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:
- COMMERCIAL COMPANIES
- CENTRAL BANKS
- INVESTMENT MANAGEMENT FIRMS
- HEDGE FUNDS
- RETAIL FOREX BROKERS & INVESTORS
- 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
- A 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
- A 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
- A 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 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.