THE FOREIGN EXCHANGE – TAKE OFF THE BLUES
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foreign exchange definition
Definitions :
The exchange is a act by which we exchange a currencies of opposite nations. Currencies take a same form as a currency inside of a country. Most of a assets
traded currency in foreign exchange markets are deposits in banks. The rate of
change is a cost of a currency of a nation in conditions of a currency of another.
There are dual sorts of exchange rates, according to a date of exchange of real currency: a exchange rate Cash is a cost for a stipulate “immediate” (one or dual days limit for large transactions), a exchange rate is a cost for a stipulate which will start at a at a little time in a future, in 30, 90 or 180 days. Transactions in money only that 40% of transactions. The foreign exchange market is obviously a brazen market.
An exchange rate can be voiced in dual ways: The inventory on a “some” is to give the number of foreign monetary units homogeneous to a section of internal currency rating to “
uncertainty indicates a series of internal currency units for one section of currency
foreign. For example, twenty Jan 1999, a euro cost was U.S. $ 1.1571 in Paris (to quote some), or yet a dollar opposite euro was at 0.86472 (listing to uncertainty). When a euro appreciates against alternative currencies, a worth quoted in sure amounts, though a market worth to uncertainty decreases. Presentations successive tables as good as graphs concentration on a exchange listing to uncertainty.
Key Features :
A market dominated by a couple of network financial In contrariety to batch markets, which have a specific geographical location, a market forchanges knows no borders: there is one foreign exchange market in a world. The Currency exchange are additionally good as good as concurrently in Paris, Tokyo, London or New York. Of by a global nature, a foreign exchange market is an mercantile classification without proper regulation, it is self-organized by open as good as in isolation that interviennent. The foreign exchange market is geographically strong on a monetary markets of some country. In 1998, a UK represents 32% of operations, a United States 18%, Japan 8%,Germany 5% as good as France 4%.
A market dominated by a couple of coins Transactions in foreign exchange markets are strong on a tiny series of currencies, and overwhelmingly on a dollar. In 1998, a U.S. dollar on normal in 87% of identified transactions, or side or a direct side. Zone currencies euro crop up in 52% of exchange (30% for a 5% mark as good as a franc french), a yen Japanese as good as a British bruise are down, they are concerned respectively in 21% as good as in 11% of transactions.
A market dominated by unsure futures transactions Foreign exchange risk is a risk of capital detriment compared with future changes in a exchange rate. Since a seventies, this risk has increasing with a drawn out floating currencies as good as a growth of general blurb as good as monetary transactions. The life of exchange rate fluctuations has dual opposite sorts of attitudes on a partial of speakers on a market: a little groups do not wish to gamble on what will be a rate change in a future. They are unprotected to currency risk in a course of their typical activities and
seek to cover their positions creditor or debtor. Other groups hold they can take a on all sides unprotected to currency risk to comprehend a gain. There was conjecture then
the future foreign exchange exchange by arbitration. In reality, a operations cambiaire brew to varying degrees coverage as good as conjecture as good as a same people might adoptthese dual attitudes.
The brazen stipulate is a categorical approach to sidestep or assume on a market
changes. This explains because it dominates a stipulate of exchange spot: in 1998 63% of operations of foreign exchange markets are brazen exchange as good as 37% of operations cash. A brazen stipulate is an agreement to exchange one currency opposite another a future date at a cost bound today, a exchange rate. There are opposite contracts exchange tenure contracts formed on a normal tenure bank as good as barter broker, are many prevalent (57% of a operations of foreign exchange markets in 1998), those formed on other derivatives, futures as good as currency options are still extrinsic (6% of operations 1998).
A market dominated by banks
Three groups of agents work in a foreign exchange market: a initial organisation is the companies, fund managers as good as individuals, a second meets a monetary authorities (central banks), a third organisation consists of banks as good as brokers which provide daily functioning of a market. The initial organisation of agents do not act without delay but transmit orders to a banks supposed “customer” for a squeeze or sale of currencies. This is the retail market (transactions in in between banks as good as their clients) The monetary authorities intervene on a market to umpire a course (purchase as good as sale of foreign currency) as good as presumably regulate exchange exchange (foreign exchange). Foreign exchange banks as good as brokers are a only private parties to work without delay on a market. For this reason, a foreign exchange market is
primarily a indiscriminate interbank market. In 1998, scarcely 90% of exchange are cambiaire made in in between banks as good as alternative monetary intermediaries.
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6 Comments to “THE FOREIGN EXCHANGE – TAKE OFF THE BLUES”
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November 16th, 2009 at 11:06 am
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November 16th, 2009 at 11:17 am
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November 16th, 2009 at 11:01 am
The foreign exchange (currency or forex) market exists wherever one currency is traded for another. It is the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small investors or speculators) are a minute part of this market, may only participate indirectly through brokers or banks, and may be targets of forex scams.
