Different Types of Foreign Exchange Market

Foreign Exchange Market

The Forex market is a worldwide largest network of currency traders who work around the clock to perform these transactions and their work drives the exchange rate for currencies around the world. Foreign exchange market exists to allow business owners to purchase currency in other countries so they can do business or trading in that country.

The most foreign exchange market is that of UK (London), followed by that of the USA, Japan, Switzerland, Singapore, Hong Kong, France, Germany and Australia. All other markets, combined together, represent only about 15 percent of the total volume,

traded globally.

Click on Below Video: Spot vs Forward Rates

Types of Foreign Exchange Market

The market in which the foreign currencies are traded is called a Foreign Exchange Market. Here the buyers and sellers are involved in the sale and purchase of currencies of different countries.

1. Spot Market

There are the quickest transactions including currency in foreign markets. These transactions include the immediate payment at the current exchange rate, which is also called the spot rate. The federal reserve states that the spot market accounts for one-third of all the currency exchange and trades take place within two days of the agreement. This does leave the traders to open up the volatility of the currency market, which can increase or decrease the price between the trade and agreement.

Click on Below Video: Forex Spot Exchange Rate Explained

2. Forward Market

These transactions are identical to the future market except for one crucial difference the terms are negotiable between two parties. In this way, the terms can be negotiated and tailored to the needs of the participants. It allows for more flexibility. In many cases, this type of market involves the currency swap, where the two entities swap currency for the agreed-upon amount of time, then return the currency at the end of the agreement.

3. Futures Market

The transactions involve future payment, and future delivery at an agreed exchange rate also called the future rate. These contracts are standardised, which means the elements of the agreement are set and non-negotiable. It takes the volatility of the currency market, particularly the spot market, out of the equation. These are some popular traders who make large currency transactions and are trying a steady return on their investments.

Click on below video: Futures Market Explained

Participants

There are five different types of entities that use the foreign exchange market on a regular basis. Commercial banks are the leaders in the market and the source of currency transactions. Traditional users refer to entities that do business across the national borders. In the market, the central banks are the official players and each country has a central bank to manage the money supply. Forex Brokers work as go-between for banks, during the large transactions. Traders and speculators work to take the benefits of short-term trends in the market.

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