Foreign Exchange (Forex)
Foreign Exchange, alternatively referred to as Forex, can be called the deals connected with changes of various currencies. For instance, the conversion process of Swiss franc into yuan.
Forex is considered as the greatest, highly liquid market, circulating more than billions U.S. dollars on a daily basis.
Although, generally accepted residency is absent, there exists a whole cluster of electronically controlled agents:
- commercial dealers;
- private speculators;
Working principle of Forex
Forex specifies the worth of a greater part of currencies. This process has an alternative designation - the exchange rate. Anyway, foreign exchange includes currency trading. Instances may comprise putting a stake on easing or tightening monetary strategy, which means increasing one currency towards another.
Currency trading contemplates 6 leading currency pairs:
- GBP/USD, or the British pound and the U.S. dollar.
- AUD/USD, or the Australian dollar and the U.S. dollar.
- USD/JPY, or the U.S. dollar and the Japanese yen.
- EUR/USD, or the Euro and the U.S. dollar.
- USD/CHF, or the U.S. dollar and the Swiss franc.
- CAD/USD, or the U.S. dollar and the Canadian dollar.
So every above-mentioned pair has its own value. Let’s see how it works. Give consideration to the pair USD/JPY. And take the cost of 127.59, that signifies buying one U.S. dollar with the use of 127.59 Japanese yen. If the price moves upwards, then the value of the U.S. dollar increases consequently towards the yen.
Speaking about Forex, it becomes obvious that the currencies are converted in lots. They are divided into mini, micro and standard ones. So that a standard lot amounts to 100,000 worth of a certain currency unit, mini lots - 10,000, while micro lots - 1,000 value. This process discerns from the usual bank visit, where you just convert your money. Forex presupposes deal-making in special regulated currency blocks. That’s what lots are for.
Forex trading processes
The Forex operates on a 24-hour basis, and hereby 5 days a week, except for national holidays, which are also bank time offs. The reason for such long business hours is the fact that every time zone has its own institutions that buy and sell currencies.
The market doesn't rely on a “one contact” principle. There exists tons of prospects concerning Forex deal-making. For instance, investors are able to address dealers, or monetary institutions, as they are more aware of the exchange functioning and possess more developed networking solutions.
Earlier, the concept of international currency trade was applied exclusively by authorities, major enterprises and hedge funds. Currently, such commercial activity is available to the general public, due to the advancement of digitalization. So that numerous enterprises suggest private entities to start the accounts and trade.
Forex trading process suggests buying or selling a currency of a certain state, i.e. material conversion is not carried out. Anyway, the market anticipates opening the account in a particular currency. The trader’s aim is to track the price hike or drop, in order to gain the profit.
Main features of Forex
It is a common fact that Forex should be separated from other far-famed markets.
So the main differences are:
- The presence of fewer regulations, meaning that market agents aren’t attached to the majority of codes or policies, as it’s prescribed with particular economic environments. So that there exists no clearing house associations.
- The absence of charges and commissions on Forex, indicating that a broker doesn't receive fees for trader’s transactions. Anyway, does the broker gain profit then? Of course! The agent obtains a spread, which means the distinction between the acquisition value and transaction price. The margin may be set or moving.
- The availability of round-the-clock entrance, signifying the continuous trading sessions all day long. There is only one pause, when temporary closure of the U.S. market happens on Saturday approximately at 1 AM GMT. Nevertheless, the New Zealand trading hour starts on Sunday at 9 PM, due to the time offset.
- The wide range of tools, meaning that the agents have an opportunity not to concentrate only on a particular currency pair.
Types of Foreign Exchange
Currently, Forex is considered intensely merchantable, exceeding the daily deal scope on the stock and bond markets. As Forex has been gathering pace, the market has become more reachable for private entities and institutions, through advances in the information technologies.
Therefore, there are lots of Forex market types, and it’s essential to distinguish them from one another:
- The spot market. In general, currencies are traded there, according to the going market rate. Factors, such as supply and demand, economic indicators, etc. influence the above-mentioned rate. Spot for the majority of currencies constitutes two business days. The only exception from the rule is the U.S. dollar, that calculates on the next working day. A noteworthy detail is that this currency is considered to be the most traded one in the world. Anyway, the spot market is reputed to fluctuate.
- The forward market. The deal on a forward market resembles the futures market transaction. A price is set as a composition of the spot rate, including forward points (a differential of interest rates among the certain currency pair) or not. Majority of transactions have a payback period of less than a year in the future, but the longer period is also practicable.
- The futures market. A settlement of transactions on the market is administered later than in the forward contract. The futures trade is standardized and has a particular calculation date, and that is its major characteristic.