While the value of a country's currency remains stable within its own borders,
in the same time its value can widely fluctuate compared to that of other countries.
Exchanging rates keep on changing constantly and
supply and demand for any given currency, and thus its value,
are influenced by economic factors, political conditions and market psychology.
Betting on the spreads between countries' currencies
by placing "buy" or "sell" orders is what Forex trading is all about.
Although, the value of the daily turnover in the forex markets substantially exceeds those of other markets,
this is not the domain of the big players only. Small investors can also participate!
The market for foreign exchange is the world's largest financial market.
Trading is conducted through an "over-the-counter" network of traders
from major commercial and investment banks linked by computer terminals.
Participants include importers and exporters, as well as traders, portfolio managers and foreign exchange brokers.
Major trading centers include London, New York and Tokyo,
with total trading volume in excess of $1.5 trillion dollars of foreign currency per day.
More than half of all trading directly involves the exchange of U.S. dollars and
other currencies are traded against U.S. dollars since currency dealers
quote other currencies against the dollar when trading among themselves.
Foreign exchange transactions that are settled immediately are said to occur in the spot market,
while transactions to be settled at a future date occur in either the forward or the futures market.
These markets are summarized below:
1. Spot Market
This is the market for currencies for immediate delivery.
The price of foreign exchange in the spot market is referred to as the spot exchange rate or simply the spot rate.
2. Forward Market
This market is for the exchange of foreign currencies at a future date.
A forward contract usually represents a contract between a large money center bank
and a well-known (to the bank) customer having a well-defined need
to hedge exposure to fluctuations in exchange rates.
Although forward contracts usually call for the exchange to occur in either 30, 90 or 180 days,
the contract can be customized to call for the exchange of any desired quantity of currency
at any future date acceptable to both parties to the contract.
The price of foreign currency for future delivery is typically referred to as a forward exchange rate or simply a forward rate.
3. Futures Market
Although the futures market trading is similar to forward market trading
in that all transactions are to be settled at a future date,
futures markets are actual physical locations where anonymous participants trade standard quantities of foreign currency
(e.g., 200,000 DM per contract) for delivery at standard future dates (e.g., March, June, September, and December).
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