The foreign exchange market in international financial and monetary relations plays an important role not only in global economic activities but also in international trade relations. explore the basic knowledge about the forex market Learn Forex Trading. We will help you clearly understand important concepts, specific characteristics, and functions of the market. And the subjects participating in this economy
Basic overview of the Foreign exchange market
This chapter focuses on explaining the basic concepts of the Foreign exchange market. Includes features, functions, and key players in this market. It also provides information on exchange rates, factors affecting rates, and intervention policies.
Some forex market concepts
Most countries in the world use their own currencies. This requires at least one party to the transaction to be able to use foreign currency. In case the currencies are not similar. Parties often use freely convertible foreign currencies to conduct transactions, usually USD. International means of payment can also be used. Such as valuable papers or gold according to international standards, collectively known as foreign exchange.
Foreign exchange includes foreign currencies and valuable means of payment. Used between countries for payments. The definition of foreign exchange may vary depending on the foreign exchange laws of each country.
To make payments, conversion from one currency to another is necessary. And this often takes place in the Foreign exchange market.
The forex market is where foreign currency transactions and valuable means of payment such as foreign currencies take place. This is the place to buy, sell, and exchange foreign currency and international payment means. Businessmen participate in the Foreign exchange market to make transactions and make profits. The foreign exchange market can also be called the interbank foreign exchange market because banks account for the majority of foreign exchange transactions.
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Foreign exchange market
Foreign exchange market serve many important basic functions:
- Operates internationally and continuously. Providing foreign currency for import-export and international business activities. Ensuring flexibility and efficiency in foreign currency transactions.
- The forex market is an important tool for central banks to implement monetary policy. Such as controlling exchange rates to stabilize the market and respond to economic problems.
- Provide tools such as forward contracts. Options to minimize exchange rate risk for businesses and individuals with foreign currency revenues and expenditures.
- Commercial banks and individuals can profit from participating in foreign exchange trading. Through speculative activities and price differences between markets.
- Support foreign currency conversion to invest in high-yield markets. Provides international payment opportunities for businesses and consumers.
Characteristics of the Forex market
To keep up with this Foreign exchange market, you need to master its characteristics. So what are the characteristics of the forex market? Let’s come to the following content
Characteristics of Forex exchange
- It is a place for foreign currency transactions, which is inherently international.
- The forex market operates anywhere, anytime, worldwide.
- Operating continuously 24/24 on a global scale. Even so, the market is open during a certain period of the day. This is called the working day, with trading hours varying depending on business practices in each country, from 9 am to 3 pm.
- Prices of goods on the Foreign exchange market reflect exchange rates. Financial leverage fluctuates flexibly based on foreign exchange supply and demand.
- The foreign exchange market expands its international scope. With the development of information systems and technology, transactions take place quickly and effectively. And transaction costs are low.
- The center of the forex market is the interbank market. With the main participation of commercial banks.
- USD is the most popular currency in transactions on the Foreign exchange market. Next are other strong currencies such as EUR, JPY, GBP, …
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Characteristics of the Forex market
Which entities participate in the Foreign exchange market?
There are many different entities involved in foreign exchange. Let’s find out what those subjects are through the content below.
Central bank
Central banks play an important role in controlling and operating the Foreign exchange market. They intervene by buying and selling foreign currencies to stabilize exchange rates. Maintain balance in import-export activities and implement monetary policy. Large institutions such as the US Federal Reserve (FED), European Central Bank (ECB), Bank of England, and Bank of Japan have the greatest influence on global currency markets.
Commercial Bank
Commercial banks are the center of activities in the Foreign exchange market. They participate by managing foreign currency reserves and providing foreign exchange services to customers. The level of participation of each bank depends on the size, network, and reputation of each organization.
Broker
Brokers act as intermediaries in foreign exchange transactions between banks, organizations, and individuals. They provide trading opportunities in the market. Ensure flexibility and accuracy in executing trading orders.
