About Forex
Forex, or foreign exchange, is the buying of 1 currency with that of another. Although it is called foreign exchange, this is just a relative term. The terms domestic and foreign is relative to the person using the term. What is foreign to one person is domestic to another. Currency exchange would be the more proper term.
The main reasons to exchange foreign currency for domestic currency is to pay for goods and services in the foreign country, to invest in its financial assets, to hedge against unfavorable rates of exchange in the future, or to profit from those changes. Foreign currency holders need to convert it back to their domestic currency to take profits, so that businesses, governments, and other organizations can use the money at home.
Hedging is exchanging currency to protect against unfavorable changes in the future. Most hedgers are governments and businesses that need to buy or sell in a foreign country sometime in the future. Speculators are people who are exchanging currency purely for profit. Governments, usually through their central banks, influence the exchange rate to some extent as well, either by buying or selling foreign currency, or by creating or destroying domestic currency. Thus, currency rates fluctuate because demand and supply for each currency fluctuates.
The foreign exchange market, often called the FX market, is an over-the-counter (OTC) market. Its consists of a network of dealers-central banks, commercial and investment banks, funds, corporations, and individuals. Transactions are done electronically, usually over the Internet, and traders buy and sell through a broker. Thus, the forex market operates as a spot market. Although there are futures and forward contracts on currencies, most forex transactions use the spot market. There is no central exchange for the spot market, and brokers and dealers are located throughout the world, so the forex market is a 24 hour market during the weekdays. Forex is the largest financial market in the world-over 2 trillion USD equivalent values of currency are traded daily.
Currency rates are listed as pairs, and there are many sites on the Internet that display current quotes. The rate of exchange is the amount of the foreign currency that is equal in value to a unit of domestic currency, or, more generally, it is the amount of currency received for each unit of the currency tendered. Thus, for instance, the Great Britain pound (GBP) has recently passed the $2 mark in value. That means that for an American trading dollars for British pounds, he needs $2 to get £1, equaling an exchange rate of 0.5.
Virtually every country, with some small exceptions, has its own currency, and most of them can be traded. However, the currencies of a few countries are the most actively traded, and constitute, by far, the largest volume of trades. The big 5 are the United States dollar (USD), Euro (EUR), Japanese yen (JPY), the British pound (GBP), and the Swiss franc (CHF).
Each currency is symbolized using 3-letter ISO (International Organization for Standardization) codes: the 1st 2 letters designate the country, the 3rd designates the currency. The most famous illustration of this is for the United States dollar-USD. However, sometimes the country name or currency that is symbolized is not the most common name. Thus, the symbol for the Swiss franc is CHF, where CH stands for Confederation Helvetica, which refers to Switzerland, and MXN stands for the Mexican Nuevo Peso, even though the most common name for Mexico's currency is simply the peso.
