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Topicmarkets Foreign exchange (aka forex) is an off-exchange retail foreign currency market
where participants purchase currency in exchange for another (at the current exchange rate).
Compared to the measly $22.4 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely with its $5 TRILLION a day trade volume.
Forex and You
Forex can affect the lives of everyone, regardless if you don't travel overseas or don't invest in currency. Today's world of commerce is such an international one that happenings on the other side of the world can ripple out to all nations.
China is a perfect example of this. The government in China regulates the exchange rate of their currency, and many believe the currency to be undervalued. A undervalued currency means Chinese made goods can be purchased for "less" on the international market. Were the Chinese government to allow the market to dictate the exchange rate the effects would definitely be felt across the globe, even for Americans who've never left America.
The reasons why an individual - or institution - would want to exchange money range to a myriad of different reasons, but the 3 main demographics include large corporations and institutions, speculators (investors) and tourists.
A tourist traveling from the United States to Germany, for example, will need the local currency (EURO), as common shops, taxi cabs, etc. will most likely not accept US Dollars. Typically the airport, hotels and other tourist destinations will have services to exchange just about any currency into the local tender.
Large Corporations and Institutions
A large portion the global foreign exchange market consists of corporations and institutions, who often exchange currency for non-investment purposes: the need to meet payroll in other countries, to pay for services from a foreign factory, mergers and acquisitions, etc.
Investors are attracted to the forex market because of its possibilities and advantages (which will be discussed in more detail in the 3rd email of this series). For example, investors enjoy the added liquidity and volume forex has to offer.
The FOREX (FOReign EXchange) Market is a cash-bank market established in 1971 when the US went off the gold standard adopted in the 1930's. At that time the US had to drop the gold standard after the 1929 crash and the British Pound became the currency of choice and the world's currency.
There have been other times before in Western History when paper money could be exchanged for gold. Throughout most of the 19th century and up to the outbreak of WW1, the world was on so-called "Classical Gold Standard" with all major countries participating in it. A gold standard meant that the value of a local currency was fixed at a set exchange to gold ounces (1 Troy ounce = 31.1 Grams).
After WW II the world needed a stable currency and a monetary agreement was reached by July 1944: seven hundred and thirty delegates from forty-four allied nations came together in Bretton Woods, NH, US The reason for the gathering was the United Nations Monetary and Financial Conference. For the first time in history monetary relations amongst the world's major industrial states were governed; it was the first time a system was implemented, in which the rules for commercial and financial relations were negotiated and agreed upon. The dollar's role was formalized under the Bretton Woods monetary agreement and other nations set official exchange rates against the Dollar, while the US agreed to exchange Dollars for gold at a fixed price on demand by central banks.
Collaspe of Bretten Woods, Birth of forex
In 1971 Aug 15 after the collapse of Bretten Woods, the pegged exchange rates on US dollar if abanded and the it give birth to floating exchange rate as forex into speculation.
The main participants in the Forex market are: central banks, commercial banks, financial institutions, hedge funds, commercial companies and individual investors. The main reasons they participate in the Forex market are: Profit from fluctuations in currency pairs (speculating) Protection from fluctuating currency pairs which is derived from trading goods and services (Hedging) With technological development, the World Wide Web has become a great trading facilitator, as it can provide individual investors and traders with access to all the latest Forex news, technology and tools.
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