The Forex Market

The Forex Market does more than 2 trillion dollars a day and you probably never heard of it. Forex is the acronym for the Foreign Exchange Market, where one country’s currency is exchanged for that of another through a floating-exchange-rate system. It is the world’s largest financial market, with estimated daily turnover of 2.5 trillion.

Forex trading is not bound to any one trading floor and is not a market in the traditional sense because there is no central exchange. Instead, the entire market is run electronically, within a network of banks. continuously over a 24-hour period. The market opens Sunday at 5 p.m. {est} and goes through Friday afternoon at 4:30 p.m. {est}.

Banks have a natural flow of foreign exchange business from their customers, who buy and sell currency to their individual needs. The banks must manage their own currency deposits in the changing light of their customers’ transactions. To hedge or not to hedge? This is a way to basically minimize their potential for loss, often referred to as a hedge.

Investment managers also now deal globally. And they also must take positions in the different currencies, as well as in more traditional instruments, such as bonds and equities. For example , if a mutual fund is invested in U.S. bonds, the manger must decide if the fund should be invested in U.S. dollars or in a different currency. Again it is a question of hedging, another layer of risk to manage.

In theory, foreign exchange dates back to ancient times, when traders first began exchange exchanging coins from different countries. However, the foreign exchange industry itself is the newest of the financial markets.

In the last hundred years, the foreign exchange market has undergone some dramatic transformations. In 1944, the postwar foreign exchange system was established as a result of a multination conference held at Bretton Woods, New Hampshire. That system remained intact until the early 1970’s.

Major Forex participants include commercial investment banks and central banks. Other participants include corporations, hedge funds, and millions of traders worldwide. The top seven banks that provide liquidity in this market include Bank of America, Credit Suisse, First Boston, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley, Dean Whitter, and USB Warburg.

As times change and many individual investors begin looking for an alternative to the stock market, the Forex is growing daily, with an average daily volume reaching upwards from 1.5 trillion to 3.5 trillion. Now than ever, the Forex will play in the wealth transfer of tomorrow.

London remains the world’s largest foreign exchange center, with daily turnover during April 1995 of $464 billion, or 35 percent of the world’s daily total volume. In the same period, both the Federal Reserve Bank of New York and the Bank of Japan reported smaller increases of 46 and 35 percent, to $344 billion and $161 billion.

In addition, London remains the most diversified Forex Market. In New York, 64 percent is between the U.S. dollar and four major currencies(euro, Japanese yen, British pounds sterling and the Swiss France. The Forex has experienced spectacular growth in volume ever since currencies were allowed to float freely against each other. While the daily volume in 1977 was US$5 billion, it increased to US$600 billion in 1987 and reached the US$1.5 trillion to 2.5 trillion mark since 2000.

While it is tempting to see the potential profits you can make in the Forex Market, the risk is huge. It is estimated that 95% of people involved in the Forex Market lose their money within 30 days. The top traders in the world have years of experience, must watch an intricate set of graphs and charts and still must make an educated guess on which trade to make. The Forex Market is always changing and is soon China currency will be part of the market which will clearly make this Market even bigger.