Forex is a "place" where currencies are traded. Eye important to most people around the world, whether they realize it or not, because the currency to be exchanged for foreign trade and business. If you live in the United States and want to buy cheese from France, you or the company you buy from should pay French cheese for the cheese in euros (EUR). This means that US importers have to exchange the equivalent of the value of the US dollar (USD) to the euro. The same thing applies to travel. A French tourist in Egypt can not be paid in euros to see the pyramids because it is not acceptable local currency. Thus, tourists have to exchange euros for the local currency, in this case the Egyptian pound, with the current exchange rate.
The need for currency exchange is the main reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of approximately US $ 2,000 billion per day. (Total volume change over time, but as August 2012, the Bank for International Settlements (BIS) reported that the forex market traded more than US $ 4.9 trillion per day.)
One of the unique aspects of the international market is that there is no central market for foreign exchange. Conversely, currency trading is done electronically over-the-counter (OTC), which means that all transactions occur through computer networks between traders around the world, not in a centralized exchange. This market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - in almost every zone the time. This means that when the US trading day ends, the forex market starts again in Tokyo and Hong Kong. Thus, the forex market can be very active at any time of the day, and prices change constantly.
Spot Market and Forward and Futures Markets
Actually there are three ways in which institutions, companies and individuals to trade forex: the spot market, forward market and futures market. Forex trading in the spot market has always been the largest market due to an "underlying" real assets that the forward and futures markets are based on. In the past, the futures market is the most popular place for traders because it is available to individual investors for long periods of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now exceeds the futures market as an option trading market for individual investors and speculators. When people refer to the forex market, they are usually referring to the spot market. Forward and futures markets tend to be more popular with companies who need to hedge their foreign exchange risk for a specific date in the future.
What the spot market?
More specifically, the spot market where currencies are bought and sold in accordance with the current price. The price is determined by supply and demand, is a reflection of many things, including the current interest rates, economic performance, sentiment against the ongoing political situation (both local and international), as well as the perception of the future performance of one currency against another. When the deal is completed, it is known as "spot transactions". It is a bilateral transaction in which one party provides the agreed amount of currency to the counter and receive a certain amount of another currency at an agreed exchange rate. Once the position is closed, payment is made in cash. Although the spot market is generally known as one relating to the transaction in the present (not future), this trade actually took two days for completion.
What future and the futures market?
Unlike the spot market, forward and futures markets are not the actual currency trading. Instead they deal with contracts that represent claims for certain types of currency, a certain price per unit and the future for completion.
In the forward market, contracts are bought and sold OTC between the two parties, which determines the terms of the agreement between them.
In the futures market, futures contracts are bought and sold based on the size and standard of the date of completion of the public commodity markets, such as the Chicago Mercantile Exchange. In the US, the National Futures Association regulate the futures market. Futures contracts have specific details, including the number of units traded, delivery and completion date, and the increase in the minimum price that can not be adjusted. Exchange acts as a partner to the merchant, giving permission and settlements.
Both types of contracts are binding and are usually settled in cash for the relevant exchange at the time of termination, although the contract can also be bought and sold before they expire. Forward and futures markets may offer protection against the risk when trading currencies. Typically, international companies large use this market to hedge against exchange rate fluctuations in the future, but speculators take part in this market as well. (For a more in-depth introduction to the future, see Futures Fundamentals.)
Note that you will see the term: FX, forex, foreign exchange market and currency markets. These terms are synonymous and all refer to the forex market.
