The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.
The trade happening in the forex markets across the globe currently exceeds US$1.9 trillion/day (on average). Retail traders (individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks.
Financial instruments:
Spot: A spot transaction is a two-day delivery transaction, as opposed to the futures contracts, which are usually three months.
Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction.
Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates.
Swap: The most common type of forward transaction is the currency swap.
Options: A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
Factors affecting currency trading:
- Economic factors (Government budget deficits or surpluses, Balance of trade levels and trends, Inflation levels and trends, Economic growth and health)
- Political conditions (Internal, regional, and international political conditions and events can have a profound effect on currency markets)
- Market psychology (Perhaps the most difficult to define (there are no balance sheets or income statements), market psychology and trader perceptions influence the foreign exchange market in a variety of ways)
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