The forex market

Forex stands for Foreign Exchange.  Forex is the nickname given to the universal currency exchange market, where currencies are traded against each other in pairs and exchange rates vary constantly.

Economic importance

The global FOREX market is the second market in the world in terms of overall volume, only behind the interest rates market. It is nevertheless the most concentrated and the first for the liquidity of the most traded assets such as the euro / dollar.

To give an idea of the liquidity in circulation, the average daily trading volume was $3,100 billion in 2007, with $1,000 billion in spot transactions and $2,100 billion in derivatives transactions.

Almost all transactions are conducted over the counter, according to a three-year study of the Bank for International Settlements (BIS). The breakdown of transaction volume was 53% between banks, 33% between a bank and a fund manager or a non-bank financial institutions, 14% between a bank and a non-financial institution (such as individuals who use the platform of the banks).

In every major bank, the operators (the traders) work nearly around the clock from different locations. A team based in Asia or Australia succeeds another one located in Europe and a third one located in North America, and so on.

However, despite its global nature and the schedule of macroeconomic data  between continents, 31% of the total market activity is still physically located in London (according to the BIS).

In its latest triennial review, the BIS (Bank of International Settlements) has shown that an increasing number of individuals are choosing to invest in the Forex. Although they still represent a very small minority of transactions and volumes, a dedicated private investors market has grown in parallel to the interbank market.

The number of trading platforms available to them on the Internet keeps on increasing, as well as the tools for real-time information once reserved for professional traders in the rooms. Now, the active foreign exchange market trader can invest minimum amounts and thanks to the huge leverage allowed, trade almost like a professional trader. Information tools broadcast in real-time news and fundamental forex information (economic indicators) and offer individuals real time trading conditions.

History

The foreign exchange market has existed in its present form, called floating exchange rate regime since March 1973 with the termination of fixed exchange rates of various currencies against the dollar dating from the Bretton Woods Act of 1944.

But the foreign exchange market has existed in one form or another since the birth of trade and economies in Antiquity. In Middle Age France, traders use to gather at the Pont aux Changes in Paris (Exchange Bridge) to exchange all sorts of currencies.

Traded products

Cash is called spot and correspond to the most basic currency exchange taking place immediately. The main pairs processed in 2004, according to the BIS were the euro/dollar for 28% of the market, the dollar/yen for and the sterling /dollar (the cable) for 14%.

Despite the strong development of the euro, the dollar remains the dominant currency, present in 89% of all transactions (37% against the euro, 20% for the yen and 17% for the pound sterling, all on a total of 200% since each transaction involves two currencies). For a non-European currency XXX, a transaction between the euro and the currency is usually split into a EUR / USD and USD / XXX. The currency pair EUR / XXX is called a cross.

Non cash products are term products maturing some time in the future. They all belong to the so-called derivatives markets. The main products in this category are outright forwards, foreign exchange swaps, futures as well as options and exotic derivatives.

The forex options market is the most diverse and most inventive of the options markets. It is responsible for creating virtually all forms of so-called exotic options or second generation options (barrier options, Asian options, options on options, and numerous forms of structured products).