What is the Foreign Exchange Market?
The Foreign Exchange Market is the financial market in which currencies are bought and sold that is a transaction is entered into where a given amount of currency is exchanged for another amount of currency. The need for the Foreign Exchange Market (commonly referred to as the Forex Market) developed to facilitate International trade where currencies were required to be settled from the country of both the importer and the exporter. It therefore plays an extremely important role in facilitating cross-border trade, financial transactions and investment. More recently, it allows borrowers to have access to the International capital markets in order to meet their financing needs in the currency which is most conducive to their requirements.
Characteristics of the Foreign Exchange Market
The Forex Market does not exist physically. It is a framework in which participants are connected by computers, telephones and telex (SWIFT) and operates in most financial centres globally. Because the Forex Market is so highly integrated globally, it can operate 24 hours a day – when one major market is closed, another major market is open to facilitate trade occurring 24 hours a day moving from one major market to another. Most exchanges of currency are made through bank deposits that is transferred electronically from one account to another. The volume of foreign exchange transactions worldwide is assumed to be approximately USD5 trillion per day in October 2006 and Standard Bank is the recognised leader in the domestic foreign exchange market, handling more than 30% of South Africa’s foreign exchange volume. The Forex Market is an over-the-counter market that is trading in financial instruments that are not listed or available on an officially recognised exchange (such as the JSE – Johannesburg Stock Exchange), but traded in direct negotiation between buyers and sellers. Trading takes place telephonically or