Forex is required to undertake business and trade transactions between the different global countries. Everyone is affected by all these transactions when we make purchases of goods bought from another country.
The uniqueness of this market is what attracts many speculators. It is a decentralised market which means that it does not have a central place where all the transactions are handled. All the trading in this market is done electronically through the large banks and financial institutions. The market trades from Sunday evening to Friday evening with no breaks in between. The main financial centres related to currency trading include New York, London, Zurich, Hong Kong, Sydney and Tokyo. The long trading hours makes it an extremely active market with movements in price continuing throughout the trading times.
Currency Trading Markets
Large institutions, investors and corporations normally trade in three manners. They undertake trades in the spot, forwards and futures markets. Of the three, the spot market is the largest as the other two are based on it. In the past, this spot was held by the futures market because investors had access to the market for longer time periods. The introduction of electronic currency trading has pushed futures to the back of the queue as speculators and investors now have a preference for the spot market. Forex traders generally refer to the spot market when they mention their trading market. The futures and forwards markets are normally used by large business corporation that need to hedge against price movements.
The Spot Market
This is the market where the various currencies are bought and sold at the current market price. The price generally affected by the economic theory of supply and demand and other factors, such as interest rates, political stability and the predicted currency performance levels. A spot deal is done once the deal has been finalised. This two-way agreement is made up of an offering from a party to purchase or sell a specified amount of one currency for a specified amount of an alternate currency, at an agreed rate of exchange. Once the position has been closed, the amount agreed upon is settled in cash. This market only deals with current transactions, instead of futures, however it still takes approximately two days for finalisation of the deal.
The Futures Market
This market deals with contracts that are related to settlement at a future date. Deals done in this market specify exact details in the contract. It specifies the settlement date, delivery date, number of units that are being traded and the minimum price increments as agreed upon by the parties involved.
The Forwards Market
This market is used for the buying and selling of contracts agreed upon between two parties. The agreement includes details related to the date of delivery and the agreed upon rate of exchange. These deals can be amended to become spot deals at the discretion of the parties involved.
Both forwards and futures deals are final and binding and will be settled in cash once the agreed date has been reached. Both of these contracts are allowed to be bought and sold before the agreed upon expiry date. These types of contracts are normally used in business undertakings as it offers companies the chance to hedge against constant price fluctuations in the exchange rate.
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