Forex market is term foreign exchange market where global currencies are traded such as USD, Euros, Pound, Yen so on. As you know currencies are very important in our life, so the question is how currencies are exchanged?
Take an example, if you are living in the USA and want to buy Kiwi fruits from France in that case either you or the company that you buy the kiwi fruits from has to pay the in EUROS. It means that the USA importer would have to exchange the equivalent value of USD dollars into EUROs.
Take another example, Suppose you are traveling as a tourist in Australia there you are not supposed to pay in EUROs to see the Sydney Opera House because it's not the locally accepted currency. So as a tourist you need to exchange the EUROs into Australian dollars (AUD) for the local currency at the current exchange rate.
Foreign exchange market is not like a central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the globe, rather than on one centralized exchange. Forex market is open 24 hours a day and five and a half days a week. However currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney across almost every time zone.
Forex has been around since nations began casting currencies. However the modern forex invention was after the accord at Bretton Woods in 1971 that time major currencies were allowed to float freely against one another. The values of individual currencies vary, which has given rise to the need for foreign exchange services and trading.
In case of spot market, forex trading always has been the largest market because it is the essential real asset that the forwards and futures markets are based on. More so, the spot market has observed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and investors.
similarly, the futures market was the most popular venue for traders because that will available to individual investors for a longer period of time.
While the people refer to the forex market by referring to the spot market then the forwards and futures markets incline to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.
Generally companies are doing business in foreign countries at risk due to fluctuations in currency values while they are buying or selling goods and services outside of their domestic market. So, forex markets provide a way to evade or hedge currency risk by fixing a rate at which the transaction will be completed.
Suppose a trader who expects interest rates to rise in the USA as compared to Australia while the exchange rate between the two currencies AUD/USD is 0.91 it means that takes $0.91 USD to buy $1.00 AUD. Here the trader considers higher interest rates in the USA will increase demand for USD and consequently the AUD/USD exchange rate will fall because it will require fewer, stronger USD to buy an AUD.
Just think the trader is correct and interest rates rise which decreases the AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went long the USD they would have profited from the change in value.
This is very common, trading currencies can be risky and composite. The interbank market has changing degrees of directive and forex instruments are not consistent. In some parts of the world, forex trading is almost completely unregulated.
The interbank market is made up of banks trading with each other around the world. The banks themselves have to determine and accept independent risk and praise risk, and they have recognized internal processes to keep themselves as benign as likely. So regulations like this are industry levied for the protection of each participating bank.