Com Foreign exchange market The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies.
This market determines the foreign exchange rate.
It includes all aspects of buying, selling and exchanging currencies at current or determined prices.
In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.
The main participants in this market are the larger international banks.
Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends.
Since currencies are always traded in pairs, the foreign exchange market does not set a currency's absolute value, but rather determines its relative value by setting the market price of one currency if paid for with another.
Ex: 1 USD is worth X CAD, or CHF, or JPY, etc.
The foreign exchange market works through financial institutions, and operates on several levels.
Behind the scenes, banks turn to a smaller number of financial firms known as "dealers", who are involved in large quantities of foreign exchange trading.
Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the "interbank market".
Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.
Because of the sovereignty issue when involving two currencies, Forex has little supervisory entity regulating its actions.
The foreign exchange market assists international trade and investments by enabling currency conversion.
For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars.
It also supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies.
In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency.
The modern foreign exchange market began forming during the 1970s.
This followed three decades of government restrictions on foreign exchange transactions under the Bretton Woods system of monetary management, which set out the rules for commercial and financial relations among the world's major industrial states after World War II.
Countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed per the Bretton Woods system.
The foreign exchange market is unique, because of the following characteristics: As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.
According to the Bank for International Settlements, the preliminary global results from the 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.
09 trillion per day in April 2016.
This is down from $5.
4 trillion in April 2013, but up from $4.
0 trillion in April 2010.
Measured by value, foreign exchange swaps were traded more than any other instrument in April 2016, at $2.
4 trillion per day, followed by spot trading at $1.
09 trillion break-down is as follows: Ancient Currency trading and exchange first occurred in ancient times.
Money-changers were living in the Holy Land in the times of the Talmudic writings.
These people used city stalls, and at feast times the Temple's Court of the Gentiles instead.
Money-changers were also the silversmiths and/or goldsmiths of more recent ancient times.
During the 4th century AD, the Byzantine government kept a monopoly on the exchange of currency.
Papyri PCZ I 59021, shows the occurrences of exchange of coinage in Ancient Egypt.
Currency and exchange were important elements of trade in the ancient world, enabling people to buy and sell items like food, pottery and raw materials.
If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold coins for more Egyptian ones, or for more material goods.
This is why, at some point in their history, most world currencies in circulation today had a value fixed to a specific quantity of a recognized standard like silver and gold.
Medieval and later During the 15th century, the Medici family were required to open banks at foreign locations in order to exchange currencies to act on behalf of textile merchants.
To facilitate trade, the bank created the nostro account book which contained two columned entries showing amounts of foreign and local currencies; information pertaining to the keeping of an account with a foreign bank.
During the 17th century, Amsterdam maintained an active Forex market.
In 1704, foreign exchange took place between agents acting in the interests of the Kingdom of England and the County of Holland.
Early modern Alex.
Brown & Sons traded foreign currencies around 1850 and was a leading currency trader in the USA.
In 1880, J.
do Espírito Santo de Silva applied for and was given permission to engage in a foreign exchange trading business.
The year 1880 is considered by at least one source to be the beginning of modern foreign exchange: the gold standard began in that year.
Prior to the First World War, there was a much more limited control of international trade.
Motivated by the onset of war, countries abandoned the gold standard monetary system.
Modern to post-modern From 1899 to 1913, holdings of countries' foreign exchange increased at an annual rate of 10.
8%, while holdings of gold increased at an annual rate of 6.
3% between 1903 and 1913.
At the end of 1913, nearly half of the world's foreign exchange was conducted using the pound sterling.
The number of foreign banks operating within the boundaries of London increased from 3 in 1860, to 71 in 1913.
In 1902, there were just two London foreign exchange brokers.
At the start of the 20th century, trades in currencies was most active in Paris, New York City and Berlin; Britain remained largely uninvolved until 1914.
Between 1919 and 1922, the number of foreign exchange brokers in London increased to 17; and in 1924, there were 40 firms operating for the purposes of exchange.
During the 1920s, the Kleinwort family were known as the leaders of the foreign exchange market, while Japheth, Montagu & Co.
and Seligman still warrant recognition as significant FX traders.
The trade in London began to resemble its modern manifestation.
By 1928, Forex trade was integral to the financial functioning of the city.
Continental exchange controls, plus other factors in Europe and Latin America, hampered any attempt at wholesale prosperity from trade for those of 1930s London.
After World War II In 1944, the Bretton Woods Accord was signed, allowing currencies to fluctuate within a range of ±1% from the currency's par exchange rate.
