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The foreign exchange market or Forex is a global market for the exchange of currency. Forex is responsible for determining the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at pre-determined prices. It is the largest market in terms of trading volume. This market works through financial institutions which operate at different levels. Banks are the financial firms called “dealers”, they are responsible for dealing or exchange of a large quantity of foreign exchange, so it is called interbank market although various other companies like insurances companies or other financial firms are also involved. The main participants in these markets are the international banks. Trade between this dealer can be very large which may involve millions of dollars. Due to the issue regarding power or authority due to the involvement of two currencies, Forex acts as a supervisory entity regulating the actions of both parties involved in the transaction.

The foreign exchange market helps in international exchange of currency by permitting the conversion of currency. For example:- there is trade business in the United States to import goods and services from states which are a member of European Union, and they pay Euros, even though their income is in United States Dollars. It also supports direct speculation and evaluation of the relative value of currencies and the carry trade speculation, based on the difference in interest rate between two currencies. The exchange market is exclusive as a result of the subsequent characteristics:

  • It has a huge trading volume which represents the largest asset class in the world with high liquidity.
  • It performs its continuing operations of 24 hours a day except on weekends. On Sunday trading starts from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York).
  • There are a variety of factors that affect the exchange rate.

The foreign exchange market has the most liquidity as compared to any other financial market. There are various traders of financial markets such as governments, central banks, commercial banks, financial institutions, currency speculators and individuals. According to the 2010 Triennial financial organization Survey, coordinated by the Bank for International Settlements, average daily turnover was $3.98 trillion in April 2010. Most developed countries allow the mercantilism of spinoff merchandise (such as futures and choices on futures) on their exchanges. The use of derivatives is growing in several rising economies. Countries like the Republic of Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.

There has been an increase from Apr 2007 and Apr 2010 of 20%, and it has doubled since 2004. The increase in turnover can be due to a number of factors:

  • Due to the growing importance of foreign exchange as an asset
  • The increase in trading activity by high-frequency traders
  • The emergence of retail investor
  • Increase in market liquidity
  • Ease in online trading of foreign exchange

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  • Commercial companies

Companies seek foreign exchange to pay for goods and services, so they cover an important part in the foreign exchange market. But they trade fairly small amount as compared to other participants and their trade have short term effect on market rates.

  • Central bank

Central banks of any country play a vital role in the exchange process. They are responsible to control the money supply, inflation rates, interest margins for a currency. At the time of crisis, they can use their substantial foreign exchange to stabilize the market. The mere expectation or rumor of a financial organization interchange intervention can be enough to stabilize the currency.

  • Foreign exchange fixing

Foreign exchange fixing is that the daily financial rate of exchange fixed by the central bank of every country. The idea is that central banks use the fixing time and rate of exchange to analyze the behavior of their currency. Fixing exchange rates mirror the important worth of equilibrium within the market. Banks, dealers, and traders use fixing rates as a market trend indicator.

  • Investment Firms

Investment management firms are those who typically manage large accounts on behalf of customers such as pension funds and endowments and use the foreign exchange market to facilitate transactions in foreign securities. For example, associate degree investment manager bearing a global equity portfolio has to purchase and sell many pairs of foreign currencies to obtain foreign securities purchases. Some investment management companies even have additional speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk.

  • Retail traders

Individual retail speculative traders represent a growing phase of this market. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely are controlled and regulated in the US by the Commodity Futures Trading Commission and National Futures Association, have previously been subjected to periodic foreign exchange fraud. A number of the interchange brokers operate from the united kingdom below monetary Services Authority rules wherever interchange commercialism. There are unit 2 main types of retail foreign exchange brokers giving the chance for speculative currency trading: brokers and dealers or market manufacturers.

Brokers function associate degree agent of the client within the broader foreign exchange market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or "mark-up" additionally to the value obtained within the market.

Dealers or market manufacturers, by contrast, typically act as principals in the transaction versus the retail customer, and quote a price they are willing to deal at.

  • Non-bank foreign exchange companies

Non-bank interchange corporations provide currency exchange and international payments to non-public people and firms. These are also known as "foreign exchange brokers". These corporations disagree from cash Transfer/Remittance corporations therein they often provide higher-value services. The volume of transactions done through Foreign Exchange Companies in India amounts to about US $2 billion per day. Around twenty-fifth of currency transfers/payments in Asian nation area unit created via non-bank interchange corporations. Most of those corporations use the USP of higher exchange rates than the banks. They are regulated by FEDAI and any group action in interchange is ruled by the interchange Management Act, 1999 (FEMA).