exchange market but most currencies are treated the U.S. dollar (USD), Japanese yen (JPY), Pound Sterling (GBP), Swiss franc (CHF ), the Canadian dollar (CAD), the Australian dollar (AUD) and, more recently, the euro (EUR). These currencies are commonly called “majors” as opposed to “minors” or “emerging” currencies, and even “exotic”, which represent all other currencies traded on Forex.
The foreign exchange market has several compartments. On the spot market, the currency exchange is effective, it is called spot market. This market is not the most used. On the foreign exchange market futures that include the largest number of operations. In this market, then it is today to negotiate the exchange of two currencies, but for a later delivery date. This market is widely used by all agents who want to hedge against exchange risk. Finally, there is a derivatives market on which exchange traded contracts including currency futures and options on currencies.
The foreign exchange market has a strong liquidity thanks to the diversity of its stakeholders. Depending on their objectives, their aversion to risk and their time horizons, it is possible to distinguish six categories of agents in this market:
The central banks involved in general to manage their foreign exchange reserves and State papers. They may also seek to influence the exchange rate by selling or buying their currencies. Transactions of the Central Banks account for about 5% to 10% of total volumes in the foreign exchange market.
Commercial banks that are historical actors in this market with 50% of transactions recorded today. They are usually the final speaker of other market participants and seek to profit by the “market making”, ie offering at any time of the bid and ask prices to their customers, and ” margin more or less certain of their customers by running transactions. Margin means taking a small profit on the price at which the market maker buys or sells a currency to his client regarding the price at which it buys or sells himself on the currency market.
Brokers who allow access to the market. There are different types of brokers in the foreign exchange market. Some only provide access to the market and pose as an intermediary between buyers and sellers in a currency pair. In this case, the broker is paid only on “the spread, the difference between the purchase price and the selling price. Some dealers are, however, like the banks and market makers also seek to make more profits through the operations of their customers by offering at any time a bid price and a seller. Given the decentralized structure of the foreign exchange market, brokers play a vital role because they are the guarantors of the successful organization of market liquidity.
Multinational corporations: in general involved in the foreign exchange market in order to pay a foreign supplier or repatriate profits made in other currencies. They also common in the market to manage the risk of changes to which they are exposed. Some large multinational companies have a real front and also seek to make gains on the market.The institutional investors are entering the market more often to cover positions in their portfolios of stocks and bonds. Transactions represent 30% of total transactions on the market. Some institutional investors, however, only manage portfolios of foreign exchange. The aim is only to generate performance by taking speculative positions on foreign currencies.
Individual investors: With the advent of the internet and trading platforms easily accessible anywhere, anytime, and also because of the leverage that is offered by these platforms, transaction volumes investors are now more 5% of total transactions on the foreign exchange market.
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