In Japan, the Foreign Exchange Bank Law was introduced in 1954.
As a result, the Bank of Tokyo became the center of foreign exchange by September 1954.
Between 1954 and 1959, Japanese law was changed to allow foreign exchange dealings in many more Western currencies.
President, Richard Nixon is credited with ending the Bretton Woods Accord and fixed rates of exchange, eventually resulting in a free-floating currency system.
After the Accord ended in 1971, the Smithsonian Agreement allowed rates to fluctuate by up to ±2%.
In 1961–62, the volume of foreign operations by the U.
Federal Reserve was relatively low.
Those involved in controlling exchange rates found the boundaries of the Agreement were not realistic and so ceased this in March 1973, when sometime afterward none of the major currencies were maintained with a capacity for conversion to gold, organizations relied instead on reserves of currency.
From 1970 to 1973, the volume of trading in the market increased three-fold.
At some time some of the markets were "split", and a two-tier currency market was subsequently introduced, with dual currency rates.
This was abolished in March 1974.
Reuters introduced computer monitors during June 1973, replacing the telephones and telex used previously for trading quotes.
Markets close Due to the ultimate ineffectiveness of the Bretton Woods Accord and the European Joint Float, the forex markets were forced to close sometime during 1972 and March 1973.
The very largest purchase of US dollars in the history of 1976 was when the West German government achieved an almost 3 billion dollar acquisition, this event indicated the impossibility of the balancing of exchange stabilities by the measures of control used at the time and the monetary system and the foreign exchange markets in "West" Germany and other countries within Europe closed for two weeks.
After 1973 In developed nations, the state control of the foreign exchange trading ended in 1973 when complete floating and relatively free market conditions of modern times began.
Other sources claim that the first time a currency pair was traded by U.
retail customers was during 1982, with additional currency pairs becoming available by the next year.
On 1 January 1981, as part of changes beginning during 1978, the People's Bank of China allowed certain domestic "enterprises" to participate in foreign exchange trading.
Sometime during 1981, the South Korean government ended Forex controls and allowed free trade to occur for the first time.
During 1988, the country's government accepted the IMF quota for international trade.
Intervention by European banks influenced the Forex market on 27 February 1985.
The greatest proportion of all trades worldwide during 1987 were within the United Kingdom.
The United States had the second amount of places involved in trading.
During 1991, Iran changed international agreements with some countries from oil-barter to foreign exchange.
Market size and liquidity [^] The foreign exchange market is the most liquid financial market in the world.
Traders include governments and central banks, commercial banks, other institutional investors and financial institutions, currency speculators, other commercial corporations, and individuals.
The average daily turnover in the global foreign exchange and related markets is continuously growing.
According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was $3.
98 trillion in April 2010.
Of this $3.
98 trillion, $1.
5 trillion was spot transactions and $2.
5 trillion was traded in outright forwards, swaps, and other derivatives.
In April 2010, trading in the United Kingdom accounted for 36.
7% of the total, making it by far the most important centre for foreign exchange trading in the world.
Trading in the United States accounted for 17.
9% and Japan accounted for 6.
For the first time ever, Singapore surpassed Japan in average daily foreign-exchange trading volume in April 2013 with $383 billion per day.
So the order became: United Kingdom, United States, Singapore, Japan and Hong Kong.
Turnover of exchange-traded foreign exchange futures and options has grown rapidly in recent years, reaching $166 billion in April 2010.
As of April 2016, exchange-traded currency derivatives represent 2% of OTC foreign exchange turnover.
Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are traded more than to most other futures contracts.
Most developed countries permit the trading of derivative products on their exchanges.
All these developed countries already have fully convertible capital accounts.
Some governments of emerging markets do not allow foreign exchange derivative products on their exchanges, because they have capital controls.
The use of derivatives is growing in many emerging economies.
Countries such as South Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.
Foreign exchange trading increased by 20% between April 2007 and April 2010, and has more than doubled since 2004.
The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment.
The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types.
In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market.
By 2010, retail trading was estimated to account for up to 10% of spot turnover, or $150 billion per day.
Foreign exchange is traded in an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house.
The biggest geographic trading center is the United Kingdom, primarily London.
According to TheCityUK, it is estimated that London increased its share of global turnover in traditional transactions from 34.
6% in April 2007 to 36.
7% in April 2010.
Due to London's dominance in the market, a particular currency's quoted price is usually the London market price.
For instance, when the International Monetary Fund calculates the value of its special drawing rights every day, they use the London market prices at noon that day.
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