Forex Transactions

What is Forex trading?

Forex is just another name for the foreign exchange markets.  Unlike the NASDAQ or DOW, these markets are open twenty-four hours a day and have a daily trading turnover of almost $4 trillion.  Another difference between other markets is that the majority of forex trading is done either using computer or over the phone.  In the past, most forex transactions were conducted by financial institutions and larger corporations.  However, more recently, retail investers having been using forex trading platforms to get in on the action.

What exactly is being traded in Forex transactions?

Very simply, Forex transactions are merely converting one type of currency to another type of currency.  Forex traders will look to exchange a currency when the exchange rate favors their transaction.  Just like with commodities, foreign currencty futures are also traded via various futures exchanges or the interbank market.


How is the Forex market different from other markets?

The foreign exchange market is different in several key areas:

* The trading volume is massive
* unlike other markets, the forex market is truly global
* the forex market operates 24 hours a day on weekdays
* the profit margins are typically lower than other markets

What are the different types of Forex transactions?

* Spot - A spot transactions is a direct exchange between two currencies.  Typically this is a two-day delivery transaction and it has a shorter time frame that other types of Forex transactions.
* Forward – A forward transaction is different from a spot transaction in that money doesn’t actually change hands until a later date.  Two parties agree on a future exchange rate and a date for their transaction and their exchange happens on that date regardless of the exchange rates at that time.
* Swap – This is the most common type of Forex transaction.  In this transaction, the trading parties exchange currencies for a determinted length of time and agree to reverse the transaction at a later (agreed upon) date.
* Future – Much like commodity futures, forex futures are standardized and traded on a specific forex futures exchange.  The length of the contract for a forex futures transaction is typically around three months.
* Option – The Forex options market is a very large and highly liquid options market.  In Forex options, the owner of the option has the right to exchange money from one currency to another at a pre-arranged rate of exchange on a particular date.

Which factors can affect foreign exchange rates?

Long story short, almost anything.  As you might imagine, the Forex market is incredibly complicated.  Common factors that can affect exchange rates are governmental economic policies, governmental budget surpluses and deficits, the economic growth and health of the country as well as the political conditions in the government.

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