foreign exchange market

 The foreign exchange market or foreign exchange market is a market that is characterized by the free exchange of currencies, that is, its main objective is to facilitate international trade and investment. It is also known as FOREX (Foreign Exchange, which translates as exchange of foreign currencies).






In this physical or virtual space, the price of each currency ,  called  the exchange rate, is set . Said price depends exclusively on the offer and demand of the participants.

                                     

It should be noted that only cash is not traded in the foreign exchange market  . On the contrary, deposits registered in financial institutions or documents that grant the right to collect an amount of money are also marketed.

This market helps to make purchases and sales of companies from different countries without them sharing the same currency. For example, a US company is allowed to import European products and pay in euros even though this company's income is in dollars. To know the value of one currency with respect to another, the currency converter is used .

Most common forex market instruments

  • Foreign currency spot transactions: These are currency purchases and sales in which the time that elapses does not exceed more than two business days.
  • Forward currency transactions: These are currency purchase and sale transactions in which the amount and price of the currency are set at the time of contracting, but the delivery of the same is made at a time set in the contract. Term operations represent 70% of the total operations carried out.
  • Financial derivatives : There are 5 within derivatives:

1.   Foreign Exchange Options: Contract that gives the right (not the obligation) to exchange one currency for another at a certain rate on a specific date .

2.   Foreign Exchange futures: it is an exchange of currencies on a certain date under an already agreed rate .

3. Non-Deliverable Forex Contract (non-deliverable forwards): a contract generally traded across borders, which is settled on the basis of different currencies.

4. Futures (outright forward): It is an exchange of one currency for another at the rate of a predetermined future day.

5. Foreign Exchange swaps: It is a contract that is characterized by the peculiarity of buying and selling a number of currencies, and reselling and repurchasing currencies at a certain rate on a specific date.

Factors why exchange rates may vary

  • Economic:  Inflation  (also core inflation ),  public deficit ,  GDP , unemployment , CPI, etc.
  • Politicians: Monetary policy of a country.
  • Psychological:  Due to rumours. The latter seems to be less important but it is not. For example: on 04/23/2013 a rumor of an attack on the White House via twitter shook the Wall Street stock market for a few minutes and the indices fell by more than 1%.

Characteristics of the forex market

Among the characteristics of the forex market are:

  • Large scale: A large number of currency exchange operations are reported around the world, setting up what is considered the largest financial market.
  • Variety: Many types of actors participate, from international entities to natural persons who approach an exchange house. Likewise, a wide range of financial assets is offered : Forwards , options , among others.
  • Agility: It is easy to communicate between the applicant and the offeror. Transactions can be made through various means such as the bank window or through a computer.
  • Utility: Allows you to satisfy the agent's need for a particular currency. This is important, for example, if the parties to a contract are not located in the same country. In that case, the buyer will normally have to purchase foreign currency .



Forex market institutions

The main participants in the foreign exchange market are


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