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FOREX Currency Market – Benefits, Characteristics, Factors, and FOREX Currency Market Tips

What is FOREX Currency Market?

  • FOREX Currency Market is the foreign exchange market characterized by free currency exchange.
  • Its main objective is to facilitate international trade and our investment.
  • It is also known as FOREX (Foreign Exchange, which translates as the foreign currency exchange).
  • In physical or virtual space, the price of each currency called the exchange rate is set.
  • This quote depends exclusively on the supply and demand of the participants.

FOREX Currency Market Benefits

  • We should note that only cash is traded in the exchange market.
  • On the contrary, deposits registered in financial institutions or documents that grant the right to collect an amount of money are also marketed.
  • This market helps make safer purchases and sales of companies from different countries without sharing the same currency.
  • For example, a US company can import European products and pay in euros even though this company’s income is in dollars.
  • The currency converter is used to calculate the accurate value of one currency concerning another.

Most common currency market instruments

1. Foreign currency spot operations

  • These are the purchase and sale of foreign currency in which the time elapses does not exceed more than two or three business days.

2. Forward currency transactions

  • These are currency purchase and sale transactions.
  • The amount and price of the currency are set at the time of contracting.
  • But the exact delivery is carried out at a time specified in the contract.
  • Term operations represent 70-75% of the total operations carried out.

3. Financial derivatives

There are five within products:

Financial Option Forex (Foreign Exchange options)

  • A contract gives us the right (not obligation) to exchange one currency for a different at a specified rate on a specific date.

Futures Forex (Foreign Exchange Futures)

  • Firstly, it exchange currencies at a specific date and under an agreement rate.
  • Secondly, non-negotiated currency contract (non-deliverable forwards)
  • Lastly, a contract generally negotiates trans-territory, which is settling on different currencies.

Future futures (outright forward)

  • It is an exchange of one currency for another at the rate of a predetermines future day.

Swap FOREX (foreign exchange swaps)

  • It is a contract characterizes by the peculiarity of buying and selling a lot of currency.
  • We can resell and buy back the money at a certain rate on a specific date.

Characteristics of the currency market

Among the significant characteristics of the FOREX market are:

1. Large scale

  • Many currency exchange operations reports around the world, configuring what considers the largest financial market.

2. Variety

  • Many actors participate, from international entities to natural persons who come to an exchange house.
  • Also, a high range of financial assets offers: Forwards, options, among others.

3. Agility

  • It is easy to communicate the applicant with the offeror.
  • We can make transactions through various means, such as the bank window, system, or through a computer.

4. Utility

  • It allows everyone to satisfy the need of the users and agents for a particular currency.
  • It is essential, for example, if the parties that have concluded a contract are not in the same country.
  • In that case, the buyer will typically need to purchase foreign currency.

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Foreign exchange institutions

The main participants in the foreign exchange market are:

1. Commercial banks

  • These financial intermediaries allow their clients to trade currencies.
  • Also, they buy and sell notes and coins in the administration of their deposits, seeking to maintain, like a percentage in dollars.

2. Central banks

  • Firstly, they are the significant monetary authorities of every country.
  • Secondly, these entities intervene to avoid fluctuations in the exchange rate.
  • For this, we have monetary policy instruments such as certificates of deposit.
  • And also, see the relationship between monetary policy and the foreign exchange market.

3. Companies

  • They go to the foreign exchange market to buy and sell foreign currency.
  • For example, they may be importers who need to purchase foreign currency to pay their suppliers.

4. Exchange houses

  • They allow the public to exchange part of their capital from one currency to another.
  • And also, they carry out cash transactions.

Factors why exchange rates may vary

1. Economic

  • Inflation (also underlying inflation ), public, deficit, GDP, unemployment, CPI, etc.

2. Politicians

  • Monetary policy of a country

3. Psychological

  • Due to rumors the latter seems to be of less importance, but it is not.
  • For example: on 04/23/2013, a story of an attack on the White House via Twitter caused the Wall Street stock market to shake for a few minutes, and the indices fell more than 1%.

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