Market size and liquidity
The foreign exchange markets is unique because of:
its trading volume,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours – 24 hours a day (except on weekends).
the variety of factors that affect exchange rates,
Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004
$600 billion spot
$1,300 billion in derivatives, ie
$200 billion in outright forwards
$1,000 billion in forex swaps
$100 billion in options.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts, but constitute a very small part of the overall forex market.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 1-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $1,000,000.
These spreads do not apply to retail customers. To individuals, banks will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travellers' cheques.
Trading characteristics
There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate – but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs
The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
On the spot market, according to the BIS study, the most heavily traded products were :
EUR/USD – 28 %
USD/JPY – 17 %
GBP/USD (also called cable) – 14 %
and the US currency was involved in 89% of transactions, followed by the euro (37%), the yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% – 100% for all the sellers, and 100% for all the buyers).Although trading in the euro has grown considerably since the currency's creation in January 1999, the foreign exchange market is thus still largely dollar-centered. For instance, trading the euro versus a non-European currency ZZZ will usually involve two trades: EUR/USD and USD/ZZZ. The only exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market.
Market participants
According to the BIS study Triennial Central Bank Survey 2004
53% of transactions were strictly interdealer (ie interbank);
33% involved a dealer (ie a bank) and a fund manager or some other non-bank financial institution;
and only 14% were between a dealer and a non-financial company.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business is moving on to more efficient electronic systems, such as Reuters 3000 Matching (D2) and EBS. The broker squawk box lets traders listen in on ongoing interbank trading is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial Companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central Banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high – that is, to trade for a profit. Nevertheless, central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in South East Asia.
Hedge Funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail Forex Brokers
See also forex scams
Retail forex brokers handle a minute fraction of the total volume of the foreign exchange market, but serve large numbers of individual traders. Standard services include 24-hour online currency trading, 100-to-1 leverage, and commission free trading. Most retail brokers do not provide direct access to the interbank market, acting a dealers rather than true brokers. The brokers earn money by offering a bid/offer spread that is wider than the interbank spread. Retail traders should be aware of the possibility that retail forex brokers may manipulate quoted spot rates, improperly trigger their clients' stop-loss orders or charge hidden fees.
According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' " [1]
Legitimate retail brokers serving traders in the U.S. are most often registered with the Commodity Futures Trading Commission as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). Potential clients can check the broker's FCM status at the NFA. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. The CFTC has noted an increase in forex scams [2].
None of the above discussion should be interpreted as saying that all unregistered forex retail brokers are unethical or criminal.
Speculation
Some people consider currency speculation to be an antisocial behavior. Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, many economists (e.g. Milton Friedman) argue that speculators perform the important function of providing a market for hedgers and transfering risk from those people who don't wish to bear it, to those who do. Other economists (e.g. Joseph Stiglitz) however, may consider this argument to be based more on politics and a free market philosophy than on economics.
Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not, according to this view. It is simply gambling, that often interfers with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum, and later to devalue the krone. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view [3]. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators only made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
Neither view sees speculators as being guided by democratic principles or by a drive to serve "the people". Rather, speculators only participate in forex markets for the expected profit.
November 16th, 2009 at 12:37 pm
Foreign exchange reserves are the foreign currency deposits held by national banks of different nations. These are assets of Governments which are held in different hard currencies such as Dollar, Sterling, Euro and Yen.
In other words is like a country is having foreign currency bank account.
The exchange reserves are not used to buy things from abroad. They are used for protection from economic crisis and currency depreciations. As you know every day the new exchange rates are announced. These rates are important because they determine how much money a country needs to buy goods from abroad and how much money it needs to service its external debt. If a currency gets depreciated the country will need more money for its imports and debt. This will make its economic planning more difficult and its economy weak. It will also be harder to pursuit economic growth.
In case of crisis or rapid depreciation of the currency the countries use their reserves to supply foreign currency and demand their local currency. Then the Law of Demand takes effect and the local currency either is not depreciated or is depreciated in a smaller degree.
It is really important, especially for weak economies and countries with large external debt to have large exchange reserves but as you understand it is difficult for the to gather so large amounts of money to be effective on their defense.
November 18th, 2009 at 11:45 am
Different countries have different currencies. Given this, the currencies will have different values. Placing a value on a particular currency so that this value is equivalent to the currency value of another country is foreign exchange.
Simply, foreign exchange earnings is the perceived profit in terms of value of currency in foreign exchanges. This perception is very relative so there is no one exact standard of measure.
Sorry, can't go any simpler than this.
November 19th, 2009 at 1:26 pm
exactly