Most people at some point either when they are making a purchase overseas or traveling, they are In some way taking part In the Foreign exchange market, however increasingly many are now turning to the Foreign exchange market or the purposes of speculation, dealing at prices only open to financial institutions. “What is the Foreign Exchange Market? ” The foreign exchange market according to business tolerance. Com states “Global market In convertible currencies are traded and their conversion rates are determined. According to the international economic text book it says ” The foreign exchange market refers to the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt Instruments. ” (Garbage, 369) Currency Trading has grown to the the world’s largest rake, and it continues to grow daily. An interesting thing about the foreign exchange market is that not only is it the largest market but it is the most liquid, compared to other markets such as the stock market.
By liquid I mean their cash and assets can easy and quickly be turned into cash. The difference between any other market and the foreign exchange market is the fact that it allows the traders to deal with more than one trader. They can choose from many different people and this also allows comparison of prices because of the many options you have. Also, another hinge about the foreign exchange market Is that It Is open twenty-four hours a day, seven days a week. The way a trade takes place in a foreign exchange market Is there is a buying of one currency and the selling of another one.
There are two types of currencies, the base currency and the counter currency. A base currency Is ” the first currency In a currency pair. In a currency exchange, the exchange rate Is quotes as the units of one currency in terms of a single unit of a base currency (InvestsГroads. Com) So for example, in a currency exchange of U. S dollars for a Euro, the base currency is the U. S dollar. The counter currency is “The second currency in a currency pair. In a currency exchange, the exchange rate Is quoted as the units of the counter currency in terms of a single unit of a base currency. ” (Investor words. Mom) So basically the currency pair shows how much the counter currency is needed to purchase on unit of the base currency. When buying a currency pair, the base currency is the one that Is being bought, and the counter currency Is the one being sold. The foreign exchange market has an estimated amount of 3 trillion transactions in a day. It has hon. that the most active exchange rates can fluctuate to about 18,000 timed in a 24 hour time span. The foreign exchange market does not really have any specific requirements or a certain meeting place. Also, It Is not restricted to just one country.
When looking at any particular currency, like the Euro, the foreign exchange market consists of all 1 OFF A majority of foreign exchange markets have three levels on which they function “in transactions between commercial banks and their commercial customers, who are the ultimate demander and suppliers of foreign exchange; in the domestic InterTAN market conducted through brokers; and in active trading in foreign exchange with banks overseas. ” The banks that are more dominate that associate with foreign trade usually do not personally deal with other traders but rather use something called foreign exchange brokers.
The importance of the exchange brokers is so that that the banks can keep up with there desired foreign-exchange balances. An example of a situation that a foreign exchange broker deals with is “retail force broker may buy euros for 1. 5475 U. S. Dollars and, at the same time, sell euros for 1. 5478 U. S. Dollars. The spread in this case is $0. 003, or 3 pips. (Investigated. Com) It used to be that that foreign-exchange trading was down over the phone, however currently most of foreign-exchanged is managed electronically.
The second trader provides the grist trader with prices of both buying and selling. When the traders agree to do business, one will send euros and the other will send, say, dollars. By convention, the payment is actually made two days later. ” (Garbage, 372) There are both positives and negatives in the case of a spot market. One positive is that it is the simplest form of meeting the foreign currency requirements. The negative aspect though is that there is no assurance of the rate until the transaction is made, which puts the risk of exchange rate fluctuations.
An example of how forward transactions work is if “in August a U. S importer may arrange for a special Christmas season shipment of Japanese radios to arrive in October. The agreement with the Japanese manufacturer may call for a payment in yen on Cobber 20” (Garbage, 372) Then to be able to prevent the Japanese Yen booming a higher a rice in terms of a the dollar, the importer would try to make a contract with the bank to purchase a yen at a stipulated price, but then it would not be able to be received until October 20. Then when it comes time to pay the contract, the U.
S importer will pay for the yen. The point of a forward market is to protect you against negative movements in the cache rate, but it will not allow you to make in money if the exchange rate does happen to go the way you want it too. So to some it up the forward transactions and the spot transactions differ in the way that the forward arrests dates can be a few months even a couple of years in the future. No money plans or actions are taken until the actual transactions take place. The spot transactions is two or less days for the transaction to be made.
A currency Swap also is involved in the banks, “it is the conversations of one currency to another currency at one point in time, with an agreement to reconvert it back to the original currency at a specified time in the future. The idea of it is to two different traders come up with the swap as one transaction, that they settle to receive and pay stipulated amounts of currencies. A benefit that the swaps provide is that if gives traders the opportunity to meet their foreign-exchange needs over a certain time frame.
Foreign-Exchange Instrument Amount Percent Spot Transactions $319 45% swaps 221 Forward Transaction 109 15 Foreign-Exchange Options 9 Total $715 100% This table shows the distribution of foreign-exchange transactions by the U. S banking and by the specific transaction type that it uses. What are the supply, demands, Equilibrium rates of foreign exchange? “A nations demand for foreign exchange is a derived demand, driven foreigner emend for domestic goods and assets such as bank accounts, stocks, bonds, and real property. ” (Scarborough, 380) A good example that is given talks about how the U.
S demand for pounds may come originate from its idea to import British goods and services or to make investments with Britain. The demand for pounds for the U. S varies with the price. As the dollar price of the pound rises the British goods and services becomes a great price to the U. S importers. This occurs because more dollars are required to be buy each pound that is needed to finance the purchases that have been imported. If the exchange rate increases and becomes higher then, this in turn reduces the number of imports that have been bought.
The quantity of foreign exchange demanded falls. It is depicted by line Do in the figure below. “The supply of foreign exchange refers to the amount of foreign exchange that will be offered to the market at various exchange rates, all other factors held constant. An example that is given talks about that supply of pounds. They are developed by the eagerness of British residents and businesses to import U. S good and services. Then they lend funds and make investments in the United States, and then they have to vive back the debts that they owed to the U. S lenders.
The British present pounds in the foreign-exchange marker to be able to get the dollars they need to make payment to U. S residents. It is depicted in the same picture babble as a positive function of the exchange rate in the U. S. As the dollar of the pound rises, the British will have to buy more goods from the U. S. Demand. ” The equilibrium is the middle point in the graph that I showed above. It is where So and Do intersect each other. Conclusion Currency trading is the world’s largest market, as people learn more and find ways to invest, the market will continue to always grow.