Foreign Exchange/ FOREX/Foreign Exchange Market

Foreign Exchange and related information

In the simplest of words, Foreign Exchange deals with the conversion of one country's currency into that of another. A country's currency is valued according to factors of supply and demand or it can be pegged to another country's currency/a basket of currencies or it can be fixed by that country's Government itself.

Pegging, is a method of stabilizing a country's currency by fixing its exchange rate to that of another country...it is mostly pegged to that of United States of America (US Dollar). However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation (which kind of explains why the exchange rate for a Dollar or Pound keeps changing everyday).

Floating is a system where the currency is set by the Foreign Exchange Market (FOREX), through Supply and Demand for that particular currency, relative other currencies. The floating exchange rates change freely and are determined by trading in the Forex market. If a currency value moves in any one direction at a rapid and sustained rate, Central banks intervene by buying and selling its own currency reserves in the Forex market, in order to stabilize the local currency.

Forex is the largest and most liquid market in the World, with an average traded value that exceed $1.9 Trillion per day including all currencies.It is also the largest market in the World, in terms of the total cash value traded. Any person, firm or country may participate in this market.

There is no central marketplace for currency exchange. The trade is conducted over counters.

Forex market is open 24 hous a days, 5 days a week and currencies are traded worldwide among major financial centers of:

• London
• New York
• Tokyo
• Zurich
• Frankfurt
• Hong Kong
• Singapore
• Paris
• Sydney

Some basic examples of the need for FOREX (as to why there would be demand for a particular currency):

1. A tourist visits a country, he/she must pay for the goods and services using the currency of that host country. So, he/she must exchange the currency of the home country for that of the host country
2. When a foreign company seeks to do business with a company in a specific country, it will again, have to pay for the local company in the local currency
3. An investor from one country may need to invest in another, in the latter's local currency

Some terms you might want to know:
Spot Trading:
It is the buying of one currency with a different currency for immediate delivery (Cash) rather than for a later day

Currency intervention:
It is the action of one or more Governments, Central banks or speculators that increases or reduces the value of a particular currency against another currency

Bank for International Settlement:
It administers the transactions of monies (multiple currencies mind you). Its main goal is to promote information-sharing and to be a Key center for economic research. It is essentially like a Central bank for other Central banks and it does not provide financial services to individuals or corporations. It is located in Basel, Switzerland.

Currency Pair:
In Forex, there is simultaneous buying of one currency and selling of another. They together constitute the currency pair.

Currency pair is of the format:    Base currency/Quote currency

Example: If I ask you, "How much of Quote currency is needed to purchase 1 unit of Base currency?"
You should answer on the lines:

USD/EUR = 1.5
Hence, I would need 1.5 Euros to get 1 USD (US Dollar)

or, EUR/USD = 0.667
Hence, I would need 0.667 USD to get 1 Euro