the foreign exchange market ( Forex , FX , or currency market ) is global decentralized or over-the-counter (OTC) market for currency trading. This market determines the exchange rate of foreign currency. It covers all aspects of purchase, sale and currency exchange at current or determined prices. In terms of trading volume, by far the largest market in the world, followed by the credit market.
The main participants in this market are the larger international banks. Financial centers around the world serve as an anchor of trade between different types of buyers and sellers around the clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not specify the absolute value of the currency but determines its relative value by setting a one-currency market price if paid in other currencies. Example: 1 USD is worth X CAD, or CHF, or JPY, etc.
The foreign exchange market works through financial institutions, and operates on several levels. Behind the scenes, banks are turning to a small number of financial companies known as "dealers", who are involved in large foreign exchange trading. Most of the foreign exchange traders are banks, so this behind-the-scenes market is sometimes referred to as the "interbank market" (although some insurance companies and other types of financial companies are involved). Trade between foreign exchange traders can be huge, involving hundreds of millions of dollars. Due to the issue of sovereignty when it involves two currencies, Forex has few (if any) regulatory bodies governing its actions.
The foreign exchange market assists international trade and investment by allowing currency conversion. For example, it allows businesses in the United States to import goods from EU member countries, especially members of the Euro Zone, and pay Euros, even though their earnings are in US dollars. It also supports speculation and direct evaluation relative to currency values ​​and carry trade speculation, based on differential rates between two currencies.
In a typical foreign exchange transaction, a party buys a certain amount of currency by paying a different quantity of the other currency.
The modern foreign exchange market began to form during the 1970s. It follows three decades of government restrictions on foreign exchange transactions under the Bretton Woods monetary management system, which sets the rules for commercial and financial relationships among the world's major industrialized countries after World War II. The countries gradually switched to a floating exchange rate from the previous exchange rate regime, which remained per Bretton Woods system.
The foreign exchange market is unique because of the following characteristics:
- its large trading volume, representing the world's largest asset class that causes high liquidity;
- geographical spread;
- Sustained operation: 24 hours a day except weekends, ie, trading from 22:00 GMT on Sunday (Sydney) to 22:00 GMT Friday (New York);
- the various factors that affect the exchange rate;
- the profit margin is relatively low compared to other fixed income markets; and
- the use of leverage to increase profit and loss margins and with respect to account size.
Thus, it has been referred to as the market closest to the ideal of perfect competition, despite currency intervention by the central bank.
According to the Bank for International Settlements, preliminary global results from the US Central Bank Triennial Survey and OTC Derivatives Markets 2016 show that trading in the foreign exchange market averaged $ 5.09 trillion per day in April 2016. This is down from $ 5.4 trillion in April 2013 but up from $ 4.0 trillion in April 2010. Measured by value, foreign exchange traded more than any other instrument in April 2016, at $ 2.4 trillion per day, followed by spot trading at $ 1 , 7 trillion.
The $ 5.09 trillion break-down is as follows:
- $ 1.654 trillion in spot deals
- $ 700 billion in front attacker
- $ 2,383 trillion in foreign exchange
- $ 96 billion currency swap
- $ 254 billion in options and other products
Video Foreign exchange market
History
Ancient
Currency trading and the first exchange occurred in ancient times. Money changers (people who help others to change money and also take commissions or charge a fee) live in the Holy Land during the Talmudic Times ( biblical times ). These people (sometimes called "kollybist? S") use city kiosks, and on the feast days of the Gentile Temple Tribunal. Money changers are also newer silversmiths and/or goldsmiths.
During the 4th century, the Byzantine government maintained a monopoly over currency exchanges.
Papyri PCZ I 59021 (c.259/8 BC), indicating the exchange of coins in Ancient Egypt.
Currency and exchange are important elements of trading in the ancient world, allowing people to buy and sell items such as food, pottery and raw materials. If a Greek coin has more gold than an Egyptian coin because of its size or contents, then a trader can exchange less Greek gold coins for a more Egyptian, or for more material goods. This is why, at some point in their history, most of the world's current circulating currencies have a value set on a certain quantity of recognized standards such as silver and gold.
The Middle Ages and later
During the fifteenth century, the Medici family was required to open a bank in a foreign location to exchange currencies to act on behalf of textile traders. To facilitate trade, the bank creates nostro (from Italian, this translates to "ours") account book containing two column entries showing the amount of foreign and local currency; information relating to account storage with foreign banks. During the 17th (or 18th) century, Amsterdam maintained an active Forex market. In 1704, foreign exchanges took place between agents acting in the interests of the United Kingdom and the Netherlands.
