Forex is short for currencies, but the actual asset class we are referring to is currencies. Foreign exchange is the act of changing the currency of a country into currency of another country for a variety of reasons, usually for tourism or trade. Due to the fact that the business is global there is a need to make transactions with most other countries of your own particular currency. Following the agreement in Bretton Woods in 1971, when coins were allowed to float freely against each other, the values of individual currencies have varied, which has led to the need for foreign exchange services. This service has been taken by commercial and investment banks on behalf of their clients, but at the same time has provided a speculative environment for trading one currency against another using the Internet.
Currencies as a hedge
Commercial companies doing business abroad are at risk because of the fluctuation in the value of the currency when they have to buy goods or services or sell goods or services to another country. Hence, forex markets provide a way to hedge risk by setting a rate at which the transaction was concluded at some point in the future. To achieve this, a trader can buy or sell currencies in the futures or exchange markets, at which time the bank will set a rate, so the trader knows exactly what the exchange rate will be and therefore reduce The risks of your company. To some extent, the futures market may also offer a means to hedge an exchange rate risk based on the size of the trade and the actual currency involved. The futures market takes place in a centralized exchange and is less liquid than the forward markets, which are decentralized and exist within the interbank system around the world. (For a new way of protecting your currency, read coverage against changes in the risk rate with currency ETFs)
Forex as a speculation
Since there is no constant fluctuation between the values of the currencies of different countries due to different factors of supply and demand, such as: interest rates, trade flows, tourism, economic strength, geopolitical risk and so on , There is an opportunity to bet against these by changing the values of buying or selling one currency against another in the hope that the currency you buy will gain in strength, or the currency you sell, will weaken against its counterpart.
Currency as an asset class
There are two distinct characteristics to this class:
You can earn the interest differential between two currencies
You can earn exchange rate value
That's why we can trade with currencies
Until the advent of the Internet, currency trading was very limited to interbank activity on behalf of its customers. Little by little, the banks themselves established proprietary tables to trade their own accounts, and this was followed by large multinational corporations, hedge funds and high net worth.
With the proliferation of the Internet, a retail market aimed at individual traders has emerged that provides easy access to the currency markets either through the banks themselves or broker forex terbaik to make a secondary market.
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