Dear Steven,
Your post on the foreign exchange market defining it as the conversion of purchasing power from one currency into another is accurate. It is also called the Forex market (FX) and is the largest and most liquid financial market in the world with an estimated turnover of $6.6 trillion every day. The global foreign exchange market has two levels – Over the Counter market (OTC) which entails companies and individuals trading. The other tier is the interbank market where few large banks exchange currencies with one another. OTC trading has been made easier for individuals and companies as new companies have set online platforms through which people can trade from anywhere. In the case of interbank trading, the concerned banks are few but the volume being traded is large and they get to dictate what the exchange rates are. In the case of OTC tier, the price is determined by forces of demand and supply. The biggest OTC trading center is the United Kingdom (UK) accounting for over 43.1% of the worlds forex trading. Therefore, the OTC market price is normally London’s market price. Investing in the forex market is quite volatile as compared to the domestic market because the forex market is high risk.
Steven’s post on the two types of trade in the foreign exchange market was also accurate. The forward market is when a buyer and seller agree to sell and buy forex at a future date and a given price. The spot market is when a seller and buyer agree to sell and buy on that same day with the price dictated by the market. However, there is a third trade called the swap market where a dealer buys currency on the spot market and sells the same amount on the forward market.
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