Early modern
Alex. Chocolate & amp; The children traded foreign currency around 1850 and were the leading currency traders in the United States. In 1880, J.M. do EspÃÆ'rito Santo de Silva (Banco EspÃÆ'rito Santo) applying and being given permission to engage in foreign exchange trading business.
The year 1880 was considered by at least one source as the beginning of a modern foreign exchange exchange: the gold standard began that year.
Before the First World War, there was much more restricted international trade control. Motivated by the onset of war, countries abandoned the gold standard monetary system.
Modern to post-modern
From 1899 to 1913, state ownership of foreign exchange increased at an annual rate of 10.8%, while gold holdings increased at an annual rate of 6.3% between 1903 and 1913.
By the end of 1913, almost half of the world's foreign exchange was done using pound sterling. The number of foreign banks operating within London borders increased from 3 in 1860, to 71 in 1913. In 1902, there were only two London foreign exchange brokers. At the beginning of the 20th century, trade was in the most active currencies in Paris, New York City and Berlin; Britain remained largely uninvolved until 1914. Between 1919 and 1922, the number of foreign exchange brokers in London increased to 17; and in 1924, there were 40 companies operating for the purpose of exchange.
During the 1920s, the Kleinwort family became known as the leader of the foreign exchange market, while Japheth, Montagu & Co. and Seligman still guarantee recognition as a significant FX merchant. Trade in London began to resemble its modern manifestation. In 1928, forex trading was an integral part of the city's financial function. Continental exchange controls, plus other factors in Europe and Latin America, hampered any attempt at the wholesale prosperity of commerce for the Londoners of the 1930s.
After World War II
In 1944, the Bretton Woods Agreement was signed, allowing the currency to fluctuate within the range of Ã, Â ± 1% of the nominal exchange rate of the currency. In Japan, the Foreign Exchange Bank Act was introduced in 1954. As a result, the Bank of Tokyo became the center of foreign currency exchange until September 1954. Between 1954 and 1959, Japanese law was changed to allow for foreign exchange transactions in more Western currencies.
US President Richard Nixon is credited with ending the Bretton Woods Agreement and a fixed exchange rate, ultimately resulting in a free-floating currency system. After the Accord ended in 1971, the Smithsonian Agreement allowed prices to fluctuate to Ã, Â ± 2%. In 1961-1962, the volume of foreign operations by the US Federal Reserve was relatively low. Those involved in controlling exchange rates find the boundaries of the Treaty unrealistic and so stop this in March 1973, when some time later no major currency is retained with the capacity for conversion to gold, organizations rely on currency reserves. From 1970 to 1973, trading volume on the market increased threefold. At one time (according to Gandolfo during February-March 1973) some markets were "split", and the two-tier currency market was introduced, with multiple currency rates. It was removed in March 1974.
Reuters introduced a computer monitor during June 1973, replacing telephones and telex previously used for trade quotes.
Market closed
Due to the final ineffectiveness of the Bretton Woods Accord and the European Joint Float, the forex market was forced to close sometime in 1972 and March 1973. The biggest US dollar purchase in 1976's history was when the West German government achieved nearly 3 billion dollars of acquisition (figures given as 2.75 billion in total by The Statesman: Volume 18 1974), this event indicates the impossibility of a balance of exchange stability by the measure of control used at the time and the monetary and foreign exchange market systems in Germany "West" and other countries in Europe were closed for two weeks (during February and, or, March 1973. Giersch, PaquÃÆ' Â ©, & amp; Schmieding the country closed after the purchase of "7.5 million Dmarks" Brawley states "...The exchange market should be closed.When they reopen... March 1st "it is a major purchase going on after the closing).
After 1973
In developed countries, state control over foreign exchange trading ended in 1973 when the condition of the modern market was full of floating and relatively free starts. Other sources claim that the first time a currency pair is traded by a US retail customer is during 1982, with an additional currency pair becoming available the following year.
On January 1, 1981, as part of the change that began in 1978, the People's Bank of China allowed certain domestic "companies" to participate in foreign exchange trading. Sometimes during 1981, the South Korean government ended the Forex control and allowed free trade to happen for the first time. During 1988, the country's government received IMF quotas for international trade.
