The Forex or foreign exchange market is a separate branch of the financial system. This market hosts transactions of several billion dollars every day and is, in fact, a very popular investment location. But how does the forex market work?
An Ultra-Dynamic Sector
The word Forex is the abbreviation of the term “Foreign exchange”, which corresponds to the foreign exchange market. Concretely, this is the financial sector where so-called convertible currencies are bought and sold, while respecting exchange rates which vary continuously.
Forex is nothing less than the second largest financial market in the world, behind the interest rate market. According to statistics from the Banks for International Settlements, between 2011 and 2013, this sector recorded an average daily trade volume of 5,300 billion dollars or 4,000 billion euros.
An Almost Institutionalized Market, But Open
Most transactions on the foreign exchange market are carried out through swaps or interest rate swaps denominated in two different currencies. Cash transactions and ongoing forward exchanges, over-the-counter, are also present in this market. Also, a good part of the Forex activity breakout is (breakout คือ, which is the term in Thai) carried out by banks and non-bank financial institutions.
Almost 43% of exchanges take place between banks, 40% between a bank and a non-bank financial institution, and 17% between a bank and a non-financial entity. Thousands of individuals also participate in exchanges, investing through the Forex platforms of banks, or fund managers.
Forex is a market open 24 hours a day, except on weekends. The main stock exchanges in the world take turns to record transactions, mostly cross-border. The principle in Forex is simple: the rate of a currency is always a function of another currency.
The quotation on the foreign exchange market, thus, always represents two currencies placed side by side; the one on the left is the base currency, and the one on the right is the counterpart currency. As in other financial markets, investors play on changes in the prices of currency pairs to reap profits in Forex.