The foreign exchange market (FX, Forex) and how transactions are conducted.
Forex is a word derived from the compound word foreign exchange and it is the largest market in the world. Currencies worth billions of dollars are traded every day in the foreign exchange market that operates 24 hours a day across significant markets in different time zones across the globe. The primary financial markets dealing in forex are located in New York, Zurich, London, Frankfurt, Sydney, Singapore, Hong Kong and Tokyo. InvestMIB The foreign exchange market is an international market that has no central marketplace and is active throughout the day with the quotes of prices shifting every day. Most companies contact international businesses every day and to do so, Forex plays a crucial role in the transaction. If a company intends to purchase meat products from the United States, it would have to pay for the meat in US Dollars. Another example of where foreign exchange occurs is when one decides to take a vacation on the tropical beaches of Mombasa, and they would have to pay for their souvenir courier shells using the local currency and in this case, the Kenyan shilling. There is a high demand for foreign currencies to be exchanged and this is the reason why the foreign exchange market is the largest and most liquid market that exists. The transaction of the Forex are conducted over-the-counter (OTC) by electronically and traders around the world are connected by computers. As mentioned, the Forex market is a large one and there are three ways through which government, individuals and institutions can conduct trade namely forwards and futures and the spot market. The forwards’ exchanges do not conduct business using typical currencies, but contracts that show claim to a particular type of money that has a future date to be settled and each unit has a specific quotation of price. The futures markets do not also trade in actual currencies but futures contracts that are bought and sold based on the date of settlement and the standard size of the public commodities market. In the United States, a good example is the Chicago Mercantile Exchange that is regulated by National Futures Association. Details included in a futures contract include the dates of delivery and settlement, the minimum price increments and the number of units that are being traded. The forwards and futures markets contracts play a crucial role in sizeable international co-operation as they are used to hedge the fluctuations of exchange rates in the volatile forex market. However in the spot market, the currencies are purchased and sold according to the prevailing value of the currency. The value of the currency is affected by various factors such as the law of supply and demands, interest rates, the economic performance and also the speculation of one currency having a higher value over the others in the future. Bilateral transactions occur in the spot market whereby one party is tasked with delivering the currency that has been agreed upon, and the other party receives the particular amount of currency at the exchange rate value that has been recognized. The finalizing of the deal is known as “spot deal” and the spot market has had the reputation of conducting transactions in the present despite the trades taking two days for settlement to take place. The foreign exchange market is so big that it makes the stock market look small due to international businesses being conducted on a daily basis. A report by the Bank for International Settlements(BIS) indicated that the foreign exchange market performed trade worth over $4.9 trillion on a daily basis.