Exchange of currency is important as it is
vital for the process of foreign trade and business. If you live in Europe and want to buy something from the United States then you have the pay the American
company in US dollar rather than Euros. So, you will have to exchange an
equivalent amount of US dollars for euros. This inherent need of international
businesses to exchange currencies makes the Forex market the largest and the most
liquid financial market in the world.
One unique feature of the Forex market is that
there is no centralized market place from where all the trading happens. Today,
it can be done electronically or over the counter at various institutions. It
is open 5 and half days a week for 24 hours. The major
financial centers for currency trading are London, Paris, New York, Tokyo,
Zurich, Frankfurt, Sydney, Hong Kong and Singapore. Since, these are situated
in various time zones; Forex trading is always active in some part of the
world.
Types
Of Forex Markets
There are three ways to conduct Forex trading:
the spot market, the futures market and the forwards market. Of these the spot
market is the largest. The forwards and futures market are more beneficial and
popular with businesses that want to hedge their foreign exchange risks on a
specific date in future.
Spot
Market: It is the market where currencies are traded
at the current price. This price is based on the supply and demand and takes in
to account various factors like interest rates, economic conditions, political
situations and the people’s perception about a currency’s value against others.
A deal hence confirmed is called a spot deal. The transaction takes place two
ways when one party exchanges a certain amount of a particular currency for an
equivalent amount in desired currency at a specified exchange rate. The
settlement happens in cash and can take up to two days.
Forwards
and Futures market: These market trades in contracts
that are representative of certain currencies at a specified rate and a date in
future for settlement. In the forward market, the contracts are traded over the
counter between the trading parties and the terms and conditions are determined
by them.
Future contracts are traded in public
commodity market. It has a standard size and a specified delivery and
settlement date, and a minimum price increment that cannot be changed. Both
these types of contracts are binding and are settled for cash.
Big multinational companies trade in these
markets to hedge the risk of exchange rate fluctuations.
According to me, out of the spot market, the futures market and the forwards market the spot market can give better chances of getting profits in Forex trading. Since it is the biggest of all, people get more options in trading than in other markets.
ReplyDeleteBest Regards,
Ramiz Jilani
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