Intervention by European banks (especially the Bundesbank) affected the Forex market on February 27, 1985. The largest proportion of all trades worldwide during 1987 were in the UK (slightly over a quarter). The United States has the second number of places involved in trading.
During 1991, Iran changed international agreements with several countries from barter oil to foreign exchange.
Maps Foreign exchange market
Market size and liquidity
The foreign exchange market is the most liquid financial market in the world. Merchants include governments and central banks, commercial banks, other institutional investors and financial institutions, currency speculators, other commercial firms, and individuals. According to the 2010 Central Bank Triennial Survey, coordinated by the Bank for International Settlements, the average daily turnover was $ 3.98 trillion in April 2010 (compared to $ 1.7 trillion in 1998). Of this $ 3.98 trillion, $ 1.5 trillion is a spot transaction and $ 2.5 trillion is traded in direct forward, swap and other derivatives.
In April 2010, trading in the UK accounted for 36.7% of the total, making it the most important foreign exchange trading center in the world. Trade in the United States accounted for 17.9% and Japan accounted for 6.2%.
For the first time, Singapore surpassed Japan in its average daily foreign exchange trading volume in April 2013 with $ 383 billion per day. So the sequence is: Great Britain (41%), United States (19%), Singapore (6%), Japan (6%) and Hong Kong (4%).
Forex trading and exchange-traded options have grown rapidly in recent years, reaching $ 166 billion in April 2010 (twice the turnover recorded in April 2007). Since April 2016, exchange-traded currency derivatives represent 2% of OTC foreign exchange. The forward foreign currency contract was introduced in 1972 on the Chicago Mercantile Exchange and traded over most other futures contracts.
Most developed countries allow the trading of derivative products (such as futures and futures options) on their exchanges. All these developed countries already have full conversion capital accounts. Some developing country governments do not allow foreign exchange derivative products on their exchange because they have capital controls. The use of derivatives grows in many developing countries. Countries such as South Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.
Foreign exchange trading increased by 20% between April 2007 and April 2010, and has more than doubled since 2004. Increased turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. Growth in electronic execution and a variety of execution options have lowered transaction costs, increased market liquidity, and attracted greater participation from many types of customers. In particular, electronic commerce through online portals has made it easier for retail traders to trade in the foreign exchange market. In 2010, retail trade is estimated to reach up to 10% of the spot rotation, or $ 150 billion per day (see below: Retail foreign exchange traders).
Foreign currencies are traded in over-the-counter markets where brokers/dealers negotiate directly with each other, so there is no exchange center or clearinghouse. The largest geographical trading center is the United Kingdom, especially London. According to TheCityUK, it is estimated that London increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, the quoted price of the currency is usually the London market price.. For example, when the International Monetary Fund calculates the value of the right of withdrawal, especially on a daily basis, they use London's market price during the day.
Market participants
Unlike the stock market, the foreign exchange market is divided into access levels. At the top is the interbank foreign exchange market, which consists of the largest commercial banks and securities dealers. In the interbank market, the spread, which is the difference between the bid and ask price, is a sharp razor and is unknown to players outside the inner circle. The difference between bid and ask prices widened (eg from 0 to 1 pip to 1-2 pips for currencies like EUR) when you descend the access level. This is due to volume. If a trader can guarantee large amounts of transactions for large quantities, they can demand a smaller difference between the offer price and the demand, which is called a better spread. The level of access that makes up the foreign exchange market is determined by the size of the "line" (the amount of money they trade). The top-tier inter-market market accounts for 51% of all transactions. From there, smaller banks, followed by large multinational corporations (which need to hedge risk and pay employees in various countries), large hedge funds, and even some of the makers of the retail market. According to Galati and Melvin, "Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in the financial markets in general, and in the FX market in particular, since the early 2000s." (2004) In addition, he noted, "Hedge funds have grown significantly during the 2001-2004 period in terms of both total and overall size". Central banks also participate in foreign exchange markets to align currencies with their economic needs.
Commercial enterprise
An important part of the foreign exchange market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade in fairly small numbers compared to banks or speculators, and their trades often have little short-term impact on market prices. Nevertheless, trade flows are an important factor in the long-term direction of currency exchange rates. Some multinational companies (MNCs) can have an unexpected impact when a very large position is closed due to exposure that is not widely known by other market participants.
