The foreign exchange market is a global online network where traders buy and sell currencies. This global market has two tiers. The first is the Interbank Market. It's where the biggest banks exchange currencies with each other. The second tier is the over-the-counter market. That's where and individuals trade. The OTC has become very popular since there are now many companies that offer online trading platforms. There are three types of trades.
The spot market is for the currency price at the time of the trade. The forward market is an agreement to exchange currencies at an agreed-upon price on a future date. A swap trade involves both. Dealers buy a currency on the spot market at today's price and sell the same amount in the forward market.
This way, they have just limited their risk in the future. No matter how much the currency falls, they will not lose more than the forward price. Meanwhile, they can invest the currency they bought on the spot market. Each has a currency trading desk called a dealing desk. They are in contact with each other continuously. The minimum trade is one million of the currency being traded.
Most trades are much larger, between 10 million to million in value. The interbank market includes the three trades mentioned above. It allows them to transfer foreign exchange to each other.
Banks trade to create profit for themselves and their clients. Traders at the banks would collaborate in online chat rooms. One trader would agree to build a huge position in a currency, then unload it at 4 p. London Time each day. That price is based on all the trades taking place in one minute. By selling a currency during that minute, the trader could lower the fix price. That's the price used to calculate benchmarks in mutual funds. Traders at the other banks would also profit because they knew what the fix price would be.
These traders also lied to their clients about currency prices. The Chicago Mercantile Exchange was the first to offer currency trading. It launched the International Monetary Market in The retail market has more traders than the Interbank Market. But the total dollar amount traded is less. The retail market doesn't influence exchange rates as much.
But they have a significant influence. Japanese companies receive dollars in payment for exports. They exchange them for yen to pay their workers.
That makes Japanese exports cheaper. For example, the Federal Reserve announced it would raise interest rates in That sent the dollar's value up 15 percent.
For the past years, there has been some form of a foreign exchange market. For most of U. That's because the U. The foreign exchange market didn't take off until Once Nixon abolished the gold standard, the dollar's value quickly plummeted. The dollar index was established to give companies the ability to hedge this risk.
Someone created the U. Dollar Index to give them a tradeable platform. Soon, banks, hedge funds and some speculative traders entered the market. Updated July 07, History For the past years, there has been some form of a foreign exchange market.More...