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What is Forex ?

Simplifying Forex

The term Forex is derived from the long word, Foreign Exchange and is used to describe the dealings that need the changing of currency types. For example when someone deals with a foreign country it is customary to quote the price in a currency that might differ from the home currency. Here Forex rates are accessed to ascertain what each part to the deal has to pay in the convenient currency types.

In very broad terms, Forex dealings are done when one type of currency needs to be changed into another. One of the strong points of the forex markets has been the possibility that common folks can access the markets far more easily than possible say a good decade or two ago. This has lead to a better understanding of what is forex market and of a broad based deepening of the very markets. It could be taken that as more activities got to be more international in nature, the financial dealings too needed to follow suit too.

Understanding the exchange rates

If someone wanted to change the US Dollars that he has to another currency, say the Euro; the first thing the person has to do is find the prevailing exchange rate for the Euro. This can be done by contacting the numerous banks that are authorized to deal in foreign exchange. If the particular rate at the moment does suit the person, he can then exercise the option to convert the US dollars to the Euro. The one form of currency is replaced by the other and that is the very basic structure of forex transactions.

Now the question arises as to who decides on the exchange rate for a currency and at a particular time? It must be understood that the modern forex markets operate on the principle that each of the currencies being traded are but a commodity. The single force that determines the value of the currency at an instance is primarily the demand for the currency and the subsequent supply. So naturally, if the demand is high as compared to the supply of a currency then the cost incurred in acquiring the currency goes up or gets expensive. Conversely is the case if the supply exceeds the demand for a currency.

Thus in essence the exchange rates are what is decided on by the demand and supply for a particular currency on the forex markets. It should be pointed out that the rates would be dynamic in nature and keeps changing in time as transactions take place and the demand-supply equation changes.

The concept of the trading floor in forex

People that have dealt in securities and equity would be able to relate to a trading floor where the actual matching of the demand and supply of the security takes place. This actually came about as a venue to hand over the physical certificates after the execution of the transactions. But one of the most telling aspects of the forex market is the absence of the actual physical hand-over of currencies at any time.

The typical forex deal would involve the balancing of the books to reflect the actual deal than a typical physical exchange of the currencies. This is safer and a lot faster to execute as well. In fact, the marked success that the paperless deals brought to the currency markets did see this practice been taken up with the broader securities and the equities market too. Thus the forex market is more of a virtual place to match the cross quotes for each set of currencies.

Administering the forex markets

Administering or regulating the traditional equity deals or the securities deals are by far a simple affair when compared to handling the forex deals. This is because most dealing houses would have a registered physical address that can provide a base for establishing jurisdictions. Traditionally the task of managing a forex house is done by the trustees and a strict corporate governance system is followed. This would mean there are the levels of control and each office bearer is given the necessary controls to function and work.

Considering the size of the deals that the typical forex clearing house handles each day, it comes as little surprising that a fair amount of control is needed to ensure the transparencies in the deals. It must be said that the very success of the forex markets lies in the very transparent structures in place as well as the open architecture that the dealers follow for the most part.

The role of currency speculators in forex

Consider any financial system that relies on the pulls and pushes of the demand and supply equations and there is bound to be individuals that would aim at gaining from the fluctuations in the prices. This happens across segments of markets and is not restricted to just the forex deals alone. But what is to be noted is that the size of the profits are much higher in the forex speculations when compared to the more traditional systems; provided the person calls correctly.

Broadly, the role of the speculators in any market is to firstly bring in the liquidity to the markets. If not for these marauders, the cost of each transaction would be so high that the whole system becomes expensive to deal with. As to whether the speculators do indeed make any money at all; that is for the individual to decide and something that should be kept out of general discussions.

Conclusion

The forex markets are in integral part of global trade and today there would be few people that wonder what is forex? The scope and breadth of the application and uses of foreign exchange is so huge that there are very few areas of modern commerce that is left untouched in some way or the other by the forex markets. It could well be like the gold and opium that oiled world trade during the colonial era.

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