Central banks
The national central bank plays an important role in the foreign exchange market. They try to control the money supply, inflation, and/or interest rates and often have an official or unofficial target rate for their currency. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "speculation stabilization" is doubtful because central banks do not go bankrupt if they make huge losses, just as other traders will. Nor is there any convincing proof that they really make a profit from trading.
Foreign exchange settings
Currency exchange is the daily monetary exchange rate set by the respective national banks. The idea is that central banks use time and exchange rates to evaluate the behavior of their currencies. Improving the exchange rate reflects the real value of the balance in the market. Banks, dealers and traders use interest rates as an indicator of market trends.
Expectations or rumors of a central bank's foreign exchange intervention may be enough to stabilize the currency. However, aggressive interventions may be used several times each year in countries with dirty floating currency regimes. Central banks do not always achieve their goals. The combined resources of the market can easily overwhelm any central bank. Some of these natural scenarios were seen in 1992-1993, the European Exchange Rate Mechanism collapsed, and in more recent times in Asia.
Investment management company
Investment management firms (which usually manage large accounts on behalf of customers such as pension funds and endowments) use foreign exchange markets to facilitate transactions in foreign securities. For example, an investment manager who has an international equity portfolio needs to buy and sell several pairs of foreign currency to pay for the purchase of foreign securities.
Some investment management firms also have speculative speculative currency overlay operations, which manage client currency exposure with the goal of generating profits and limiting risk. While the number of specialist firms of this type is quite small, many have large asset values ​​under management and can therefore result in large trades.
Retail foreign exchange dealer
Individual retail speculative traders are a growing market segment. Currently, they participate indirectly through a broker or bank. Retail brokers, although largely controlled and regulated in the US by the Commodity Futures Trading Commission and the National Futures Association, have previously experienced periodic currency frauds. To deal with this problem, in 2010 NFA requires its members who deal with the Forex market to register like that (I.e, CTA Forex, not CTA). Traditional NFA members will be subject to minimum net capital requirements, FCM and IB, subject to a larger minimum net capital requirement if they deal with Forex. A number of foreign exchange brokers operate from the UK under the rules of the Financial Services Authority where foreign exchange trading using margin is part of a broader over-the-counter derivative trading industry that includes contracts for differences and financial bet differences.
There are two main types of retail FX brokers that offer the opportunity to trade speculative currencies: broker and dealer or market maker . Broker functions as a customer agent in the broader FX market, looking for the best prices on the market for retail orders and handling on behalf of retail customers. They charge a commission or "mark-up" in addition to the price earned in the market. Dealers or market makers , on the other hand, usually act as agents in transactions versus retail customers, and quote the price they are willing to deal with.
Non-bank foreign exchange company
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as "foreign exchange brokers" but are different because they do not offer speculative trading but currency exchanges with payments (ie, there is usually a physical delivery of currency into a bank account).
It is estimated that in the UK, 14% of currency transfers/payments are made through the Foreign Currency Company. The selling point of these companies is usually they will offer better exchange rates or cheaper payments than the customer bank. These companies are different from Remittance Companies because they generally offer higher value services. The volume of transactions made through Foreign Exchange Companies in India amounts to about USD 2 billion per day. This does not compete well with the well-developed international foreign exchange market, but with the entry of the online Forex Company, the market continues to grow. About 25% of currency/payment transfers in India are made through non-bank Foreign Exchange Companies. Most of these companies use USP exchange rates better than banks. They are governed by FEDAI and any transactions in Foreign Currency are governed by the Foreign Exchange Management Act, 1999 (FEMA).
Money transfer and remittance and bureau de change
Money transfer/money transfer companies make low-value, large-volume transfers generally by economic migrants back to their home countries. In 2007, the Aite Group estimated that there was a $ 369 billion remittance (an increase of 8% over the previous year). The four largest overseas markets (India, China, Mexico and the Philippines) received $ 95 billion. The largest and most famous provider is Western Union with 345,000 agents globally, followed by the UAE Exchange. The exchange bureau or currency transfer company provides low-value foreign exchange services to travelers. These are usually located at airports and stations or at tourist sites and allow physical records to be exchanged from one currency to another. They access the foreign exchange market through a bank or non-bank foreign exchange company.
