Sample Business Studies Paper on A Look at The Exchange Market

The foreign exchange market also known as the Forex Market is the world’s largest currency market. The foreign exchange market specifically deals with the exchange and speculation of international currencies therefore it is also known as the currency market. Regardless of the fact that the market is the largest currency market in the world a majority of the people are ignorant of the intricate operations of the market. The forex market is an international currency exchange market that has branches in all the major cities in the world and deals in the buying and selling of international currencies.

The concept of money exchange has been practiced by mankind since time immemorial. The idea of money exchange was used by merchants in the ancient civilizations of both Egypt and Mesopotamia. The Talmudic writings that underpin Judaism also write about the role of money-changers who were instrumental in the exchange of money for a commission in ancient Jerusalem. In the medieval period, the Medici family of Italy made a name for themselves due to their widespread activities of money exchange. Historical reports also point out to the existence of a booming money exchange trade in Amsterdam that controlled the circulation of money in entire Europe. Up to the Second World War international currencies were pegged to precious metals such as gold and silver to stabilize the value of the currencies from the vagaries of the exchange process (Hill and Hult 54). The gold was replaced by the US dollar as a peg for all the international monetary denominations and the dollar supplies were the only currencies backed with gold. However, in the current foreign exchange market trading currencies are free to choose their unique peg and the value of the currencies is determined by the forces of supply and demand prevalent in the international market.

The forex market is an intricate web of numerous exchange markets inundated with brokers from all over the world. This messy complex web of markets and players in the forex market makes the market looks like an unorganized market. The operations of the forex market are however highly synchronized and organized to ensure a smooth operation of all the exchange markets in the world.  The forex market is divided into two operational segments; the interbank market and the over-the-counter (OTC) market (Elisabet). The interbank market provides a basis for large banks to exchange currencies for complex and gigantic financial transactions such as hedging, balance sheet adjustments on behalf of their clientele who are mostly giant financial corporations (Hill and Hult 112). The OTC provides a marketing platform for individuals interested in the exchange of currencies to trade. The trade done through the OTC platform is mostly done through online sites, applications and brokers.

There are numerous types of trading options in the foreign exchange market ranging from the spot market and the forward market to the swap trade. These diverse trading options provide traders with numerous options for dealing with international currencies. The spot market trading option involves direct trading based on the value of a given currency at a given time (Pilbeam 87). The forward market, on the other hand, involves an agreement to exchange currencies at a fixed price on a future date. The forward market deals only with future transactions and involve commercial agreements and contracts. Lastly, the swap trade option inculcates both the spot and forward trading options and involves traders buying currencies at current prices, holding onto them and selling them in the forward market at a profit. The swap trade option is the most favored forex trading option as it enables the traders to buy currencies when their values are low and sell when their worth rises, therefore, making huge amounts of profits.

The foreign exchange market has a 24 hours operating timeline and operates all the days of the week except during weekends. The 24-hour operating timeline is due to the international aspect of the forex market. The forex market has branches in almost all major cities in the world such as New York, Tokyo, Toronto, Hong Kong, Sidney and Zurich among many others. The 24-hour operating timeline of the forex market enables traders all over the world to trade at their convenience. The major players in the forex market are central banks of various countries, commercial banks, retail forex brokers, hedge funds, and investment management corporations.

The forex market is highly liquid therefore enticing various traders from all over the world. Due to the number of traders involved and the huge amounts of money involved in the transactions the trading volume in the forex market is massive and therefore provides traders with a wide and fertile platform for making profits. The average amount of transactions done through the foreign exchange market in a day is estimated to be more than $5 trillion (Chen). Therefore the foreign exchange market provides a suitable trading platform for investors and traders seeking to optimize their investments. Another advantage posed by the forex market is the limited financial regulations and standards that restrict its operations as the forex market is not regulated by a central body that oversees its operations. Compared to the average domestic stock exchange market the forex market is subjected to few rules and regulations that make financial transactions much easier and less complex. For example, traders in the forex market don’t have to pay the traditional transaction fees and commissions that are compulsory in the domestic stock markets.

First-time traders and investors are given leverage in the form of a soft loan that they can use for their transactions. The purpose of the leverage is to increase the control of the investor has over the currencies he or she is interested in trading. The loan is mostly given to the investors by their brokers and it is useful in enhancing the profit and gains of the investor. Moreover, the leverage enables the investor to increase the potential returns on his investment. An investor who has a leverage of $1000 can trade $10000 worth of international currency at the forex market with a margin of 1% at a 100:1 leverage ratio (Amadeo). The leverage method is quite essential as it gives an investor an upper hand in the transaction in the forex market.

The foreign exchange market provides investors with a salient trading and investment option compared to the domestic trading options. With only a limited number of financial regulations and a twenty-four-hour operating timeline an investor worth his salt can make huge amounts of profits by getting involved in the forex transactions. The huge amount of transactions involved in forex trading and the diversified trading options which are easily accessible online makes trading in the forex market a lucrative business option.

 

Works Cited

Amadeo, Kimberly. “The Market That Dwarfs the Stock Market.” The Balance, The Balance, 27 Oct. 2019, www.thebalance.com/foreign-exchange-market-3306088

Chen, James. “Forex Market Definition.” Investopedia, Investopedia, 29 Jan. 2020, www.investopedia.com/terms/forex/f/forex-market.asp

Elisabet, Furioc. “The Foreign Currency Market: What It Is and How It Works.” NEWS BBVA, BBVA, 25 Apr. 2018, www.bbva.com/en/foreign-currency-market-work/

Hill, Charles W. L., and G. Tomas M. Hult. Global Business Today. McGraw Hill Education, 2018.

Pilbeam, Keith. International Finance. Palgrave Macmillan, 2006.