What is the Foreign Exchange Market?
The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of approximately US$4 trillion. Foreign Exchange is the simultaneous buying of one currency and selling of another. The currencies are always traded in pairs, for example Euro/Dollar or Dollar/Yen
Where is the Forex market located?
The Forex market has no special location. It is a huge network of currency dealers connected with each other by means of telecommunications, which are concentrated in all the world’s leading financial centers and work 24 hours a day as a single smoothly running mechanism. The bulk of forex trading takes place between a few hundred large banks that process transactions made by large companies and governments. These institutions continually provide exchange rates for each other and for the broader market. The most recent quotation from one of these banks is considered the market's current pricing for that currency. Trading occurs over the internet, by telephone and through computer terminals at hundreds of locations around the globe.
Who are the participants in the Forex Market?
The Forex market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and individual investors.
Why is forex trading so popular?
Forex trading is attractive because it offers unparalleled freedom. A forex trader can live anywhere and trade in currencies from all across the globe as long as he/she is within reach of the internet. Work can be from home or office and trades can even be made while traveling. Moreover, a forex trader can usually choose his/her own hours to work since the global foreign exchange market is open 24-hours a day.
When does the Forex market open for trading?
A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.
What are the most commonly traded currencies in the Forex market?
The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, which include the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD) and the Australian Dollar (AUD).
How are currency prices determined?
Currency prices are affected by a variety of economic and political conditions, most importantly interest rates, inflation and political stability. Moreover, governments sometimes participate in the Forex market to influence the value of their currencies, either by flooding the market with their domestic currency in an attempt to lower the price, or conversely buying in order to raise the price. This is known as Central Bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the Forex market makes it virtually impossible for any one entity to "drive" the market for any length of time.
What is BID and ASK?
BID is the price at which an investor can place an order to buy a currency pair. This is also known as the 'bid price' or 'bid rate'.
ASK is the price at which a currency pair or security is offered for sale; the quoted price at which an investor can buy a currency pair. This is also known as the 'offer', 'ask price', or 'ask rate'.
What is direct and indirect quotation?
Direct quote is fixed units of foreign currency against variable amounts of the domestic currency while, indirect quote is fixed unit of domestic currency against variable amounts of foreign currency.
What is a forward contract?
A Forward contract is an agreement entered into between two parties to buy or sell an asset at a future date for an agreed price. A Forward contract is not traded on an exchange
What is a future contract?
A futures contract is an agreement between two parties to buy or sell a specified quantity and quality of asset at a certain time in the future at a certain price agreed to at the time of entering into the contract on the futures exchange.
What is option?
An Option is the right but not the obligation of the holder, to buy or sell the underlying asset by a certain date at a certain price. There are two types of options: CALL OPTION and PUT OPTION.
What is call option?
A call option is a contractual agreement, which gives the owner (holder) of the option, the right but not the obligation to purchase a stated quantity of the underlying asset (commodities, shares, indices, etc.) at a specified price (called the strike price), on the expiry date.
What is put option?
A put option is a contractual agreement, which gives the owner (holder) of the put option, the right but not the obligation to sell a stated quantity of the underlying asset (commodities, shares, indices, etc.) at a specified price (called the strike price), on the expiry date.
