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Foreign exchange

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Revision as of 19:44, 24 June 2005 by Rhody Trader (Talk | contribs)

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Description

The foreign exchange market (also referred to as forex or fx) is the market of currencies. Trade takes place when one country's currency (such as the Swiss Franc) is exchanged for the currency of another country (say the Japanese Yen). The market exists to facility the exchange of money around the globe for business and travel purposes, though speculation has become increasingly popular over the years.

Market Structure

Foreign Exchange transactions take place 24 hours per day, around the world through a combination of inter-bank and futures markets, though the inter-bank market far surpases the futures market in volume. In fact foreign exchange is the largest of the financial markets, dwarfing all others.

Participants

The Forex market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators.

Currency Symbols

The forex market trades is currency pairs. These pairs use a standardized quote structure of Base/Quote. Those pair quote can be thought of in terms of how much of the Quote currency it takes to make one unit of the Base currency.

Currency pair quote use standardized three character abbreviations known as SWIFT or ISO codes. The codes for the major (most active) currencies are:

  • AUD - Australian Dollar
  • CAD - Canadian Dollar
  • EUR - Euro
  • JPY - Japanese Yen
  • GBP - British Pound
  • CHF - Swiss Franc
  • USD - U.S. Dollar

Putting this together, EUR/USD is the number of U.S. Dollars it takes to equate to 1 Euro.

It should be noted that a cross-rate or cross currency pair (often just called a cross) is the term used in common market parlance for a currency pair which does not include the USD. An example would be EUR/GBP.

Currency Quotes

Currency market quotes are displayed in a standard bid/offer set-up. Among the major currency pairs (pairs which include two of the major currencies as listed above), most are quoted to 4 decimal places. Where the Japanese Yes is included as the Quote currency, the standard is 2 decimal places.


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