FOREX – A Liquid Financial Market

Foreign Exchange Market or in another short term “FOREX” or “FX” permit banks and other institutions to simply buy and sell currencies. Rather we can say that it deals with the currencies.

The principle of FOREX is to help worldwide trade and investment so that it helps businesses to exchange one currency to another. For e.g.: An Indian company allows importing US Based Company goods and they pay in dollars, although the business’s income is in rupees. So, in general expression we can say that a party buys a quantity of one currency by paying the quantity of another currency.

The FOREX trading started during the early 70’s when countries gradually switched to floating exchange rate (where currency value is allowed to rise and fall according to the market status) from the previous exchange rate regime (It is the way a country handles its currency in respect to foreign currencies and the FOREX).

The inimitable part of FOREX lies behind due to certain reasons:

o It’s trading amount which has been increasing hugely.

o The tremendous liquidity of the share market.

o Its geological distribution.

o Its extensive hour of trading.

o The low margin income compared with other markets of unchanging income but the profit can be surely gained by large trading.

o And lastly the usage of leverage.

The average turnover of global FOREX is expected to be $3.98 trillion, according to the statement given by the Bank for International Settlements. Currently, FOREX is one of the major and the most liquid financial markets in the world. The traders who are included in this FOREX deal are central banks, currency speculators, different types of companies, governments and other financial organizations. And it is certain to say that the FOREX markets are growing continuously as the volumes grew a further 41% between 2007 and 2008, according to the Bank for International Settlements.

The FOREX trades are not centrally cleared markets rather there are number of inter-connected marketplaces where different currencies are dealt. Depending on the area where it has been placed and the market makers the FOREX rates are different rather than a single exchange rate Banks throughout the world participate in FOREX with main trading center such as New York, Singapore, Hong Kong, Tokyo and London.

Changes occurs in FOREX trade due to actual economic flows and these prospect are due to the gross domestic products (GDP) growth, price rises (inflation), interest rate, budget session and other economic conditions and these major are being declared publicly on proper time and date so that they can access at the same news.

One of the major determinants of FOREX rates lies is the political condition whether it is internally, regionally or internationally and these had created a deep effect on currency market. These rates are liable to change due to political unsteadiness and anticipations about the new party which can also create negative impact the growth of economy. Therefore the market psychology manipulate the FOREX in certain ways which includes unsettlement of the international events, long term trends that may rise from economic or political trends, “Buy the rumor, sell the fact” concept which allows the market being overbought or oversold and the economic numbers which can surely reflect economic policy and the numbers taken on a lucky charm based effect.

Cristian Stan