Forex is the shorthand for foreign exchange market and while many people don’t know the details, it is an important part of everyone’s life. The foreign exchange market is where you trade currencies. If you travel to another country and they use a different currency, dollars would have to be exchanged for euros or yen, depending on where you are. Also, when the United States buys products from other countries such as wine from Italy-the company importing it must pay for it with euros. So, Forex is not a vague practice but instead, very relevant.
It is the requirement of changing money that has built Forex to a giant market, even bigger than the Stock Market. As of 2014, there was an average of $2000 billion dollars per day conducted in the foreign exchange market. This type of volume makes the Forex the biggest and most liquid market in the world.
Another distinct difference about the Forex is that it is not contained in one building or place. Transactions are done electronically, by traders, around the world on computers. This market is open for 5 ½ days per week around the clock. Such countries as London, Zurich, Tokoyo and Paris are considered very active traders in the Forex market. When you consider the difference in time zones, this means that when the United States traders are finishing their day of exchange- countries around the world are just starting. All of these factors make the Forex very active and price quotes fluctuate by the minute.
There are three major categories of the Forex market used by corporations and individuals. These are the spot market, the forwards market and the futures market. Each of these has its own distinction. The largest of these three is the spot market because it is the major asset that others are based on.
Spot market is where buyers purchase exchanges based on the current quoted price. Many things can affect the pricing such as the interest rate, political mood and the overall performance of the economy. Once a price is agreed on, it becomes a “spot deal.” The final settlement is in cash and usually takes two business days to settle.
Forwards and future markets do not trade in tangible currencies. Future exchanges instead use contracts that make claim to a particular currency type with a specific price and a date that is settled between the two parties. Future markets are brokered by the exchange and they have certain guidelines about delivery and settlement dates that can’t be changed. The future contracts are settled on an agreed upon date in the future.
Either type of market, forward or future are equally binding and usually settle in cash. Corportations use forward and future markets to protect themselves against fluctuations in the market and rate changes. Speculators in the market often use this type of contract to ensure pricing when the market is unstable.
So, as you can see-Forex is the market in action and the exchange works with investors and businesses to ensure fair and equitable trading.