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History of Forex and what is the Forex market PDF Print E-mail


Foreign exchange Definition

Any type of financial instrument that is used to make payments between countries is considered foreign exchange. The list of instruments includes electronic transactions, paper currency, checks, and signed, written orders called bills of exchange.

Large-scale currency trading, with minimums of $1 million, is also considered foreign exchange and can be handled as spot price transactions, forward contract transactions, or swap contracts.

Spot transactions close at the market price within two days, and the others are set to close at an agreed-upon price and an agreed-upon date in the future.

History of Forex

The Currency or Foreign Exchange (Forex or FX) market has been around since the time of the pharaohs in Egypt. Even during the middle ages there were forms of currency trading. After WWII, the Bretton Woods Accord was established to help stabilize the global economy.

During this time,speculation in the various national currencies helped to destabilize the currency market. This accord limited the flow of currencies from one country to another and valued their currency to that of the U.S. Dollar. At that time, the U.S. Dollar was valued against a certain amount of gold, which was called the Gold Standard.

In 1971, the U.S. Dollar abandoned the gold standard which created an increase in the amount of currency trading. During this same time, the Smithsonian Agreement was created and in effect until 1973 when it failed. It was during this time, that the Currency market, as we know it, came about. The current Free Floating System began and opened the door for individuals to take advantage of trading in foreign currency markets. Now that the personal computer and internet are readily available to all, the foreign exchange market is giving individual traders the opportunity to take advantage of currency trading.

Today, the Foreign Exchange market is the largest financial exchange inthe world, trading between $1.5 and $2.0 trillion each day. This is substantially more volume than all the volume in the U.S. markets combined. The FX market transactionsare conducted between two counterparts over an electronic network.

Who trades in the FX Market?

  • Governments and Central Banks
  • Banks and Investment Banks
  • Hedge Funds
  • Businesses
  • Investors and Speculators

Take a look at part of the annual report for Berkshire Hathaway (Warren Buffet's Company):

Category Pre-Tax Gain (in $ millions)
2004 2003
Common Stocks 870 448
U.S. Government Bonds 104 1,485
Junk Bonds 730 1,138
Foreign Exchange Contracts 1,839 825
Other (47) 233
Total $3,496 $4,129

In 2004, they made $870 million in pre-tax gains with their common stock compared to $1,839 million in their foreign exchange ontracts. That is more than twice the amount they made with stocks. Most large banks and other institutions have similar numbers and results. For instance, Bank of America made more than twice as much in the foreign exchange market as it did with its equity business.


Source tradesteps4x.com