Forex or foreign Exchange or FX involves the buying and selling of
one currency against another currency. They are always traded in pairs
e.g. EUR/USD, USD/JPY. So when you are buying Euro dollars (EUR) you
are also selling the US dollars (USD) in exchange for the Euro dollars.
If you want to buy US dollars then you would sell the Euro dollars in
exchange for buying the US dollars.
An example that we would
encounter frequently is when we travel overseas and need to exchange
the local currency for the foreign destination currency and we would
head to the local money changer or bank to buy the foreign currency.
This is a good example that we are familiar with.
By buying and
selling currencies at the money changer or bank we are already involved
in this huge foreign exchange market. Banks and central banks,
investment funds, hedge funds, exporters and importers, companies and
retail forex traders are among the main participants in the forex
market.
Banks trade to generate profits and also act as buyers
and sellers of one currency against another for their clients trading
and commercial transaction. While central banks buy and sell currencies
to hold as reserves and protect the reserves. They also act to moderate
their country's currency strength to facilitate reasonable terms of
trade in the international markets for their exports and imports.
Investment
funds have a percentage of their portfolio in the forex market for many
reasons like diversification, hedging, etc. While most hedge funds will
speculate on currencies as it is the biggest market in the world thus
able to accommodate their large trading size which is quite difficult
to do in the equities or futures market.
To be continue.. at - Forex Options Trading - What is Forex? (Part 2 of 2)
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