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QUESTIONS
The Forex Market
Unlike other financial markets, the foreign exchange (Forex) market
has no central location. There is no stock exchange and there are no
set market hours. Rather, the Forex market is an electronic network
of approximately 5,000 banks around the world that exchange money
through electronic trading systems. It is a global market and, as
such, operates 24 hours a day, from Sunday through Friday,
corresponding with the opening and closing of financial centers
around the world. Any time, day or night, there should be buyers and
sellers somewhere in the world.
The 24 hour market means that exchange rates and market conditions
can change at any time in response to developments that can take
place at any time. Traders must be alert to the possibility that a
sharp move in an exchange rate can occur during an off hour,
elsewhere in the world.
Forex Trading
A large portion of all foreign exchange deals are done in the spot
Forex market and that is where CFS FOREX Forex & Futures operates. A
spot transaction represents a direct exchange of one currency for
another at the current rate. It is important to know that when
buying currencies in the spot market, you are not actually
purchasing a big pile of cash or coins, rather you are purchasing a
bank deposit denominated in the particular currency at a bank in the
particular country.
The term "Foreign Exchange" refers to the simultaneous buying of one
currency and selling of another, which is why currencies are always
quoted and traded in pairs. An example would be Euro/US Dollar (EUR/USD)
or US Dollar/Japanese Yen (USD/JPY). In order to buy a particular
amount of the first (or base) currency, you must sell a certain
amount of the second (or terms) currency. That certain amount of the
second currency you must sell is determined by the exchange rate.
The forces of supply & demand in the market determine the exchange
rate. Every currency pair has a different unique exchange rate.
In the foreign exchange market there are always two prices for every
currency - one price at which sellers of that currency want to sell,
and one price at which buyers of the currency want to buy. The
buying price is called the bid and the selling price is called the
ask. The difference between the bid and ask prices is called the
spread. A market maker must quote both a bid and an ask price for
any currency for which he is making a market.
All Forex transactions involve two currencies. You are
simultaneously buying one currency and selling the other in the
pair. The first currency in any given pair (e.g. EUR/USD) is called
the base currency and the second is called the quote currency. A
trader always buys or sells a fixed amount of the base currency, in
standard lots of 100,000 units. For example, if a trader buys EUR/USD,
he is buying 100,000 Euros and selling the necessary amount of US
Dollars as prescribed by the current exchange rate. When speaking,
the base currency is always stated first. For example, a quote for
"Dollar-Yen" means that the Dollar is the base currency in the pair.
Traders always think in terms of how much it costs to buy or sell
the base currency, so bid and offer quotes are always for the base
currency.
The Traded Currencies
The Dollar, Euro, Yen, and Pound are the most traded currencies.
They combine for a huge bulk of the trading transactions in any
given day. Corporations and banks have known this for years, and
have often used Forex for hedging purposes. With the increase in
global trade, multinational corporations have used the Forex market
to manage their risk in changes in currency rates. The most common
currency pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF, which
together totals 63 % (two-thirds) of all Forex spot trades.
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