What is Forex?
Forex is an abbreviation for Foreign Exchange, which in turn is also abbreviated to FX. The Forex Markets are the global Currency Markets and deal with the exchange of one currency for another.
The market is open 24 hours a day and is traded five and a half days a week, globally, across all time zones, with no centralized currency exchange or marketplace. The Forex market is an Over-The-Counter market, or OTC, which indicates that there is no central exchange where counterparties meet, with no set geographical location. Rather counterparties meet through a network of various financial institutions and individuals to transact across established computer networks.
There are major financial cities around the globe; in London, continental Europe (Primarily Paris, Frankfurt and Zurich), Hong Kong, Singapore and Australia and mostly New York in the USA, which make up the global OTC market and make Forex the largest market amongst all asset classes. On average every day many trillions of US Dollars area transacted and exchanged, which includes all world currencies, with market participants being extremely diverse.
Foreign Exchange or Currency Trading is essentially a transaction of buying one currency and buying another simultaneously, effectively, exchanging one currency for another.
Types of Forex
There are three ways to trade Forex:
- Spot market
- Futures market
- Forwards market
The spot market is by far the largest of the three ways to trade Forex. The spot market is where exchange is made between currencies at the current price, which is determined by many factors. Counterparties in a “spot trade” will agree to deliver a set quantity of one currency and receive a set amount of another currency at the agreed current transaction price.
The futures market for currencies primarily trades on the Chicago Mercantile Exchange (CME) in the USA and is based around the concept of futures contracts. In its simplest form, a futures contract is a legally binding agreement with a futures exchange to sell or buy a set amount, at a set price of a particular financial asset or commodity at a set time in the future. Currency futures are simply an agreement to buy/ sell a set amount of one currency on terms of another (usually versus US Dollars) at a set time in the future, for a set price.
The forwards market is very similar to the futures market in dealing with the future (or forward) price of currencies relative to each other. However, the forwards market is OTC (Over-The-Counter), which means there is no centralized exchange between counterparties. This allows for greater flexibility in the time frames, amounts and other details in the transactions. However this all heightens counterparty risk, as there is no centralized exchange between the tractors.
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