Foreign exchange or forex are OTC derivatives on currency pairs (exchange rates). It is the largest financial market in the world, decentralized and specific for currency trading.
It includes trades between major banks, central banks and other financial institutions, multinationals or governments. Small investors only participate indirectly, through brokers or banks.
- Economic policies, such as initiatives to attract foreign investment.
- Social, political and economic events. An unexpected event and its potential collateral damages will reflect in the exchange rates.
- Trade flows, since commercial trades will impact on exchange rates.
- Central banks, because their interventions will have effects on exchange rates, given the expected rise or fall in currency demand.
- Interest rate differential, that will impact on exchange rates since investors will be bound to prefer assets with higher interest rates.
The main players are governments, central, investment and commercial banks, asset managers, brokers, companies, speculators and private investors.
Forex is the largest financial market in the world, decentralized and specific for currency trading. It is a global market with no physical existence or marketplace.
Postdated sale and purchase deals of currency pairs are continuously being made by phone or through electronic platforms.
- Spot: Bilateral transaction involving the exchange of one main currency for another at an agreed-upon exchange rate value. Settlement is normally carried out two days after.
- Forward: The start date, defined when opening a position, should be of three or more days. In such case, the investor is defining initially all the rollover adjustments that will be made up to the forward settlement date.
- Option: A contract that gives you the right to buy or sell a certain amount of currency at a specific interest rate at a specific date, but implies no obligation. For that right, the buyer grants the seller a monetary compensation (prize).
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