Enterprise
Enterprises, including domestic and multinational companies. Plays an increasingly important role in the Foreign exchange market. These businesses expand foreign currency reserves to minimize risks. Participate in import and export deals.
Individual
Individuals, including both domestic and foreign citizens, participate in the Foreign exchange market to invest, borrow, and serve their personal needs.
What is the foreign exchange market composed of?
The foreign exchange market is made up of three main parts: interbank market, foreign exchange exchange, and decentralized trading market.
Interbank forex market
The interbank market is the center of foreign exchange trading activities. Where major global banks perform currency exchanges at the spot and forward exchange rates. This is not a specific location but an information network connecting banks. Through electronic networks and links with foreign exchange brokers.
Companies use foreign exchange services from banks with which they do business. Each bank meets its customers’ needs by conducting foreign currency transactions with other counterparties in the interbank market. For popular currencies, major banks usually have enough reserves to make transactions. But with less-used currencies, banks often go through foreign exchange brokers.
In the interbank market, banks act as agents for their customers. In addition to performing currency exchanges, they provide consulting on trading strategies. Offers a wide range of monetary instruments and risk management services. They also assist clients in controlling exchange rate risk by providing information on foreign exchange regulations globally.
Foreign Exchange Department
A foreign exchange exchange is a place that specializes in conducting foreign exchange futures and foreign exchange options transactions. On forex exchanges, currency trading is often done through brokers. People who facilitate transactions to take place efficiently. By processing and fulfilling orders from customers.
Transactions on foreign exchange exchanges are often much smaller in scale than transactions on the interbank market. This size also varies depending on the currency being traded.
Decentralized forex market
The decentralized market is where parties participate in buying and selling securities directly with each other. Not through listing on a specific transaction point. Usually through a global computer network.
All foreign exchange transactions can take place in the Over-the-Counter (OTC) market. Large financial institutions and investment banks are the main participants in this market.
The decentralized market has become a rapidly growing industry in recent years due to the many benefits it brings to business. First, it allows businesses the freedom to choose which organization provides the best (lowest) price when conducting transactions. Second, it creates the opportunity to carry out flexible transactions according to customer requirements.
Business operations on the forex exchange exchange
So what types of operations exist in the forex market? Let’s take a look at the important operations in the content below
Forex spot delivery
Spot transaction in foreign exchange is the process of buying and selling foreign currency in which the transfer of foreign currency is carried out on the same day or no later than two working days after the purchase contract is agreed.
This operation is performed on the spot market and is based on the spot rate. This means that the exchange rate is predetermined and valid at the time of transaction. Spot exchange rates are usually announced at all commercial banks and on public information sites.
Banks usually do not charge transaction fees but use the difference between the buying rate and the selling rate to offset transaction costs, manage risks, and earn profits. However, customers may need to deposit according to each bank’s regulations for spot transactions. Payment is due 01 or 02 working days after the date of the foreign currency purchase and sale transaction.
Trading exchange rate differences in the Foreign exchange market
The difference between prices on spot markets creates arbitrage opportunities in this market. Therefore, exchange rate arbitrage can be considered a variation of spot exchange operations. It involves buying a currency where the price is low. Resell at a higher price (or vice versa) to profit from the price difference.
In this type of business, the trader does not face foreign exchange risk. Buying and selling take place simultaneously at the same time. Do not create a shortage or surplus of foreign currency. However, implementing exchange rate arbitrage transactions tends to equalize exchange rates across different Foreign exchange market. Due to the rise of modern information sites. Today, the forex market has become transparent on a global scale. Buyers/sellers can reach each other and easily know the price. This leads to the business of foreign exchange rate differences no longer being as popular as before.
Foreign exchange futures
Forward foreign exchange trading is a foreign currency buying and selling process in which two parties commit to buying and selling a certain amount of foreign currency with each other at an exchange rate agreed upon when signing the contract. The delivery and payment of foreign currency will take place on a specified date in the future.
