One of the largest financial market in the whole world is the Forex market which is trading around $1.5 trillion each day. Trading in the Forex market is connected through the phones and by the electronic communication networks (ECNs) between the participants in the various markets around the world, rather than having one particular central location.
Due to high demand of currencies, the market is open for 24 hours a day from 5pm EST on Sunday until 4pm EST on Friday. Due to the availability of traders across the world which are handling the meeting demands for a particular currency, so the international market has the scope of trading currency.
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Currency is the basic requirement of every business and person, and is also needed around the world for international trade by central banks and the global businesses. Central banks are particularly relied on the foreign exchange markets since 1971- at the time when fixed currency markets ceased to exist because of the gold standard was dropped. Since that very time, most of the international currencies have been “floated” rather than tied to the value of gold.
Changes in economic and political instability and infinite other perpetual things also affect the currency markets. Central bank seeks to stabilize their country’s currency by trading it on the open market and also keeps a relative value compared to other world’s currencies. Business that operates in multiple countries seek to mitigate the risks of doing business in the foreign markets and hedge currency risk.
In order to hedge the risk, businesses are entering into the currency swap. This gives them the right but not the obligation to buy a set amount of a foreign currency in order to set a price in another currency at a date in the future. Through this strategy they are limiting their exposure to the large fluctuations in currency valuations.
The trades are being conducted through the network of computers rather than any physical change that has the possibility of closing over the time, so there is the ability of the Forex to trade over a 24-hour period and due to the presence of different parts of international time zones also the Forex trade is opened for 24-hours a day. For example, when you hear that the US dollar is being closed at a certain rate, this simply means that was the rate at which market was being closed in New York. This thing happens because currency continues to be traded around the world long after New York’s close, unlike the other securities.
Securities like domestic stocks, bonds, commodities etc., are not required to trade beyond the standard business day in the issuer’s home country because these are not as relevant or in need on the international trade. There is much focus on the domestic market and the demand for trade in these markets is also not very high enough to justify its opening for 24-hours a day, so its meaning is likely that few shares would be traded at 3am in the US.
The Forex market can be split into three main regions: Australasia, Europe and North America, with several major financial centres within each of these main areas. For example, Europe is comprised of major financial centres such as London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct Forex trading for themselves and their clients in each of these markets.
Each day of Forex trading starts with the opening of the Australasia area, followed by Europe and then North America. As one region’s markets close another opens, or has already opened, and continues to trade in the Forex market. These markets will often overlap for a few hours, providing some of the most active period of Forex trading. So for example, if a Forex trader in Australia wakes up at 3 a.m. and wants to trade currency, they will be unable to do so through Forex dealers located in Australasia, but they can make as many trades as they want through European or North American dealers.