London, New York, Tokyo, and Singapore are the world??™s major foreign exchange markets in the world. Having different countries as part of the major foreign exchange market it allows money to go around the world. It is clear that a nation??™s currency must be accepted by international banks, and business in order for any nation to be part in international commerce and exchange.
To have a better understanding it is said that foreign exchange market is the market where currencies are trade. This is considered the world??™s largest market because in consist of approximately a trillion in daily volume. This is also the most liquid, differentiating from other markets. The foreign exchange market does not have a central location to conduct business; this is conducted over the counter. Not having a central location allows traders to select from the various dealers to make their trades; in addition, it allows traders to compare prices. When a trader deals with a large dealer he or she has an advantage because in must cases large dealers have access to pricing at the largest banks in the world.
When talking about foreign exchange market it is necessary to say that this involves buying one currency and selling another currency, and this happens simultaneously. This type of exchange is done because the value of the one currency is determined when comparing it to another currency. When comparing the first currency is called base currency and the second currency is called counter currency. The currencies are named this way because it shows how much of the counter currency it??™s required to purchase one unit of the base currency.
Regarding the purchase of a currency pair the way it??™s done the base currency is bought while the counter currency is sold, it is also said that when a currency pair is sale the opposite happens. There are four major currency pairs; these are EUR/USD (Euro/US Dollar), USD/JPY (US Dollar/Japanese Yen), GBP/USD (Pound Sterling/US Dollar), and USD/CHF (US Dollar/Swiss Francs).
???Forex Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market. Registering for a demo account allows a new trader to download the online trading platform that is used by the companys clients trading live accounts and make trades as if they were doing it with real money. The demo account is an excellent way to experiment with the foreign exchange market while learning your way around the trading platform. It allows you to experience every step of currency trading including choosing currency pairs, deciding how much risk to take, tracking the time and dates of placed trades, deciding how long to stay in the trade, and when to exit the trade. It also allows the placing of stop and limit orders on trades??? (Go Currency).
Banks, brokers, customers, and central banks are the four types of foreign exchange market participants. Bankers are considered the biggest participants in the foreign exchange market. Banks are able to earn their profits when they buy and sell currencies from and to each other. Brokers are the intermediaries between banks. Dealers contact brokers to find out the best price for currencies. Customers are considered as the large companies needing foreign currency when conducting business or making investments. Central banks act on behalf of their government and many times they ???participate in the FX market to influence the value of their currencies??? (Federal Reserve Bank of New York).
In foreign exchange markets there are different types of FX transactions. FX transactions consist of spot transactions, and forward transactions. Spot transactions are the type of accounts for approximately a third of the transactions done at FX. An example of how a spot transactions work is ???A trader calls another trader and asks for a price of a currency, say British pounds. This expresses only a potential interest in a deal, without the caller saying whether he wants to buy or sell. The second trader provides the first trader with prices for both buying and selling (two-way price). When the traders agree to do business, one will send pounds and the other will send dollars. By convention the payment is actually made two days later, but next day settlements are used as well??? (Federal Reserve Bank of New York). A forward transaction is one of the ways FX deals with the risk that is engage in a forward transaction. In this type of transaction the buyer and the seller have to agree on the exchange rate for the giving date, this is when the money is actually exchange.
It is important to understand how and why a currency increases or decreases in value could create negative and positive effects on a nation and the world. Tim Schilling stated money is used as a medium of exchange and has a value of its own and it provides commodities; at the same time oil, gold, silver, or corn also provides commodities. In foreign market exchange the system that allows the price of currencies to fluctuate is floating exchange rate. This system was not the standard exchange rate until the last decade of the 20th century. Prior to the floating exchange rate the exchange rates were fixed, or kept constant, at the same time they could be exchanged depending on the amount of goal and this was called gold-exchange standards.
Gold standards was done to fix the prices of currencies this was not stable, however; at the time it had the trust of all nations citizens. Gold has a long history of value, and for average citizens its value was the way citizens were able to understand and trust (van Eeden). The use of gold standard exchange helped currencies remain fairly constant in value as re-printing of currencies, against gold was rarely done (Federal Reserve Bank of New York). When gold was first produce it cost money and the gold standard did not account for it which it created that when a nation would produce or bought gold, the nation was spending more for it than it was using it to value its currency. When the gold standard exchange became too difficult to maintain it was the time the gold standard ended. In 1971 President Nixon made the announcement that the United States would not redeem United State dollars for gold this was because United States import of good from foreign countries was expanding and United States had concerns that United States did not have enough gold reserves to redeem the dollars. This created that the United States dollar was not pegged to the price of the gold and other currencies started valuing their currencies exclusively to the United States dollar.
Today, foreign exchange markets and the use of national banks help to establish a firm trading value for a currency; at the same time it helps business to conduct international transactions because businesses have a place to trade foreign currencies. This also allows businesses to learn the value of international currencies allowing them to set the right prices for their products and services. A foreign exchange market allows the various groups to have an understanding of the value of the products and services and prices it should be placed on them.
Bordo, M.D. (NA). Gold Standard. The Concise Encyclopedia of Economics, The Library of Economics and Liberty. Retrieved June 26, 2010, from URL http://www.econlib.org/library/Enc/GoldStandard.html
Federal Reserve Bank of New York. (NA). The Basics of Foreign Trade and Exchange. Retrieved June 26, 2010, from URL http://www.newyorkfed.org/education/fx/foreign.html#float
Go Currency.com, (NA). The Foreign Exchange Market for Beginners. Retrieved June 26, 2010 from URL http://www.gocurrency.com/articles/forex-for-beginners.htm
Gold standard. (2010). In Encyclop?dia Britannica. Retrieved June 27, 2010, from Encyclop?dia Britannica Online: http://www.britannica.com/EBchecked/topic/237431/gold-standard
Schilling, T, (1998, June). Strong Dollar, Weak Dollar: Foreign Exchange Rates and the U.S. Economy. Retrieved June 26, 2010 from URL http://www.eric.ed.gov/ERICWebPortal/search/detailmini.jsp_nfpb=true&_&ERICExtSearch_SearchValue_0=ED456072&ERICExtSearch_SearchType_0=no&accno=ED456072
Van Eeden P, (2005, November 18). The History of Money. Retrieved June 26, 2010 from URL http://www.kitco.com/weekly/paulvaneeden/nov182005.html