This market has the participation of banks, multinational companies, investors in the international market, and import-export businesses. These are subjects that often face great impacts from exchange rate fluctuations.
Futures trading has developed strongly and plays an important role in the Foreign exchange market. It is highly effective in minimizing exchange rate risks for businesses when participating in import-export activities, foreign loans, or investments abroad. The futures market is also where speculators actively operate to make profits.
Forex forward contracts are often defined in multiples of 30 days: 1, 2, 3, 4, 5, 6, 9, and 12 months. However, the two parties can agree on different terms or it can last longer than 1 year.
Swap on forex exchange
A foreign exchange swap is the process of simultaneously buying and selling a certain type of foreign currency. With the same amount of value, the buying and selling times are different. This is a combination of two types of forex trading. Including spot transactions and forward transactions.
The basic advantage of performing swap transactions is to use swap contracts to reduce costs and limit risks from exchange rate fluctuations. During the swap transaction process, both banks and customers have specific benefits.
For customers, the benefit is demonstrated by being able to meet their foreign or local currency needs at the moment. For banks, the benefit lies in meeting customer needs. Thereby enhancing the reputation and increasing the brand value of the organization. At the same time, banks can also profit from the difference in buying and selling prices of foreign currencies.
Foreign exchange futures in the forex market
Futures foreign exchange trading is the process of agreeing to buy and sell a determined amount of foreign currency at a fixed exchange rate at the time the contract takes effect. Foreign currency transfers are made at a future date through an Exchange, not directly through a bank.
The Exchange plays the role of setting regulations and controlling the activities of participating members. These members can be representatives of companies, commercial banks, or individuals with their accounts.
Futures foreign exchange contracts are similar to forward foreign exchange contracts. Has higher liquidity. Ability to delete old contracts and open new contracts at any time. The two parties pay each other the difference in value at the time the contract expires.
In addition to the purpose of limiting risk, this is also a suitable tool for speculators. Speculators predict the price of a foreign currency will increase in the future. Will buy futures contracts of that foreign currency. On the contrary, other speculators predict that the price of that foreign currency will decrease in the future. Will sell futures contracts of that foreign currency. The Exchange is an organizer and intermediary in transactions. Will arrange these types of contracts.
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Forex options
Options contracts give contract participants the right to buy/sell one currency for another at a previously agreed fixed exchange rate. In a precise period in the future.
Options not only help investors stay ahead of a currency’s trend. It also helps avoid all kinds of risks of loss. You can profit from options regardless of which direction the price movement takes (up, down, or even no change).
Foreign exchange options trading takes place based on a buy or put option contract.
- Call option contract: Allows the buyer of the contract to have rights. However, it is not mandatory to buy a certain amount of currency.
- Put option contract: Allows the buyer of the contract to have rights. However, it is not mandatory to sell a certain amount of currency.
The buyer in a call option contract or the seller in a put option contract can execute or cancel the contract if they find it unprofitable. However, they must pay an option fee when signing the contract.
Epilogue
Through sharing from Self-study forex, the forex market is a complex and diverse system. With diverse trading facilities such as interbank markets, exchanges, and decentralized markets. Trading types such as spot, futures, swaps, and options all play an important role in weighing risk and optimizing returns.
Thanks to its flexibility and liquidity, the Foreign exchange market provides investment opportunities and protection to traders and investors globally. At the same time, it is also an indispensable part of the international economy.
Questions related to the Foreign exchange market
What are the main classifications of forex trading?
The main types of transactions in the Foreign exchange market include spot transactions, futures transactions, foreign exchange swaps, and foreign exchange options.
What is the nature of a foreign exchange option contract?
Foreign exchange options contracts give the buyer the right, but not the obligation, to buy or sell a currency at a specific time in the future, at a pre-agreed fixed rate.
What is the meaning of forex futures trading?
Futures foreign exchange trading is an agreement to buy and sell a foreign currency at a fixed exchange rate at a future time, carried out through exchanges, helping to reduce risks and facilitate operations. international trade.
