About Forex

Forex is a currency exchange market. It is arguably the most affordable yet rewarding segment of the financial market trading. 24 hours a day 5 days a week millions of traders throughout the globe benefit from the highest liquidity and trading volumes in the world. Forex has been one of the World's most revolutionary and innovative financial markets so far.

We offer a quick look at the history of Forex as well as an easy to understand introduction into it's very nature:

Market players are in the first place commercial banks executing orders from exporters, importers, investment institutions, insurance and retirement funds, hedgers and private investors. Commercial banks also perform trading operations in their own interests and at their own expenses. Daily turnover of the largest banks often exceeds several billion U.S. Dollars and many have their overall profit formed mostly by speculative currency exchange operations.

Brokerage houses are also playing an important role of contractor between large numbers of banks, funds, commission houses, dealing centers, etc.

Commercial Banks and Brokerage Houses do not only execute currency exchange operations at prices of other active players, but come out with prices of their own as well, therefore are actively influencing on the price formation process. We call them Market Makers.

In contrast to the above, passive players cannot set their own quotations and make trades at quotations offered by active market players. Passive market players are normally pursue the following aims: make payment under export or import contracts, invest or set up a branch overseas, create a joint venture, tourism, margin speculation, foreign currency hedging, etc.

The participants' list witnesses that the market is widely used by big business and for serious matters. A change in currency rate may cause importers or exporters as well as other businesses incur significant losses which forces them to use a variety of risk hedging instruments such as forward deals, options, futures and so on. Forex is an important part of every successful business.

Market players can be divided into several groups:

Central banks

Their main task is exchange regulations in the foreign market, namely, the prevention of spike rates of national currencies in order to prevent economic crises, maintaining the exports and imports balance. Central banks have a direct impact on the currency market. Their influence can be direct - in the form of currency intervention, or indirect – via regulation of money supply and interest rates. Central bank may act in the market on their own to influence the national currency, or together with other central banks to conduct a joint monetary policy in the international market or for joint interventions. Central banks are normally entering the Forex market, not for profit, but to verify the stability or correct the existing national currency exchange rate for it has a significant impact on the home economy. Central banks may not be attributed to either "Bulls" or "Bears", because they can play bullish as well as bearish depending on the particular challenges facing them at the moment. Central banks may also go on the currency market through commercial banks. Although profit is not the main purpose of these banks, they are not attracted to unprofitable operations neither, so the central banks' intervention are normally disguised and carried out through several commercial banks at the same time. Central banks of different countries sometimes join together for coordinated interventions. The greatest influence on world currency markets were:

• ventral U.S. bank - US Federal Reserve (Fed),
• the European Central Bank (ECB),
• the Bank of England (also known as the Old Lady),
• the Bank of Japan.

Commercial banks

They execute most of foreign exchange operations. Other market participants carry out conversion and deposit-lending operations through accounts opened in commercial banks. Banks accumulate (via transactions with clients) the aggregate market demand for currency conversions as well as for fundraising or investment to fulfill them in other banks. Apart from dealing with clients' requests, banks may operate independently and at their own expense.

Foreign exchange market in the end of the day is a market of interbank deals, therefore speaking of the movement of exchange or interest rates, we will have in mind the interbank foreign exchange market. International exchange markets are most of all affected by major international banks with daily volume of transactions estimating in billions of US dollars. These are: Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others. Their main difference is large volume of transactions frequently causing significant changes in quotations.

Big players may act as either "Bulls" or "Bears".

• "Bulls" are those market participants who are interested in enhancing the value of currency.
• "Bears" are interested in reduction of currency value.

The market is permanently in equilibrium between the bulls and the bears, so currency quotations fluctuate within fairly narrow limits. However, when either of the group prevails, exchange rates change in a rather dramatic and significant way.

Firms performing Foreign Trade Operations

Companies participating in international trade constantly demand foreign currency (importers) or supply foreign currency (exporters), as well as place or attract free currency volumes in form of short-term deposits. These participants don not have a direct access to the currency market and realize their conversion and deposit transactions via commercial banks.

Firms carrying out international investment

Investment Funds, Money Market Funds and International Corporations and companies, represented by various international investment funds, implement the policy of diversified management of assets portfolios by placing money in securities of governments and corporations of different countries. They are simply called funds in dealer slang. The best known funds are "Quantum" of George Soros executing successful exchange speculations, or a "Dean Witter" fund. Major international corporations engaged in foreign industrial investments: creation of subsidiaries, joint ventures and the likes, such as, for example, Xerox, Nestle, GE (General Electric), BP (British Petroleum) and others are also a part of this group.

Currency exchange

In some countries with transition economies there are currency exchanges, whose functions include currency exchange for businesses and adjustment of market exchange rates. The state is usually actively regulating the exchange rate, taking the advantage of the exchange market size.

Brokerage firms

Brokerage firms are bringing together buyers and a sellers of foreign currency and conduct conversions between them, as well as dealing in deposit and loan operations. Brokers charge commission for their intermediary services in form of a percentage per transaction.

A so called ECN (Electronic Communication Network) brokers have been widely developing recently. ECN is an electronic platform where currency exchange requests from various contractors are brought together. Their clients are large banks, brokerage firms and private clients. Access limit in terms of deposit with such brokers are usually high which makes it unaffordable to most private investors. It is assumed that ECN brokers do not act as a counterparty to its clients and only charge commission.

Individuals

People who realize a wide range of non-trade transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling of cash.

With the introduction of margin trading individuals have received an opportunity to invest idle funds in the Forex market with a view to profit.

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