As The Time Zones Differ, Trading Is Done Almost 24 Hours A Day

Category: Finance.

Foreign currency trading is done in a foreign exchange market where one type of currency is exchanged or traded for another type of currency.

Players participating in currency trading within a FOREX market are the large banks like Citibank and Deutsche bank, nationalized and government banks, financial institutions and, multinational firms investment companies. Currency trading is regarded as the largest financial market in the world. The daily volume of the present global forex market is around US$ 3 trillion. Trading within a market is done in levels, where a player in a level doesn t have access to other levels. Given the huge size and high liquidity of the markets worldwide, small players cannot easily do trading in a FOREX market. The top level is the inter- bank market comprised of large banks like Deutsche bank, Union bank of, Citibank Switzerland and other banks across the world.

In the top level, the difference between the bid and ask price known as Spread is very minute and is not available to other circles outside. The top ten players sweep off 70% of the total business done in the FOREX trading. As the levels descend, the difference increases mainly due to the volumes traded. Currency trading has almost doubled today since 2001 mainly because of the recongnition of FOREX trading as an investment and asset class and also an increase in the fund management assets of pension funds and hedge funds. Level of access for a player is determined by the line , the money with which one is trading. Commercial companies do currency trading mainly to pay their customers for their good or services and trade in small amounts compared to large banks. Let us see the typical characteristics of a FOREX currency trading.

Investment management companies do trading to manage the pension or endowment or investment portfolio of their customers and are usually in large amounts, because they have to invest in foreign equities for which they need to exchange currency to buy those equities. Due to the over- the- counter nature, the currency markets doesn t trade in a single dollar or a euro rate, but rather a different number of rate applicable only to that particular market. Usually these rates are close to each other. There is no central house or hub or exchange or clearing house as traders deal directly with each due to this OTC nature. Otherwise special traders called arbitrageurs take advantage of the difference in the rates and make huge profits out of it. As the time zones differ, trading is done almost 24 hours a day. Main trading centers across the world are in London, Tokyo and Singapore, New york.

Fluctuations in the rate occur due to changes in the inflation, interest rates of banks, trade deficits and, GDP growth surpluses, cross- border M& A deals, financial health and, economic situations some other macro economic conditions. During creation, the XXX is known as base currency is the strongest and YYY the weakest. Currencies are traded for each other and each pair of currencies is a separate and unique product and usually denoted by XXX/ YYY. Today the US dollar is in almost 88% of the transactions followed by Euro( 37% ) and yen. Trading is done through different kinds of instruments like derivatives, forward transactions, spot transactions, options and futures, swaps and exchange- traded funds. The most traded pairs are Euro/ US dollar, US dollar/ Yen and GB pound/ US dollar.

Currency speculation is done by speculators who do an important job of transferring the risk from those who can t bear to those who can bear it. Currency trading is affected by some factors like economic and financial situations, and other psychological, political scenarios issues related to the markets. Speculators always face controversies due to the risk they take up.

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