Trade of currencies is done by the foreign exchange market, which is also known as currency, forex, or FX. It provides an ease to banks and other institutions for buying and selling currencies.
Basic Purpose of Foreign Exchange Market
The basic purpose of the foreign exchange market is to facilitate international trade and investment. A foreign exchange market provides help to businesses for converting one currency to another. For instance, a U.S. business is permitted by it to import European goods and pay Euros, even though the income of business is in U.S. dollars.
In a typical foreign exchange transaction what happens is that a quantity of one currency is purchased by a party by paying a quantity of another currency. The modern foreign exchange market has been started initiating during the 1970s, at that time countries gradually switched to floating foreign exchange from the previous exchange regime, which does not change and remained fixed as per the Bretton Woods system.
Why Foreign Exchange Market is Unique?
The foreign exchange market is unique because of
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Its trading volumes makes it unique,
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It is unique because of its the extreme liquidity,
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It is unique because of its geographical dispersion,
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It is unique because of its long trading hours: it works 24 hours a day except on weekends(from 22:00 UTC on Sunday until 22:00 UTC Friday),
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It is unique because of the variety of factors that has their effects on exchange rates.
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It is unique because of the low margins of profit as compared to other markets having fixed income , but due to very large trading volumes profits can be high.
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It is unique because of the use of leverage
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From 1988 to 2007, turnover of the main foreign exchange market has been measured in billions of USD.
Average daily Turnover in Global Foreign Exchange Markets
As such, this market has been referred to such a kind of market that is closest to the ideal perfect competition, notwithstanding market manipulation by central banks. Average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, according to the Bank for International Settlements. Trading in the world’s main financial markets has been accounted for $3.21 trillion of this. In main foreign exchange market turnover this approximately $3.21 trillion has been broken down as follows:
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In spot transactions $1.005 trillion
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In outright forwards $362 billion
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In foreign exchange swaps $1.714 trillion
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$129 billion estimated gaps in reporting
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Posted by R. MAK. in Forex Basics, Forex Market · 0 Comment
