FOREX

The term Forex stands for Foreign Exchange Market and is the market for trading international currencies. Within Forex, various individuals or entities such as banks, institutional traders and companies operate by exchanging one or more currencies at an agreed price. The average daily volume traded on Forex is equal to 5 billion dollars, so it can be included among the most important financial markets in the world. Moreover, Forex is certainly the most liquid market ever: sudden news and events can quickly change the value of currencies, which makes Forex a very popular market. A brief history of Forex Forex and foreign exchange history have their roots in the late Middle Ages, a historical period where kings, emperors, clergy and aristocrats continually printed money to meet specific economic needs. At that time, the recovery of European exchanges went hand in hand with a substantial monetary circulation, which gave rise, in fact, to the exchange of currencies. For many years, currency trading was unregulated. The first regulation took place in 1944, towards the end of the Second World War, with the Bretton Woods agreements. This pact, which had the burden of supporting the economies most strained by the war, outlined a system of fixed exchange rates for each currency adhering to the agreement. Each monetary currency was valued about the value of the US dollar, which was established concerning the value of gold, at the time 35 dollars. The Bretton Woods agreement lasted until 1973, after which time the currency market was freed from these rigid impositions. The situation varied again in the mid ‘90s, when the growing computerization allowed private investors to enter the currency exchange (and no longer just banks), giving life to the current Forex.

The business of trading currency with a view to profit is called Forex Trading (or Trading on Forex). In detail, it concerns the possibility of buying and simultaneously selling a currency to make a profit. The element that brings traders closer to Forex trading is undoubtedly the volatility of currencies, a characteristic which, while on one hand, it can affect the profit, on the other, implies a greater exposure to risk. The gain and loss in Forex trading are determined by the change in the value of a currency. Several reasons stimulate the fluctuation of a currency, and among the main ones, we can include economic, financial and geopolitical reasons. Forex contains most world currencies, and the market can operate thanks to a global interbank network, equipped with four important trading centers: London, Tokyo, Sydney, and New York. This distribution allows you to cover all time zones. How Forex works In Forex banks, professional investors and individual investors (the latter can access it through intermediaries) meet to give life to currency exchanges. The exchanges take place only in electronic form (OTC) and consist of selling and purchasing a currency for speculative purposes. We find three different financial instruments in the Forex market: the Spot Market, the Forward Market, and the Futures Market. The Spot market refers to an immediate temporality, while the Forward and Future markets are instruments that operate in the future.

The Spot Market is the backbone of Forex trading. The operations of the other Forward and Futures instruments are based on the Spot market. In this market, currencies are bought and sold at the current price, a value determined, for each currency, by the flows of supply and demand. With this instrument, the exchange of financial instruments is immediate.

In the forward market, the purchase or sale of a currency is fixed at a predetermined price. It should be noted that the transaction does not take place until the stipulated price is reached. In the Forward Market, there can be two different contracts: an open contract, namely without an expiration date, and a closed contract, that has limit date, by which, if the price is not reached, the transaction is cancelled.

In the forward market, a purchase or sale of a currency is fixed at a specific price and on a specific date. Unlike the Forward, the Future is binding, so the parties must arrange the exchange by the set date.

To better understand the Forex world, it is necessary to deepen the concepts of base currency and currency pairs. The base currency is the first one that is shown in the presentation of a currency pair. In the case of the GBP / USD currency pair, the base currency will be GBP, the British pound. US dollars, or USD, are instead called secondary currency. What does it mean? Within the currency exchange envisaged by our example, GBP are bought or sold in exchange for a certain USD amount, depending on the exchange rate. All currencies are always traded in pairs. There are currently 4 macro-categories of currency pairs. Here they are in detail: – Major pairs: these are the currency pairs that affect about 80% of Forex traders. Their appreciation is due to the fact that such currencies support the world's most important economies. We can highlight the main ones: GBP / USD, EUR / USD, USD / JPY, and USD / CHF. – Minor pairs: this category of currency pairs includes all those combinations between currencies usually included in the major circuit but not parameterized to the dollar (USD), therefore quoted only among themselves, such as the following: GBP / JPY, EUR / CHF, and EUR / GBP. Regional pairs: These are classified according to their geographical areas, such as the Asia-Pacific area (AUD / NZD, AUD / SGD) or the Scandinavian area (EUR / NOK). -Exotic pairs are currency pairs where a major currency is compared with a currency relating to an emerging country. For example, the EUR / MXN (Euro – Mexican Peso) and USD / PLN (US Dollar – Polish Zloty) pairs.