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The foreign exchange market (Forex) cannot be localised. Trading does not take place centrally via an exchange location, but via computer systems. This takes place around the clock - except usually at weekends - and worldwide.
The advantage of this decentralised and self-regulating market is that there are no transaction costs. Also, in contrast to the stock exchange, there is no supervisory body that monitors the foreign exchange market. With a daily turnover of around five trillion US dollars, the foreign exchange market is the largest of the three financial markets, which in addition to the foreign exchange market include the money market as well as the credit and capital markets.
Currency reserves and desives are interrelated
To secure their international solvency, central banks such as the European Central Bank (ECB) or the American Fed accumulate reserves. Part of these are foreign exchange reserves. They are also used to offset deficits in international payment transactions.
Currency reserves also enable a country to influence the exchange rate by buying or selling domestic currency and foreign exchange.
In Germany, the German Bundesbank manages the currency reserves, in the euro area the European Central Bank.
Current example Russia
In June 2015, foreign exchange reserves in Russia were increased to cover capital outflows and support the sharply fallen rouble exchange rate. This shows the interplay between foreign exchange reserves and foreign exchange.
Foreign exchange trading
International foreign exchange trading began in 1880, when it became possible for the first time to open an account abroad in another currency. This set the stage for the first currency transactions. In 1944, the International Monetary Fund (IMF) and the World Bank were founded.
Initially, fixed exchange rates existed until the USA pursued an inflationary monetary policy towards the end of the 1960s to compensate for its growing foreign trade deficit and the other states were no longer prepared to absorb the devaluation of the US dollar. In 1973, the so-called "free floating" exchange rates of European Community currencies against the US dollar began, determined primarily by supply and demand.
Types of currency trading
Depending on the time of fulfilment of the currency transaction, a distinction is made between different types of foreign exchange transactions.
Spot foreign exchange transactions
Spot transactions offer little room for speculation. There are no more than two working days between the conclusion of the transaction and its fulfilment. As a rule, therefore, it is a pure currency exchange. A classic example is the exchange of cash with Exness login client area in a holiday destination.
Forward exchange transactions
In a forward transaction, the contracting parties determine on the day of the transaction when and at what rate the currency exchange will take place. For example, if someone wants to travel to the USA in a year's time, he can speculate that the dollar will be worth less on the day of payment than the rate he has secured.
Currency arbitrage transactions
In arbitrage transactions, speculation is not on the exchange rate change between the times of buying and selling, but on the current spread between the bid and ask price, i.e. the buying and selling price. Traders exploit the price differences on several foreign exchange markets.
Foreign exchange swaps
A foreign exchange swap is the difference that arises between the forward and spot rates of a currency. In a swap transaction, one partner provides the other with foreign currency immediately (spot transaction) and at the same time agrees on a fixed date and rate for the repurchase (forward transaction).
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