Forex Trading

Forex exchange refers to the value of one currency with respect to the other. Forex exchange is generally rated as the number of units of counter currency that can be bough in lieu of base currency. Suppose one US dollar worth 26.89 JPY, which means one US dollar, can be bought on exchange of 26.89 Japanese yen. Some special terminology is used in forex exchange; exchange rate that is fixed on today’s date for future reference is termed as forward forex exchange and the exchange rate of the currency at the present date is termed as spot exchange rate.

 Due to liquidity in the market condition, forex exchange is abruptly variable in its nature. Depending on the market conditions and stock exchange, rate of currency varies. There are few major currencies in forex market which are considered as base currency. US dollar, euro, Australian dollar, Britain Pound and franc are most traded currencies in world market. There are certain conventions of denoting forex exchange. For spot transactions, currencies are quoted up to four places of decimals and for forward outrights they are quoted up to six places of decimals. However there is no such specified rules and currency value greater than 20 can also be quoted up to three decimal places and above 80 is quoted up to two decimal places. Forex exchange in market largely varies with the supply and demand of the products in forex trade. Market size and liquidity is the basic reason why forex exchange is free-floating in its behavior.

 A real exchange rate is defined as RER= e (p*/p), where P refers to the domestic price level of the currency and p* refers to the foreign price level. It’s a general conclusion that whenever the demand of a commodity is more than supply then the value of that currency belonging to a particular country tends to increase on the other hand if the demand is less than supply then forex rate will decrease. Inflation, productivity, and overall economic growth of a country largely affect its currency rate.

Increase or decrease in the value of currency depends on two factors, transaction demand of money and speculative demand of money. Transaction demand of money is linked with the overall market condition of the country. The Gross domestic product (GDP) and the employment rate have direct impact on transaction demand of money. As the unemployment rate will rise, the overall money spend by the consumer will be less in the market as such the banks would not be able to fulfill the demand of money in business transactions. Speculative demand of money is all based on the strict decision taken by central bank on the interest rate of the money. More is the interest rate; more will be the demand of that currency in the market. But currency speculation can even destroy the economy of a country if its not been manipulated properly with future reference.