Forex Market
Forex is the largest and most liquid capital market due to the easy access of the global world toward finance, trade and commerce. The trade and exchange of currency at international level occurs for the sake of doing business. There are a lot of challenges and risks within the trade of currency. Rogue traders usually suffer many challenges in affecting currency value due to massive transaction systems. Inter bank dealing investors can get advantage of the contribution of the system to market transparency.
Currency Exchange and Trade through Forex
Forex is a kind of modern invention for trading currency at the international level for the sake of conducting trade and business across borders. There is no centralized exchange, the currency exchange occurs electronically among the traders through computer networks all over the world. It uses three venues including futures markets, spot markets, and forwards markets for trade. The spot market is the biggest of all of them including future and forward markets. It serves as a base for other markets as an underlying asset. Mostly the FX market is the preference of many people due to its trading through the spot market. On the other hand, people use future and forward markets for the sake of hedging the risks or challenges of foreign exchange to a specific date in their companies and financial institutions. Companies can buy and sell the contracts before their expiry. Both contracts are usually settled for cash at the relevant exchange and are legally binding.
Significance and Purpose of Spot Market in Forex Trading
In the forex trading, the spot market has been considered the largest due to its greatest trading performance for the futures and forwards markets in the largest underlying real capital. Based on trading cost, the spot market buys or sells the currencies. The price varies according to the demand and supply among the customers and the market. It can be calculated based on the rates of contemporary interests, economic condition, attitude or inclination toward current politics, and the future performance of the currencies of different countries against each other.
The final agreed deal is called a spot deal. In this deal, one party provides the currency to the counterparty upon which both are agreed and get a specific asset of another currency according to the value of exchange rate regarding their agreement. So, the transaction is bilateral. The settlement occurs in the form of cash after the closure of a position. In the spot market, the dealing with the transactions does not occur in the future. Hence, it occurs in the present and usually requires a pair of days for settlement.
Purposes of Forwards and Futures Markets on Forex Trading
On the other hand, forwards and futures contracts are private and standardized agreements among two parties. In forward contracts, both parties purchase a currency on the upcoming date and at a current cost in the OTC market. While futures contracts, both parties get the currency delivery at an upcoming time and present cost. The future contracts do this on exchange rather than OTC.
Concluding Benefits of Forex
Hence, forex is the largest financial market all over the world due to easy access without any large investment, accounts with free demo for practicing it without risk, direct transactions among trading parties, the small cost of transactions, leverage ability for opening a decent position with a small price, ease in getting and delivering assets and dependence of these assets cost on states’ condition.
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