As the business sectors becoming global enterprises, entities and people want negotiable tools to generate transactions. So does the forex trading has become the vital component for these entities. Merely, forex trading is the process of buying and selling of currencies. Currencies are vital to most individuals in the world as they are needed to be transacted for businesses to run or trade. Surprisingly, the forex market has a daily exchange value of $5 trillion!
For instance, if the company which is in the US wants to buy a product from French, they have to purchase that in euros(EUR). Which implies the importer has to transact the similar value of US dollars into euros. It is the same case with a traveler who wants to visit pyramids because dollars are not locally accepted.
Thus, There are two views on why forex trading in important and regarded most significant in the financial market.
First the companies or government, even the individuals receive or has gained foreign currencies via buy and sell activities.
Secondly. The conversion of proceeds from foreign countries.
Thus, every day millions, billions and trillions of money progress through the trade.
As learned, the foreign exchange market is where traders trade the currencies globally. There are various currencies around, but few are considered as major currencies. To name a few, there are 8 mostly traded currencies in the financial markets. They include British pound (GBP), U.S. dollar (USD), Canadian dollar (CAD), Swiss franc (CHF), Euro (EUR), Australian dollar (AUD), New Zealand dollar (NZD), Japanese yen (JPY). Apart from the major currencies, there are even cross pairs such as JPY/CAD and GBP/JPY and even exotics like USD/HKD, USD/ZAR which can be traded in the market.
Apart from major currencies which are deliverable, they are even NDFs such as Chinese renminbi (CNY ), Indian rupee (INR ), South Korean won(KRW), Egyptian pound(EGP ), Chilean peso(CLP ) etc.
In Forex, we generally have two pairs of currencies- base currency and quote currency. Usually, currencies are paired as the investors are buying from one currency of a country with the another country’s currency. In transacting, quote currencies are used to purchase or buy the base currency. In foreign exchange trading, the most popular currency pair is EUR/USD.
Future, forward and spot financial syndicates
To trade in forex, institutions, financial corporations, individuals, and institutions can do it in three ways- the forwards, the spots, and the futures. Previously, the futures were the most common place for traders, as it was accessible to individuals for an extended duration. But with the introduction of electronic trading and diverse forex brokers, the spots have an infinite transaction now crosses the futures as the favored trading financial market for speculators and individual investors. The futures and forwards are usually most popular with enterprises who want to protect their foreign investments to a particular date for the future.
Spot Market, the settlements are usually done in T+2 working days. It is where the delivery of commodity and cash have been taking place. In the spot market, investors can transact through OTC (over the counter).
Forwards and futures syndicates, deal with the contracts which represent transactions to a specific currency figure, a particular cost per unit with a later date settlement. In forward markets, agreements are made and sold Over-The-Counter among two persons, who settles the term of the contracts among themselves. There is a pre-decided price at a particular time in the future. The asset exchanges is generally a financial instrument or a commodity. There is a protection upon risk during the currencies are traded. Generally, Multinational companies use these financial institutions to hedge towards exchange rate changes, but individuals also participate in these financial transactions as well.
To sum it up, the Foreign exchange also called forex trading or FX trading is a means of transacting currencies world over. Although it is known as an exchange or market, currencies are traded over here. This market is open to everyone. So, they are individuals like retail traders or large enterprises who are institutional traders. These investors can trade through financial institutions such as investments managers, hedge funds, and banks.