FX speaks about the foreign exchange of money in a wide marketplace around the world with an electronic mode anytime, anywhere.

1. FOREIGN EXCHANGE(FX)
Capstone
Finance for Everybody(F4E)
-by Suriya V

2. General Concept of Forex or FX
• Foreign Exchange (forex or FX) is the trading of one currency for another.
• For example, one can swap the U.S. dollar for the euro. Foreign exchange
transactions can take place on the foreign exchange market, also known as
the Forex Market.
• The forex market is the largest, most liquid market in the world, with trillions of
dollars changing hands every day. There is no centralized location, rather the forex
market is an electronic network of banks, brokers, institutions, and individual
traders (mostly trading through brokers or banks).

3. Key-players of FX

4. FX- Hierarchy

5. Working of FX
• The market determines the value, also known as an exchange rate, of the
majority of currencies. Foreign exchange can be as simple as changing one
currency for another at a local bank.
• It can also involve trading currency on the foreign exchange market. For
example, a trader is betting a central bank will ease or tighten monetary
policy and that one currency will strengthen versus the other.

6. Size of the Foreign Exchange Market
• The foreign exchange market is unique for several reasons, mainly because of its
size. Trading volume in the forex market is generally very large.
• As an example, trading in foreign exchange markets averaged $6.6 trillion per day
in April 2019, according to the Bank for International Settlements, which is owned
by 62 central banks and is used to work in monetary and financial responsibility.
• The largest trading centers are London, New York, Singapore, and Tokyo.

7. Trading in the Foreign Exchange
Market
• The market is open 24 hours a day, five days a week across
major financial centers across the globe. This means that you
can buy or sell currencies at any time during the day.
• The foreign exchange market isn't exactly a one-stop shop.
There are a whole variety of different avenues that an investor
can go through in order to execute forex trades. You can go
through different dealers or through different financial centers
which use a host of electronic networks.

8. Differences in the Forex Markets
• There are some fundamental differences between foreign exchange and other
markets. First of all, there are fewer rules, which means investors aren't held to as
strict standards or regulations as those in the stock, futures or options markets. That
means there are no clearing houses and no central bodies that oversee the forex
market.
• Second, since trades don't take place on a traditional exchange, you won't find the
same fees or commissions that you would on another market. Next, there's no cut-
off as to when you can and cannot trade. Because the market is open 24 hours a day,
you can trade at any time of day. Finally, because it's such a liquid market, you can
get in and out whenever you want and you can buy as much currency as you can
afford.

9. The Spot Market
• Spot for most currencies is two business days; the major exception is the
U.S. dollar versus the Canadian dollar, which settles on the next business
day. Other pairs settle in two business days. During periods that have
multiple holidays, such as Easter or Christmas, spot transactions can take as
long as six days to settle. The price is established on the trade date, but
money is exchanged on the value date.

10. The Forward Market
• A forward trade is any trade that settles further in the future than spot.
The forward price is a combination of the spot rate plus or minus forward
points that represent the interest rate differential between the two
currencies. Most have a maturity less than a year in the future but longer is
possible. Like with a spot, the price is set on the transaction date, but
money is exchanged on the maturity date.
• A forward contract is tailor-made to the requirements of the counterparties.
They can be for any amount and settle on any date that is not a weekend
or holiday in one of the countries.

11. The Futures Market
• A futures transaction is similar to a forward in
that it settles later than a spot deal, but is for
standard size and settlement date and is traded
on a commodities market. The exchange acts
as the counterparty.

12. Example of Foreign Exchange
• A trader thinks that the European Central Bank (ECB) will be easing its monetary
policy in the coming months as the Euro zone's economy slows. As a result, the
trader bets that the euro will fall against the U.S. dollar and sells short €100,000 at
an exchange rate of 1.15. Over the next several weeks the ECB signals that it may
indeed ease its monetary policy. That causes the exchange rate for the euro to fall to
1.10 versus the dollar. It creates a profit for the trader of $5,000.
• By shorting €100,000, the trader took in $115,000 for the short-sale. When the euro
fell, and the trader covered their short, it cost the trader only $110,000 to repurchase
the currency. The difference between the money received on the short-sale and the
buy to cover is the profit. Had the euro strengthened versus the dollar, it would have
resulted in a loss.

13. Key takeaway
• Foreign Exchange (forex or FX) is a global market for exchanging national
currencies with one another.
• Foreign exchange venues comprise the largest securities market in the
world by nominal value, with trillions of dollars changing hands each day.
• Foreign exchange trading utilizes currency pairs, priced in terms of one
versus the other.
• Forwards and futures are another way to participate in the forex market.