Trading Characteristics
There is no market unified or centralized for most trades, and there are very few cross-border regulations. Due to the nature of the over-the-counter (OTC) currency market, there are more interconnected markets, where different currency instruments are traded. This implies that there is no single exchange rate but more different prices (prices), depending on which bank or market maker is trading, and where it is. In practice, the tariff is quite close because of the arbitration. Due to London's dominance in the market, the price of a particular currency quotation is usually the London market price. Major trade exchanges include Electronic Broking Services (EBS) and Thomson Reuters Dealing, while major banks also offer trading systems. A joint venture of Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and aspires but fails for the role of central market clearing mechanism.
The main trading centers are London and New York City, although Tokyo, Hong Kong, and Singapore are also important centers. Banks around the world participate. Currency trading happens continuously throughout the day; when the Asian trading session ends, the European session begins, followed by the North American session and then returns to the Asian session.
Exchange rate fluctuations are usually caused by actual monetary flows and by expectations of changes in monetary flows. This is due to changes in the growth of gross domestic product (GDP), inflation (purchasing power parity theory), interest rate (interest rate parity, Domestic Fisher effect, International Fisher effect), budget deficit and trade or surplus, M & amp transboundary the big one ; Transactions and other macroeconomic conditions. Headlines are released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, major banks have an important advantage; they can see their customer's order flow.
Currencies are trading against each other in pairs. Each currency pair is thus an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are ISO 4217 international letters of the currencies involved. The first currency (XXX) is the base currency quoted relative to the second currency (YYY), called the counter currency (or quote currency). For example, the quotation EURUSD (EUR/USD) 1.5465 is the Euro price expressed in US dollars, which means 1 euro = 1.5465 dollars. The market convention is to quote most of the exchange rate against USD with the US dollar as the base currency (eg USDJPY, USDCAD, USDCHF). The exceptions are British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD) and euro (EUR) where USD is the opposite currency (eg GBPUSD, AUDUSD, NZDUSD, EURUSD).
Factors affecting XXX will affect XXXYYY and XXXZZZ. This causes a positive currency correlation between XXXYYY and XXXZZZ.
In the spot market, according to the 2016 Trienial Survey, the most heavily traded bilateral currency pair is:
- EURUSD: 23.0%
- USDJPY: 17.7%
- GBPUSD (also called cable ): 9.2%
U.S. currency involved in 87.6% of transactions, followed by the euro (31.3%), yen (21.6%), and sterling (12.8%) (see table). The percentage of volumes for all individual currencies should increase by 200%, as each transaction involves two currencies.
Trading in the euro has grown tremendously since the creation of the currency in January 1999, and how long the foreign exchange market will remain centered on the open dollar for debate. To date, euro trading versus non-European currencies, ZZZ will usually involve two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is a currency pair traded in the interbank spot market.
Determinants of the exchange rate
The following theories explain exchange rate fluctuations in the floating exchange rate regime (In a fixed exchange rate regime, rates are determined by the government):
- International parity conditions: Relative purchasing power parity, interest rate parity, domestic Fisher effect, International Fisher effect. Although to some extent the above theories provide a logical explanation for exchange rate fluctuations, but these theories are shaky because they are based on irrefutable assumptions [ie, free flow of goods, services and free capital] in the real world./li>
- The balance of payments model: This model, however, primarily focuses on tradable goods and services, ignoring the increasing role of global capital flows. Failed to provide an explanation for the continuous appreciation of the US dollar during the 1980s and most of the 1990s, although the current US current account deficit soared.
- An asset market model: viewing currencies as an important asset class for building investment portfolios. The price of an asset is influenced largely by the desire of people to hold the existing amount of assets, which in turn depends on their expectations on the future value of these assets. The market model of exchange rate asset states that "the exchange rate between two currencies represents a price that only balances relative stocks, and demand, assets in that currency."
None of the models developed so far succeeded in explaining exchange rates and volatility in longer periods of time. For shorter time frames (less than a few days), algorithms can be designed to predict prices. It is understandable from the above model that many macroeconomic factors affect the exchange rate and ultimately the price of the currency is the result of the double forces of demand and supply. The world currency market can be seen as an enormous fusion vessel: in a mixture of current and ever-changing major events, the supply and demand factors are constantly shifting, and the price of one currency in relation to another appropriate shift. There is no other market that covers (and confiscates) as much as what happens in the world at a given time as a foreign exchange.
Supply and demand for the given currency, and thus its value, is not influenced by a single element, but rather by some. These elements generally fall into three categories: economic factors, political conditions, and market psychology.
