About Foreign Exchange Market in Details

The foreign exchange market (Forex, FX, or currency market) is a global decentralised or over-the-counter (OTC) market for the trading of currencies.

This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.

Types of Foreign Exchange Market

The market is an over-the-counter market and the foreign exchange rates will be dictated by it. It involves the buying, selling and exchanging of currencies at the market rate. With regard to trade rate, forex is the largest in the world. Let us take a look at different types of foreign exchange markets.

1.  The Spot Market

In the spot market, transactions involving currency pairs take place. It happens seamlessly and quickly. The transactions require instant payment at the prevailing exchange rate which is also known as the spot rate.

2.  Futures Market

The transactions in the futures market require future payment and distribution at a previously agreed upon exchange rate which is known as the future rate. The transaction or agreement is more formal in nature which ensures that the terms of the transaction are set in stone and cannot be altered. Traders who conduct the majority of the transactions enjoy a consistent return on the assets. Regular traders prefer a future market transaction.

3.  Forward Market

The third type of foreign exchange market is the forward market where deals are similar to future market transactions. In this case, the parties will negotiate the terms of the transactions and the terms agreed-upon can be negotiated and altered as per the needs of the concerned parties. The forward market has higher flexibility as compared to the futures market.

4.  Swap Market

When there is a simultaneous borrowing and lending of two types of currencies between two investors, it is known as a swap transaction. Here, one investor borrows a currency and in turn, pays in the form of a second currency to the second investor. The transaction is done to pay off their obligations without having to deal with a foreign exchange risk.

5.  Option Market

In the options market, the currency of exchange from one denomination to the other is agreed upon by the investor at a specific rate and on a specific date. The investor has a right to convert the currency on a future date but there is no obligation to do so.

Functions of Foreign Exchange Market

The various functions of the Foreign Exchange Market are as follows: 

  • Transfer Function: The basic and the most obvious function of the foreign exchange market is to transfer the funds or the foreign currencies from one country to another for settling their payments. The market basically converts one’s currency to another.

  • Credit Function: The FOREX provides short-term credit to the importers in order to facilitate the smooth flow of goods and services from various countries. The importer can use his own credit to finance foreign purchases.

  • Hedging Function: The third function of a foreign exchange market is to hedge the foreign exchange risks. The parties in the foreign exchange are often afraid of the fluctuations in the exchange rates, which means the price of one currency in terms of another currency. This might result in a gain or loss to the party concerned.

Features of Foreign Exchange Market 

This kind of exchange market does have characteristics of its own, which are required to be identified. The features of the Foreign Exchange Market are as follows:

  1. High Liquidity

The foreign exchange market is the most easily liquefiable financial market in the whole world. This involves the trading of various currencies worldwide. The traders in this market are free to buy or sell the currencies anytime as per their own choice.

  1. Market Transparency

There is much clarity in this market. The traders in the foreign exchange market have full access to all market data and information. This will help to monitor different countries’ currency price fluctuations through the real-time portfolio. 

  1. Dynamic Market

The foreign exchange market is a dynamic market structure. In these markets, the currency values change every second and hour.

  1. Operates 24 Hours

The Foreign exchange markets function 24 hours a day. This provides the traders the possibility to trade at any time. 

Who are the Participants in a Foreign Exchange Market?

Foreign Exchange Market
  • The participants in a foreign exchange market are as follows:
  • Central Bank: The central bank takes care of the exchange rate of the currency of their respective country to ensure that the fluctuations happen within the desired limit and this participant keeps control over the money supply in the market.
  • Commercial Banks: Commercial banks are the channel of forex transactions, which facilitates international trade and exchange to its customers. Commercial banks also provide foreign investments. 
  • Traditional Users: The traditional users consist of foreign tourists, the companies who carry out business operations across the globe.
  • Traders and Speculators: The traders and the speculators are the opportunity seekers who look forward to making a profit through trading on short-term market trends.
  • Brokers: Brokers are considered to be the financial experts who act as a sure intermediary between the dealers and the investors by providing the best quotations.

Advantages of Foreign Exchange Market

The whole world economy is relying upon this foreign exchange market for obvious advantageous reasons. Let us check what are the advantages gained in the foreign exchange market-

  • There are very few restrictive rules, this allows the investors to invest in this market freely.
  • There are no central bodies or clearinghouses that head the Foreign Exchange Market. Hence, the intervention of the third party is less.
  • Many investors are not required to pay any commissions while entering the Foreign Exchange Market.
  • As the market is open 24 hours, the investors can trade here without any time-bound.
  • The market allows easy entry and exit to the investors if they feel unstable. 

Foreign Exchange Market FAQ

What is the main foreign exchange market?

The foreign exchange market or forex market is the market where currencies are traded.

Who owns the forex market?

Jefferies Financial Group

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