Foreign Exchange Avery Hall, Blair Morgan, Dany Torres, Kasey Davis

Foreign Exchange (FOREX) is the exchange of one currency for another or the conversion of one currency into another currency. It also refers to the global market where currencies are traded virtually around the clock.

This market is called the Foreign Exchange Market, where participants are able to buy, sell, exchange and speculate on currencies.

Key Components

Facts on the Foreign Exchange Market

  • Increasing globalization has led to a massive increase in the foreign exchange transactions in recent decades
  • The global FOREX market is the largest financial market in the world
  • The U.S. Dollar is the most actively traded currency
  • FOREX is highly liquid

The Foreign Exchange Market is made up of:

  1. BANKS
  2. COMMERCIAL COMPANIES
  3. CENTRAL BANKS
  4. INVESTMENT MANAGEMENT FIRMS
  5. HEDGE FUNDS
  6. RETAIL FOREX BROKERS & INVESTORS

IMPORTANT TERMS

  • A spot deal is the purchase or sale of a foreign currency, financial instrument, or commodity for immediate delivery, the most common type of trade
  • forward trade occurs when stockbrokers personally purchase shares of a stock while knowing that their firm plans to purchase numerous shares of the same stock
  • forward price is the delivery price for a commodity, currency or financial asset decided upon by the buyer and the seller to be paid at a predetermined date in the future
  • futures transaction settles later than a spot deal, but is for a standard size and settlement date, and it's traded on a commodities market

Exchange Rates

Exchange Rates are the prices at which currencies trade, or the price of a country's money in terms of another country's money

There are two different types of exchange rates:

  • Fixed Exchange Rates are for countries who keep the exchange rate against some other currency at or near a particular target.
  • Floating Exchange Rates are for countries who let the exchange rate go wherever the market takes it.

Exchange rates fluctuate all the time. When a currency becomes more valuable in terms of other currencies, economists say that the currency appreciates. When a currency becomes less valuable in terms of other currencies, it depreciates.

HISTORY OF FOREX

Many countries used gold and silver as a method of international payment. The issue of using gold and silver for payment is that the value of the metals is affected by global supply and demand. The gold standard eventually broke down during the beginning of World War I. The major European powers felt the need to print more money to help pay for projects, but the financial burden was so large, there wasn't enough gold for the currency exchange. The gold standard would make a small comeback between the wars but wouldn't really work.

The Bretton Woods System was established but was discontinued in 1971. The modern foreign exchange market began forming in the 1970's. It followed three decades of government restrictions on foreign exchange transactions.

The FOREX Market and International Trade Market are similar in that:

  • both are large markets
  • both follow strong market trends
  • both utilize technical analysis to provide users with accurate data
America's Role in The Foreign Exchange Market

The United States plays a major role in the FOREX Market.

Although not the strongest currency, the US Dollar is the most actively traded currency in the world and the default currency for most transactions.

The US economy holds so much power, that traders around the world devote their time studying the exchange rates for the US Dollar because of the high demand to buy and sell Dollars.

U.S. Dollar Index - 43 Year Historical Chart

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Credits:

Created with images by frankieleon - "russian colors" • Astryd_MAD - "euro bill bills" • Waltie - "5 roubles coins" • TheDigitalWay - "money banknotes currency" • PublicDomainPictures - "business cash coin" • Unsplash - "buildings skyscrapers new" • free pictures of money - "Money"

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