Define foreign exchange market
Posted by Ripon Abu Hasnat on Wednesday, September 3, 2014 | 0 comments
The foreign exchange market is a global decentralized market for the
trading of currencies. The main participants in this market are the larger
international banks. Financial centers around the world function as anchors of
trading between a wide range of multiple types of buyers and sellers around the
clock, with the exception of weekends. The foreign exchange market determines
the relative values of different currencies.
The foreign exchange market works
through financial institutions, and it operates on several levels. Behind the scenes
banks turn to a smaller number of financial firms known as “dealers,” who are
actively involved in large quantities of foreign exchange trading. Most foreign
exchange dealers are banks, so this behind-the-scenes market is sometimes
called the “interbank market”, although a few insurance companies and other
kinds of financial firms are involved. Trades between foreign exchange dealers
can be very large, involving hundreds of millions of dollars. Because of the
sovereignty issue when involving two currencies, Forex has little (if any)
supervisory entity regulating its actions.
The foreign exchange market is unique
because of the following characteristics:
1. Its huge trading
volume representing the largest asset class in the world leading to high
liquidity;
2. Its geographical
dispersion;
3. Its continuous
operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on
Sunday (Sydney) until 22:00 GMT Friday (New York);
4. The variety of
factors that affect exchange rates;
5. The low margins of
relative profit compared with other markets of fixed income; and
6. The use of leverage
to enhance profit and loss margins and with respect to account size.
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