TheForeign Exchange Market is a market where the currencies of various nations are bought and sold. It is abbreviated to Forex . The foreign exchange market determines the relative values of different currencies. This is the world's largest market, with about $3 trillion being traded on a daily basis. The scope offoreign exchange is vast, with the market fulfilling purposes ranging from cross-border investment, currency speculation to trade in goods and services. It is a transaction where a party purchases a quantity of one currency by paying a quantity of another currency.
Features of Foreign Exchange Market are:
It has huge trading volume which leads to high liquidity.
It works continuously except on weekends.
There is huge geographical dispersion means it is spread all over the world.
Leverage are used to enhance the profit size.
Components of Foreign Exchange Market:
Banks
Commercial Companies
Investment management firms
Retail Brokers
Hedge Funds
Companies transferring money
How the Foreign Exchange works :
Trading in foreign exchange market takes place through Inter Bank Market. Inter Bank Market is a network of more than thousand banks. Each bank in the market trades directly with each other through Electronic Banking System (EBS). Buy and Sell orders are placed first and after that those orders are matched with the price.In the foreign exchange market trading always occurs in currency pairs. It means that the pricing of the currency is determined by the demand and supply of the currency in relation to the other currency in the pair. Currency pairs are not only bought and sold by only banks but also by the individuals investors via brokers.