What is Forex?
Curious what Forex is? The word Forex is a short form of foreign exchange market. It can also be called FX or currency market. Any one of these terms refers to a huge decentralized market for foreign currency exchange. These foreign currencies include some of the easily recognizable hard currencies in the global marketplace: the Japanese Yen, the US dollar, the Euro, the British Pound, and the Australian and Canadian dollars.
A few key features for the foreign exchange (forex) market are:
- Trading in Forex occurs 24 hours a day during the week.
- There is a huge number of transactions (volume) which leads to a high level of liquidity.
- Lower margins compared to other markets allowing private speculators to participate in leveraged trading in foreign currency exchange.
- Since there is no central location or exchange for Forex, there is not a lot of cross border regulation.
Transactions on the FX market are handled through counterparties rather than a main clearing house. Liquidity in the forex markets comes mostly from banks. They are the market makers. London has historically dominated the foreign exchange market, so the quotes are usually London's market prices for a particular currency. However, since the foreign exchange marketplace is a lot of interconnected markets, there are opportunities for arbitrage as a variety of forex quotes may be present depending on where the market maker is. Other key international cities are prime areas for forex. There are important trading centers in New York, Paris, Zurich, Singapore, Tokyo, and Hong Kong as well. Contracts are traded "over the counter" or OTC. That means currency contracts are bought and sold via electronic or computer networks all over the world.
The four main contract types or instruments on foreign exchange markets are:
- spot contracts
- forward contracts
Spot contracts tend to have a lot of interest because they have the "real" underlying asset, whereas forward and futures contracts are derivatives of these. Spot contract markets have currencies being bought and sold at current price quotes. Forward or futures contracts are contracts for delivery at a date sometime in the future for an agreed upon exchange rate value.
Prices for all markets are dependent on a number of factors that can influence the supply and demand for a particular currency. The fundamentals for this supply and demand can include things like:
- interest rates
- economic situations
- political situations
- domestic economic reports
- the perceived performance of one currency against another
These are just a few basic pieces of information to describe what forex is.