What is Forex
The advent of money, brought with it- the price of change. Change the saviour of progress to an epoch of globalization. The global village as we call it today, is pillaged by foreign exchange strength of currency and the myriad web it has sewn the world into.
The forex market is the largest financial market in the world, with an average daily turnover of over 1.8 trillion USD!! The veracity of foreign exchange has throttled past the wisp of timeless humanity proving to be a forerunner to the creation of a global village; where money sings hymns of being placed at the pinnacle of the value chain of life itself.
24 hours... the market churns out a spectacular number of bid/ask prices coupled with spot, future and forward contract transactions. The essence of the forex market is the exchange of value for value. Perception prevails over the volume of currency traded pertaining to the strength of the currency versus that of the country. The existence of such a diverse market solely depends on its diverse participants the commercial banks, central banks, speculators, arbitrators, multinational corporations, governments, financial markets, institutions, forex brokers and long/short traders. The financial-economic status that integrates the worldwide markets is based on effective price discovery mechanisms.
The purpose of forex market is to permit transfers of purchasing parity denominated in one currency for another. Most currency transactions are channeled through the world wide interbank market, it is the wholesale market in which major banks trade with one and another. In the spot market, currencies are traded for immediate delivery, two business days after the transaction has been concluded. In the forward market, contracts are made to buy and sell currencies for future delivery. When trading forex there is a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening. A simple example will clear the way one must view a bid/ask spread say, $: Rupee is 45.6789/45.6900 what this finally proclaims is that the value of one dollar is Rs. 45.6900.
The legendary beginnings are the harbingers of the most successful developed by mankind that has broken the barriers of culture, communication and integrated the system of global economics. The Bretton Woods Agreement spelled the path of innovative early stages to achieve the final consensus in markets. The aim of stabilising international currencies and preventing money fleeing across nations. This agreement fixed all national currencies against the dollar and set the dollar at a rate of $35 per ounce of gold. This gold standard prevented higher dignataries from arbitrarily debasing money and triggering inflation. Though, the gold standards was plagued with inadequacy. growth would entail importing goods to sustain the pace of development, this phenomena would reduce gold reserves. The vicious circle would then play its tune todoom resulting in shrinknig money supply, bearing higher interst rates, bringing the country forth from an era of progress to that of semi progress backed by recession. Prices of goods would plummet leading to augmented exports. The reversal caused inflows of gold back resulting in an improved money supply; saw interst rates fall leading to an economic boom. The trend continued until the outbreak of world war I interrupting the movement of gold resources. in the aftrmath of the war the policy was revoked to be replaced by currencied pegging their worth against the dollar, with the dollar weighed relative to gold. In 1971, the agreement was withdrawn and the US dollar was no longer convertible to gold.
Micro and macro economics swept the stadium creating a market instead of an agreement therey allowing the spread of foeign exchange in all its glory. The theory of monetarism, currency convertability , volatility, demand and supply are the basis to the effective working of the forex market. This lead to market deregulation and open trade settling with the computer age of high-tech, fast moving information on a second to second basis.
What makes the market so unique is it the trading volume, the liquidity, the participants, the geographical dispersion, the 24 hour market or the plethora of factors that effect exchange rates The quintessence is a culmination of the numerous factors to form a whole. Political, economic, social, technological conditions prevailing in a country determine its currency standing in the market when pegged against a basket of currencies. The key to success is that human beings never see information as it is; they see information as they are and with the truth dispensed the market causes dissensions a.k.a. speculation. And the participants who make the global village plausible include:-
Arbitrageurs who seek to earn risk free profits by taking advantage of different in interest rates among countries. They use forward contracts to eliminate the exchange risk involved in transferring their funds from one nation to another. Traders - use forward contracts to eliminate or cover the risk of loss on export or import orders that are denominated in foreign currencies. A forward covering transaction is related to a specific payment or receipt expected at a specified point of time.
Hedgers- engage in forward contracts to protect the home currency value of various foreign currency denominated assets and liabilities on their balance sheets that are not to be realized over the life of the contracts. They lock in the exchange rate of future trade and try eliminating risk. Speculators: actively expose themselves to currency risks by buying or selling currency forwards in order to profit from the exchange rate fluctuations based on macro economic concepts.
The saga of the markets continues as accumulation of profits becomes ever so enterprising that the dynamism of the factors play out the future of tomorrow. forex markets breathe on devaluation and inflation (devaluation to gain trade competitiveness is self defeating as a weaker currency tens to result in higher domestic inflation, offsetting the benefits of devaluation), protectionism and quotas (Restricting supply relative to the demand, the quota causes price of foreign goods to rise), boosting savings rate, current account deficit, unemployment, The Gross Domestic Product, Industrial Production, Purchasing Managers Index, Producer Price Index, Consumer Price Index, Durable Goods, Employment Cost Index, Retail Sales barely graze the tip of the iceberg. The indicators when revised upwards or downwards as the need may be increase the consumer confidence index thereby, strengthening the economy.
Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit and order placement decisions.
Certain risk management issues:
1.Unexpected corrections in currency exchange rates
2.Wide variations in foreign exchange rates
3.Volatile markets offering profit opportunities
4.Lost payments
5.Delayed confirmation of payments and receivables
6.Divergence between bank drafts received and the contract price
The market looms endlessly with innovations knocking on the doors of advancement be it through instruments (futures, options, swap options, bonds) or forms of currency (bullion, silver) the future sprays a ray of furthering progress to sustain new heights of improvement. The appreciation or depreciation of a currency is in the hands of humanity- that is the force that will finally decide the future of the forex market but as for now, it look like the world can protract far more trading volumes that it ever has in the past! Heres to humanity the intellect behind the largest market in the world!
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