The foreign exchange market (Forex, FX or currency trading) is a global, decentralized global financial market for trading currencies. Financial centers around the world act as anchors of trading between a variety of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of various currencies.
The forex market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions and retail investors. The average daily turnover in global foreign exchange and related markets is continuously growing. After the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover U.S. $ 3.98 trillion in April 2010 (vs. $ 1.7 trillion in 1998) was. [3] Of this $ 3.98 trillion, 1.5 trillion U.S. dollars and cash transactions was $ 2.5 trillion traded in futures, swaps and other derivatives.
There is no unified or centrally cleared market for the majority of the shops, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a series of interconnected markets where currencies are traded. This implies that there is not one single course, but a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice, the prices are often very close, otherwise they could be immediately exploited by arbitrageurs. Due to London's dominance in the market, is a particular currency quoted price is usually the London market price. The most important trading partner exchanges are EBS and Reuters, while large banks also offer commercial systems. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarketspace opened in 2007 and sought a role as a central market clearing mechanism.
Unlike a stock market, the forex market is divided into levels of access. At the top is the inter-bank market, which is up to the largest commercial banks and securities dealers. In the interbank market, spreads, the difference between the bid and ask prices are razor is sharp and not known to players outside the inner circle. The difference between the bid and ask prices widened (for example 0-1 pip to 1-2 pips for currencies like the EUR), while going down the levels of access. This is due to the volume. If a dealer to ensure a large number of transactions for large quantities, they can demand a smaller difference between the bid and ask price, which is known as a better distribution. The levels of access, the forex market are determined by the size of the "line" (the amount of money with which they trade) determined. The top-tier inter-bank market accounts for 53% of all transactions. From there, smaller banks, followed by large multinational corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail market makers. According to Galati and Melvin, "have pension funds, insurance companies, mutual funds and other institutional investors play an increasingly important role played in the financial markets in general, and early in the foreign exchange markets in particular since the 2000s." (2004) In addition, he notes, "Hedge funds have grown in the period 2001-2004 in terms of both number and size". [9] Central banks also participate in the forex market, currencies order to align their economic needs.
The following theories explain the fluctuations of exchange rates in a floating exchange rate regime (In a fixed exchange rate regime, prices are decided by its government):
International parity conditions: Relative purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Although some of the above theories provide logical explanation for the fluctuations of exchange rates, but these theories can be undermined because they are based on challengeable assumptions [eg As free movement of goods, services and capital] which seldom hold true in the real world.