Fundamentals of FOREX Trade

Introduction:

The FOREX (foreign exchange) market or currency market is the market where the currencies are traded abroad. It consists of a large number of agents around the world who buy and sell currencies of different nations, thus allowing the realization of any international transaction. This trade consists of a set of agents, buyers and sellers of foreign currency, who are in different locations around the world and communicate by use of the mobile phone network, internet or other media technologies.

The FOREX trade market is a mechanism that allows, an impersonal and efficient way, to purchase foreign currency. This, in turn, facilitates international trade, because it transfers purchasing power from one currency to another, so agents from a country can buy, sell and establish other business relations with the agents of other nations. So, the exchange market includes exporters, importers, domestic tourists abroad, foreign tourists in a country, investors, and so on.

Classification of the traders:

Most economists agree that the currency market can be classified as follows:

1. Non-financial companies (exporters, importers, etc.) or, tourists, immigrants, investors, and so on.
2. Multinational companies: they conduct their transactions in terms of what has been called as a vehicle currency: the US dollar.
3. Commercial banks: they act as intermediaries between buyers and sellers of foreign currencies.
4. Central Banks: they are the regulatory bodies in a country and on them depends not only the exchange rate, but also the regime or exchange rate system as a whole, i.e. pre-determining exchange rates, changing the income in dollars, keeping an eye on the national currency etc.

The main functions of FOREX trade can be summarized as follows:

It deals with the transfer of funds or buying power of a country and its respective currency against another, providing the ability to make payments denominated in currencies of other nations, which is, the price of a currency in terms of another.

It helps in the creation of a credit function in the sense that a lot of international transactions are made using credit facilities provided by the foreign exchange market. This is necessary because the goods require some time to be transferred from a country to another. That's why a series of mechanisms such as letters of credit, bills of exchange has been created.

CONCLUSIONS

The FOREX trade market is the backbone of a nation's economy as it controls the flow of funds from the international market and it also creates new avenues of international trade.

Article Written By By Rajot Chakraborty