Currency market or foreign exchange market or forex market is an over the counter market where trading of currencies is done the rate determined here is foreign exchange rate which includes buying, selling, and exchange of currencies at the current or determined price this market is the largest market in terms of trading volume which is followed by credit market. Large International banks and financial centers are the main participants of this market.
In this market currencies are always traded in pairs this market works with financial institutions and there are several levels on which it operates behind the scenes are the banks which transform or turn into dealers or small financial firms and involve in larger quantities of currency trading as most of the financial firms are banks it is also called as interbank market trade occurs in large quantity involving hundred millions of dollars this market greatly assists international trade and investment by allowing currency conversion and it also permits US business to import and export goods in other countries.
In this market typical trading takes place as a buyer purchases some quantity of currency in the exchange of or by paying some quantity of another currency this market’s modernized form began in 1970 this followed the three decades of government restrictions due to the Bretton Woods system which set out the rules for currency trading.
Some of the characteristics of forex or currency market are-
This market has a higher trading volume which represents high asset class leading to high liquidity. The market is continually operational that is 24 hours in a week except for weekends it has low margins as compared to other markets in which there is a fixed income and this market uses leverage to improve or enhance profit or loss margins.
Also in this market, there is spot transaction which is a two day delivery which settles the next day as opposed to future contracts in this trade there is a direct exchange between two currencies and has the shortest time frame.
Then there is a forward contract in this one currency is not exchanged until a future date is specified in this contract the buyer and seller both agree upon some future date to exchange the currencies.