Forex (Foreign Exchange)

The Forex (Foreign Exchange) is the over-the-counter market (that is to say between traders that are not subject to a “regulated” market) on which currencies of the entire world are exchanged; currencies list the ones according to others in the form of crosses.

Today, the Forex is the world first financial market;  the medium daily volume of transactions (about $ 3500 billion) represents three times the one of the shares and futures markets got together. As it develops during the resignation of the fixity of exchange rates of several currencies between each other, (with the gold standard as a reference) in 1974, the Forex as a market determines the evolution of the parity of all the currency crosses including the floating rate one.

The most exchanged currencies in the world are the Dollar (USD: 43% of the sales and purchases), the Euro (EUR: 19%), the Japanese Ten (JPY: 8.5%), the Pound sterling (GBP: 7.5%), the Swiss Franc (CHF: 3.5%); Australian Dollar (AUD) and the Canadian Dollar (CAD). The “secondary” currencies with exchange regimes “linked” or “fixed” (the Argentinean currency for example has a fixed parity with the Dollar, it is the same for the CFA Franc of West Africa with the Euro, and the Chinese Yuan with a currency basket which has  a “dollar” dominant) are not exchanged a lot on the Forex.

The main stakeholders on the Forex are the following:

• Banks and financial institutions which represent 50% of the transactions via “market makers’” propositions that offer at any time a bid and an ask; the difference of the two (called spread) is the financial gain.

• The great firms that want in general to cover against the exchange risk linked to the international activity (but multinationals also developed their own trading desks that intervene directly on the Forex with a speculative aim).

• The Central Banks which sometimes intervene on the market (by massively selling or buying a currency) with the aim to regulate and maintain a specific monetary policy; so the European Central Bank can sell Euro if it hopes to make this currency decrease.

• The institutional investors (hedge funds etc…) which intervene as well to cover shares or bonds portfolio as with a direct speculative aim, at about 30% of the transactions on the Forex.

• Private individuals, which investments strongly developed thanks to the « on-line » trading, represent about 5% of the transactions on the Forex.

A position taken on the Forex consists in selling a currency and buying another one. For an investor, buying EUR/USD means buying Euro and selling Dollar.

If an investor banks on a rise of the EUR/USD parity (accretion of the Euro according to the Dollar) and if the Euro/Dollar parity goes from EUR/USD = 1.3000 to EUR/USD = 1.3050, so the €10000 bought will have made this investor win $50.

For Asia to the United States through Europe, the Forex is a market that works continuously, 24hours on 24. A “switch” strategy will consist in playing on the time difference on the same support.