Essay on Foreign Currency : Foreign Exchange Market

Essay on Foreign Currency : Foreign Exchange Market

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Forex simply means buying and selling of foreign currency in ‘Foreign Exchange Market’. People call it ‘Foreign exchange currency market’ or ‘foreign currency market’ or ‘FX market’. It is the largest and most liquid financial market in the world with an average turnover of near about U.S. $4 trillion on daily basis. In order to conduct foreign trade or business, currencies needs to be exchanged.
Example: You are based in India and want to buy chocolates from Switzerland, you will pay the cost of chocolates in Swiss franc since you are importing. Thus, you will exchange equivalent amount of Indian Rupees (INR) into Swiss francs (CHF). The same goes when you plan to visit a foreign country, you have to pay for your expenses in the locally accepted currency and thus, needs you to exchange your currency into local currency of that country.
There is no centralized depository or exchange where foreign exchange transactions are conducted. Currencies are traded electronically ‘over-the-counter’ (OTC) which means the transactions take place via ‘computer networks’ by traders or market participants located worldwide. The FX market is opened 24 hours a day & 5 days a week and the major financial centres are located in New York, London, Paris, Zurich, Frankfurt, Tokyo, Hong Kong, Singapore, Sydney and all the currencies are traded across the world in almost every time zone. This market is super active all the time with frequent changes in the price quotes.

Trading types of forex market and its brief:
There are three ways to trade in forex i.e. the spot market, the forwards market and the futures market.
Spot Market is the largest & popular market where currencies are purchased and sold according to their current values. Demand and suppl...

... middle of paper ... of $100 in FX market.
Let’s take an example; with $100 you bought $10,000 units of euro-dollar at $1.3425 and the value increased to $1.3775, immediately sell them and get your $100 back. In case the value drops at $1.3117, you will lose your $100. Always remember, if the price falls by 1% the entire capital can be lost.
With the use of leverage, you can maximize your gains but it can leave you with massive losses if you went wrong with trading that’s a reason people often consider it like double edge sword. However, you can control your loss by setting its limit. Nowadays, forex brokers has a kind of software which keeps on monitoring your position 24 hours a day and 5 days a week and automatically liquidates when the margins are breached. This process will limit the risk on the money invested and ensures that your account does not have negative balance.

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