Economic factors
These include: (a) economic policy, propagated by government agencies and central banks, (b) economic conditions, generally expressed through economic reports and other economic indicators.
- Economic policy consists of government fiscal policy (budgetary/spending practices) and monetary policy (the means by which the government central bank affects the supply and the "cost" of money, as reflected by the interest rate).
- Government budget deficit or surplus: The market usually reacts negatively to the widening government budget deficit, and positively narrows the budget deficit. The impact is reflected in the currency value of a country.
- Balance of trade rates and trends: The flow of inter-state trade reflects the demand for goods and services, which in turn implies the demand for a country's currency to trade. The surplus and deficit in trade in goods and services reflect the economic competitiveness of a country. For example, a trade deficit may have a negative impact on a country's currency.
- Inflation rate and trends: Usually the currency will lose value if there is a high inflation rate in the country or if the rate of inflation is considered to increase. This is because inflation erodes purchasing power, thus demanding, for that particular currency. However, currencies sometimes strengthen as inflation rises on expectations that the central bank will raise short-term interest rates to combat rising inflation.
- Economic and health growth: Reports such as GDP, employment rate, retail sales, capacity utilization and others, detail the level of economic growth and health of a country. In general, the healthier and stronger the economy of a country, the better its currency will perform, and the more demand for it will be.
- Economic productivity: Increasing productivity in the economy must positively affect the value of its currency. The effect is more prominent if the increase in the trade sector.
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on the currency market.
All exchange rates are vulnerable to political instability and anticipation of the new ruling party. Political turbulence and instability can negatively impact a country's economy. For example, the destabilization of coalition governments in Pakistan and Thailand could have a negative impact on the value of their currencies. Similarly, in a country facing financial difficulties, the emergence of a political faction considered fiscally responsible may have the opposite effect. Also, events in one country in an area can spur positive/negative interest in neighboring countries and, in the process, affect their currency.
Market psychology
Market psychology and trader perceptions affect the foreign exchange market in various ways:
- Flights to quality: Disruptive global events can lead to "flight to quality", a kind of capital flight where investors move their assets to a perceived "safe place". There will be greater demand, resulting in higher prices, for currencies deemed to be stronger on top of their relatively weaker counterparts. The US dollar, Swiss franc, and gold have become traditional safe havens during times of political or economic uncertainty.
- Long-term trend: The currency market is often moving in long-term visible trends. Although currencies do not have an annual growing season like physical commodities, the business cycle is felt. The cycle analysis looks at long-term price trends that may increase from economic or political trends.
- "Buy rumors, sell facts": This market truism can be applied to many currency situations. The tendency for currency prices to reflect the impact of certain actions before they occur and, when the anticipated event occurs, reacts in the opposite direction. This can also be called an "oversold" or "overbought" market. To buy gossip or sell facts can also be an example of a cognitive bias known as a buffer, as investors focus too much on the relevance of outside events to the price of the currency.
- Economic figures: Although economic numbers may reflect economic policies, some reports and numbers take effect like a talisman: the numbers themselves become important to market psychology and may have a direct impact on short-term market movements. "What to watch for" can change over time. In recent years, for example, the money supply, jobs, trade balance figures, and inflation figures all took turns in the spotlight.
- Technical trade considerations: As in other markets, price movements accumulated in a currency pair such as EUR/USD can form a real pattern that traders may use. Many traders are studying price charts to identify the pattern.
Financial instruments
Spot
Spot transactions are two-day delivery deals (except in case of trade between US dollar, Canadian dollar, Turkish lira, euro and Russian ruble, completing the next business day), as opposed to futures contracts, which are usually three months. This trade is a "direct exchange" between two currencies, has the shortest period of time, involves cash rather than a contract, and interest is not included in the agreed transaction. Spot trading is one of the most common types of Forex Trading. Often, forex brokers will charge a small fee to clients to roll out expired transactions into new identical transactions for continued trading. This roll-over cost is known as the "Swap" fee.
Forward
One way to deal with foreign exchange risk is to engage in forward transactions. In this transaction, money does not actually change hands until some are agreed upon on a future date. Buyers and sellers agree on the exchange rate for any future date, and transactions take place on that date, regardless of the current market price. The trading duration can be one day, several days, months or years. Usually the date is determined by both parties. Then the forward contract is negotiated and approved by both parties.
