Foreign Exchange Market

Topics: Foreign exchange market, United States dollar, Currency Pages: 6 (1965 words) Published: September 25, 2013
The foreign exchange market is agreeingly the world’s largest market place with the average daily turnover of US $4 Trillion. With the market operating 24 hours a day, 5 days a week the foreign exchange market does not operate or advance on a regulated exchange, therefore is known as an OTC otherwise known as “over the counter” transaction. Most people at some point either when they are making a purchase overseas or traveling, they are in some way taking part in the Foreign exchange market, however increasingly many are now turning to the Foreign exchange market for the purposes of speculation, dealing at prices only open to financial institutions. “What is the Foreign Exchange Market?”

The foreign exchange market according to business dictionary.com states “Global market in convertible currencies are traded and their conversion rates are determined.” According to the international economic text book it says “ The foreign exchange market refers to the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments.” (Carbaugh, 369) Currency Trading has grown to the the world’s largest market, and it continues to grow daily. An interesting thing about the foreign exchange market is that not only is it the largest market but it is the most liquid, compared to other markets such as the stock market. By liquid I mean their cash and assets can easy and quickly be turned into cash. The difference between any other market and the foreign exchange market is the fact that it allows the traders to deal with more than one trader. They can choose from many different people and this also allows comparison of prices because of the many options you have. Also, another thing about the foreign exchange market is that it is open twenty-four hours a day, seven days a week.

The way a trade takes place in a foreign exchange market is there is a buying of one currency and the selling of another one. There are two types of currencies, the base currency and the counter currency. A base currency is “ the first currency in a currency pair. In a currency exchange, the exchange rate is quotes as the units of one currency in terms of a single unit of a base currency” (Investerwords.com) So for example, in a currency exchange of U.S dollars for a Euro, the base currency is the U.S dollar. The counter currency is “The second currency in a currency pair. In a currency exchange, the exchange rate is quoted as the units of the counter currency in terms of a single unit of a base currency.” (Investor words.com) So basically the currency pair shows how much the counter currency is needed to purchase on unit of the base currency. When buying a currency pair, the base currency is the one that is being bought, and the counter currency is the one being sold. The foreign exchange market has an estimated amount of 3 trillion transactions in a day. It has shown that the most active exchange rates can fluctuate to about 18,000 timed in a 24 hour time span.

The foreign exchange market does not really have any specific requirements or a certain meeting place. Also, it is not restricted to just one country. When looking at any particular currency, like the Euro, the foreign exchange market consists of all locations where euros are exchanged for other national currencies.

A majority of foreign exchange markets have three levels on which they function “in transactions between commercial banks and their commercial customers, who are the ultimate demanders and suppliers of foreign exchange; in the domestic interbank market conducted through brokers; and in active trading in foreign exchange with banks overseas.” The banks that are more dominate that associate with foreign trade usually do not personally deal with other traders but rather use something called foreign exchange brokers. The importance of the exchange brokers is so that that the banks can keep up with there desired...

Bibliography: Carbaugh, Robert J. International Economics. Cambridge, MA: Winthrop, 1980. Print.
"Introduction To Foreign Market Exchange." Gomarketsaus. N.p., n.d. Web. .
"Investment and Financial Dictionary by InvestorWords.com." Investment and Financial Dictionary by InvestorWords.com. N.p., n.d. Web. 09 Dec. 2012.
"More Articles." BusinessDictionary.com. N.p., n.d. Web. 09 Dec. 2012.
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