Although we are not aware, the foreign exchange market has a profound impact on our everyday life, the exchange of currencies more obvious that we have to do during a visit of a foreign country, to the how our price prices and sometimes even the wages fluctuate due to the variance of the value of our currencies compared to those of foreign countries with which we operate. Even the money under your mattress is changing constantly!
What is the foreign exchange market?
We define a market as a place where people could meet for buying or selling things, whether tangible as in a food market, or virtual like websites like eBay.
There are well-established financial markets in the world of the New York Stock Exchange (NYSE) physically located and the Chicago Mercantile Exchange (CME), or on electronic markets based as NASDAQ. In these commercial markets are able to exchange shares, raw materials, bonds or currencies. On the foreshield market, also known as Forex, buyers and sellers have a place to exchange dollars, euros, books, yen, etc.
But why is it need of a foreign exchange market? The foreign exchange market is an important tool for providing commercial transactions between different currencies. Imagine, for example, the Chinese manufacturer who has an order of ten thousand t-shirts of a European wholesaler. The Chinese manufacturer, most likely willing to pay for a US dollar from the European wholesaler, who will have to change its euros in US dollars to pay the Chinese manufacturer. At the same time, the Chinese manufacturer will have to buy cotton on the cotton market, negotiated in US dollars. In the end, this manufacturer will probably change the US Chinese yuan dollars, spend it on goods and salaries in China, or maybe he or she thinks about the opening of a company on the England, so will change some of the US dollars in Colombia-books. Without a foreign exchange market, none of these operations could be enough. Having a free market where thousands of participants could decide on the value of an asset is the most logical and just way of giving value.
The foreign exchange market provides machinery to make international payments, for the transfer of purchasing power from one currency to another, and ensure that the relative value of each currency is clear and universal.
There were even money changers in ancient Greece, but the currencies we know has evolved a lot since. Since the 1970s, deep structural changes have occurred in the global financial system and the economy:
A change in the international monetary system, the fixed exchange rate indicated on the Bretton Woods agreements, at floating exchange rates in the early 1970s “to the present day
Financial deregulation in the world, leading to greater freedom for financial transactions and increased competition between financial institutions.
The liberalization of international trade, in the context of multilateral trade agreements. Huge expansion of international capital transactions.
Huge progress in technology, allowing the instantaneous transmission of market and fast information and reliable performance of financial transactions.
The development of new financial instruments and progress in understanding the financial system.
All these elements offer fertile ground for development in currency trade.
In the first decade of the 21st century, the great technological advances in the Internet trade have allowed the small retail trader an easy access to the foreign exchange market, traditionally the field of global banks.
Who are the participants?
Because you will trade with (or maybe against) them, it is very important to know who are the foreign exchange market actors: