Forex(fx) - Foreign Exchange

Forex(FX)-Foreign Exchange

Forex (FX) or Foreign Exchange is the market in which country currencies are traded. The forex market is the most liquid and largest market in world, with average traded values in trillions of dollars per day. All the currencies of world are included in this.

There is no direct market for currency exchange; trade is done over the counter. The forex market open for 24 hours and 5 days a week, and currencies are traded globally among the major financial hubs of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. Foreign Exchange is the biggest market in the world in terms of the total cash value traded, and anyone from corporates to person can participate in it.

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Understanding Forex

Forex trade is executed either a spot or a forward basis.

Spot Trades

A spot deal is for instant delivery, which is done as two trading days for most currency pairs. The major exception is the trading of U.S. dollars vs. Canadian dollars, which is settled in one trading day. The trading day calculation excludes Saturdays, Sundays and official holidays in either currency of the country.

The most actively traded currency is US Dollar. The euro is the most traded counter currency, followed by the yen(Japan), pound(British) and franc(Swiss). Market movements are steered by a mix of speculation, especially in the short term; economic strength and growth; and interest rate differentials.

Forward Transactions

Any forex trade that settles a date later than spot date is considered a "forward." The value is calculated by normalizing the spot rate to consider the spread in interest rates between the two currencies. The amount of this tuning is called "forward points." Forward points replicate only the interest rate spread between two countries. They are not a prediction of how the spot market will do at a date in the future.

A forward is a readymade contract: it can be for any amount and can settle on any date that's not a weekend or holiday. Trade with maturities bigger than a year are unusual, but they exist. As in a spot trade, money is traded on the settlement date.

Futures

A "future" is quite similar to a forward in that it is for a date longer than spot, and the pricing has the same basis. Unlike a forward, trading is done on an exchange, and can only be completed for stated money and dates. With a futures agreement, the purchaser pays a share of the value of the contract up front. That worth is marked-to-market daily, and the purchaser either pays or takes money based on the variation in value. Futures are widely used by speculators, and the agreements are usually settled before maturity.