Foreign Exchange Trading is the simultaneous buying and selling of two currencies with the objective of benefiting from favorable movement in FX rates. For example, if you buy a USD / YEN contract (US dollar against the Japanese yen), you are buying US dollars and at the same time selling Japanese yen. In other words, you are exchanging yen for US dollars.
You can also trade in the FX market to
take advantage of the interest differentials
between two currencies. For example, you
might sell a EUR / USD contract (selling
Euro and buying US dollars) with the view
that the current interest rate differential
between the two currencies will hold and
the United States is more likely to raise
interest rates than Europe in the near
future. This is because you will
earn interest on the currency that you
bought and pay interest on the currency
that you sold.
Unlike the stock market or the futures
market, the FX market is traded over-the-counter
and trading is not done in a centralised
location like an exchange, but rather
through a network of phones, telexes,
and faxes, and through Reuters that connect
all the banks and financial institutions
globally. Hence, the FX market operates
24 hours every day, worldwide.
Usually, FX trading is done on value spot
basis (settlement on the second business
day after the transaction date), but some
are settled before spot basis (valued
today or valued tomorrow) while some are
traded value forward (settlement beyond
two business days).
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