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Nowadays foreign exchange market became the most powerful and important market in the world. And, of course, it is possible to benefit from it.
The foreign exchange market impacts directly every obligation, equity, manufacturing asset, private property and any investments accessible to foreign investors. Foreign exchange rates play an important role in financing government deficits, equity ownership in companies and real-estate holdings. Foreign exchange trading helps to determine who owns the banks at which you maintain your corporate and personal accounts, and who hires and fires employees. The currency in your pocket is literally stock in your country, and like a share, its value varies on the international market providing traders with substantial opportunities for loss or profit.
Foreign Exchange – a brief history
In 1944, the Breton Woods Agreement was initiated in an effort to keep cash from draining out of war-ravaged Europe. Currency values were pegged to the U.S. Dollar, which was then pegged to the price of gold. In 1971, the modern era of foreign exchange first emerged with the collapse of the Bretton Woods Agreement. The U.S. Dollar was convertible into gold no longer, signaling an increase in currency market volatility and trading opportunities.
In 1973, the collapse of the subsequent Smithsonian and European Joint Float agreements signaled the real beginning of the free-floating currency exchange system that drives the markets today. As early as in the 1980’s, computer technology extended the reach of the exchange marketplace. The values of the major world currencies became independent of each other, with intervention available to the states through the central banking system only.
Foreign Exchange Markets – size and scope
The foreign exchange market stunts growth of the combined operations of the New York, London, and Tokyo futures and stock exchanges. Daily turnover on the spot market is about US$1.5 trillion per day.
Forward outright FX trading and spot transactions take place in the inter-bank market. 51% of the market is in spot FX transactions, and 32% of the market is in currency swap transactions. Forward outright FX transactions represent 5% of this daily turnover. Options on inter-bank FX transactions are making up 8%. Thus, the inter-bank market accounts for 96% of the global foreign exchange market, 4% are divided among all the remaining global futures exchanges.
The role of Forex in the Global Economy
The foreign exchange market has always been an invisible hand that guides the sale of goods, services and raw materials in every country in the world. The forex market was created by necessity. Traders, investors, bankers, exporters and importers recognized the benefits of speculating for profit, or hedging risk. The importance of this market comes from its sheer size, complexity and almost limitless reach of influence.
The market has its own momentum; it follows own imperatives, and comes to own conclusions. These conclusions make impact on the value of all assets -it is crucial for every individual or institutional investor to understand the foreign exchange markets and the forces behind that ultimate free-market system.
Inter-bank currency contracts and options, on the contrary to futures contracts, are not traded on exchanges and are not standardized. Banks and dealers act as principles in these markets. They negotiate each transaction on an individual basis. Forward "cash" or "spot" trading in currencies is essentially unregulated - there are no limitations on speculative positions and daily price movements.
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