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Kosova E.V., Burdakova H.L.

Donetsk National University of Economics and Trade after M. Tugan-Baranovsky

The Forex as the main element of the foreign currency exchange

 

The foreign exchange (currency or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The Foreign Exchange Market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

 Today FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global Forex and related markets is continuously growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International Settlements [1] (figure 1).

Figure 1. Main foreign exchange market turnover, 1988 - 2007, billions of USD [2].

Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008 [3].

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc, and the need for trading in such currencies (table 1). The ten most active traders account for almost 73% of trading volume.

Table 1

Top 10 currency traders, % of overall volume, May 2008

Rank

Name

Volume

Rank

Name

Volume

1

 Deutsche Bank

21.70%

6

 JPMorgan

4.19%

2

 UBS AG

15.80%

7

 HSBC

4.10%

3

 Barclays Capital

9.12%

8

 Lehman Brothers

3.58%

4

 Citi

7.49%

9

 Goldman Sachs

3.47%

5

 Royal Bank of Scotland

7.30%

10

 Morgan Stanley

2.86%

 

The international currency market Forex is a special kind of the world financial market. Trader’s purpose on the Forex to get profit as the result of foreign currencies purchase and sale. The exchange rates of all currencies being in the market turnover are permanently changing under the action of the demand and supply alteration. The latter is a strong subject to the influence of any important for the human society event in the sphere of economy, politics and nature. Consequently current prices of foreign currencies evaluated for instance in the US dollars fluctuate towards its higher and lower meanings. Using these fluctuations in accordance with a known principle “buy cheaper – sell higher” traders obtain gains. Forex is different in compare to all other sectors of the world financial system thanks to his heightened sensibility to a large and continuously changing number of factors, accessibility to all individual and corporative traders, exclusively high trade turnover which creates an ensured liquidity of traded currencies and the round - the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open.

Just as on any other market the trading on Forex, along with an exclusively high potential profitability, is essentially risk - bearing one. It is possible to gain a success on it only after a certain training including a familiarization with the structure and kinds of Forex, the principles of currencies price formation, the factors affecting prices alterations and trading risks levels, sources of the information necessary to account all those factors, techniques of the analysis and prediction of the market movements as well as with the trading tools and rules. An important role in the process of the preparation for the trading on Forex belongs to the demotrading (that is to trade using a demo-account with some virtual money), which allows to testify all the theoretical knowledge and to obtain a required minimum of the trade experience not being subjected to a material damage.

The foreign exchange market is unique because of: its trading volumes, the extreme liquidity of the market, the large number of, and variety of, traders in the market, its geographical dispersion, its long trading hours: 24 hours a day except on weekends (from 10pm UTC on Sunday until 9pm UTC Friday), the variety of factors that affect exchange rates, the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes) the use of leverage.

Literature:

1. Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007 – Final results. - The mode of access: <http://www.bis.org/publ/rpfxf07t.pdf>

2. Forex Statistics. - The mode of access: <http://www.understandmarket.com/index.php?categoryid=81>

3. Euromoney's annual FX Poll. - The mode of access:  <http://www.euromoneyfix.com/Article.aspx?ArticleID=1928002>