Non-deliverable forward (NDF)
Forex, ECN, and major broker banks offer NDF contracts, which are derivatives that lack real ability. NDF is very popular for currencies with limits such as Argentine pesos. In fact, a Forex hedger can only hedge risks with NDF, as currencies like Argentine Pesos can not be traded on the open market like the major currencies.
Swap
The most common type of forward transaction is the exchange of foreign exchange. In a swap, two parties exchange currency for a certain period of time and agree to reverse the transaction at a later date. This is not a standard contract and is not traded through exchange. Deposits are often required to hold open positions until the transaction is completed.
Futures
Futures are standard futures contracts and are usually traded on the exchange created for this purpose. The average contract length is about 3 months. Futures contracts are usually included in any amount of interest.
A currency futures contract is a contract that specifies a particular currency standard volume that will be redeemed on a specific settlement date. Thus currency futures contracts are similar to forward contracts in terms of their liabilities, but are different from forward contracts in the way they are traded. They are usually used by MNCs to protect their currency positions. In addition they are traded by speculators who hope to capitalize on their expectations of exchange rate movements.
Options
The foreign exchange option (usually abbreviated to the FX option) is a derivative in which the owner has the right but not the obligation to exchange money in a single currency to another currency at a pre-approved exchange rate on a specific date. The FX option market is the deepest, largest and most liquid market for any options in the world.
Speculation
Controversy about currency speculators and their impact on the devaluation of national currencies and the economy occurs on a regular basis. Economists, such as Milton Friedman, argue that speculators are ultimately the effect of stabilization on the market, and that stabilizing speculation performs an important function in providing markets for hedger and transferring risks from people who do not I do not want to endure it, for those who do. Other economists, such as Joseph Stiglitz, consider this argument to be more based on politics and free-market philosophy than the economy.
Large Hedge Funds and other large capitalist "traders" are major professional speculators. According to some economists, individual traders can act as "noise dealers" and have a more unstable role than bigger and better actors.
Currency speculation is considered a very suspicious activity in many countries. While investments in traditional financial instruments such as bonds or stocks are often considered to positively contribute to economic growth by providing capital, currency speculation does not; according to this view, it is just a gamble that often disrupts economic policy. For example, in 1992, currency speculation forced the Swedish National Bank (Swedish central bank) to raise interest rates for several days to 500% per annum, and then to devalue its cronies. Mahathir Mohamad, one of the former Prime Ministers of Malaysia, is one of the supporters of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory Millman reports opposing views, comparing speculators with "vigilante" who only help "enforce" international treaties and anticipate the basic economic "legal" impact to make a profit.
In this view, countries can develop unsustainable or mismanaged economic bubbles in their national economies, and foreign exchange speculators make the inevitable collapse happen more quickly. A relatively rapid collapse may even be better than a continuing economic fault, followed by an eventual, larger, ultimate collapse. Mahathir Mohamad and other speculative criticism are seen as trying to deflect the fault of themselves for causing unsustainable economic conditions.
Risk aversion
Risk aversion is a type of trading behavior shown by the foreign exchange market when a potentially harmful event occurs that can affect market conditions. This behavior is caused when risk-averse investors liquidate their positions in risky assets and divert funds into less risky assets due to uncertainty.
In the context of the foreign exchange market, traders liquidate their positions in various currencies to take positions in safe-haven currencies, such as the US dollar. Sometimes, the choice of safe-haven currencies is more of a choice based on prevailing sentiments than any of the economic statistics. An example is the 2008 Financial Crisis. Worldwide equity values ​​fall as the US dollar strengthens (see Figure 1). This is despite the strong focus of the crisis in the US.
Carry trade
The currency carrying the trade refers to the act of borrowing one currency that has a low interest rate to buy another with higher interest rates. The big difference in the price can be very profitable for the merchant, especially if high leverage is used. However, with all the investments superimposed, this is a double-edged sword, and large exchange rate fluctuations can suddenly turn trade into big losses.
See also
References
External links
- User guide for the Second Annual Central Bank Survey of foreign exchange market activity, Bank for International Settlement
- The Foreign Exchange Committee of London with links (right) to committees in NY, Tokyo, Canada, Australia, HK, Singapore
- Daily renewal of the US Federal Reserve exchange rate
- Currency converter and historical download of Bank of Canada (10 years)
- OECD Exchange Rate Statistics (monthly average)
- National Futures Association (2010). Trading in the Foreign Currency Market Retail Off-Exchange . Chicago, Illinois.
Source of the article : Wikipedia
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