FOREX MARKET
November 1, 2007 – 2:48 pm
FOREX MARKET
 
The commonly known terminology “Forex†means Foreign Currency Exchange Market, where buying and selling of any foreign currency takes place. Simply put every one of us is dealing in Forex when we buy a foreign product or service and pay for it in the currency of our nation. Forex Market can be explained by illustrating the Share Market, where individual investors and institutions buy and sell shares listed in a Stock Exchange and in Forex the part played by individuals is minimal whereas financial institutions like Banks engage in Forex market day in and day out. Unlike Share Market held in a Stock Exchange during specified hours of business, Forex Market is operating 24 hours of the day – Sunday to Friday.
The need for exchange of currencies between countries arises when trade and commerce takes place between the countries, whose currencies are being exchanged in large quantities. To understand the magnitude of Forex market today, suffice it to say that everyday the world market handles $1.5 trillions.
The official Foreign Exchange Market came into existence in 1973, even though the use of money on trade and commerce in the form of printed paper bills started from the Babylonian civilization period. There were money changers in the Middle Eastern countries who exchanged paper bills of other countries for coins of metals. The usage of paper bills, as we call them currencies, was much easier for traders and businessmen in those days to carry anywhere and exchange them for the products they buy in a certain country.
The Forex market was carrying on business with stability and easiness from the Middle Ages until the World War I. Though the Great Depression occurred in 1931 affected Forex market seriously, there was smooth sailing and increase of Forex market to manifold proportions from 1931 to 1973. Significantly, the Bretton Woods Accord emerged during the end of World War II and tried to stabilize the economical environment of world countries by pegging all currencies to the U.S. Dollar and pegging the U.S. Dollar to stock of gold valued then at a price of $35 per ounce of gold. The making of U.S. Dollar as the bench mark worked effectively in bringing back stability to the global economy.
In the later years of 1971 and 1972, the two attempts of Smithsonian agreement envisaging greater fluctuation band in currencies and the European community trying to veer out from the clutches of U.S. Dollar by establishing European Joint Float, which included Italy, France, West Germany, Netherlands, Luxemburg and Belgium, failed miserably. Thereupon in 1973 the free floating system of Forex which is prevalent even today came to stay. Governments all over the world are free to either peg their currencies to any specified currency, semi-peg them or allow foreign currencies to float freely inside their respective countries.
Yet another attempt by Europe in 1978 to create a separate European Monetary System, independent of U.S. Dollar also failed like the earlier agreements and fell apart in 1993. Today, the Forex market is handled by Banks, brokerage houses, hedge funds and individuals and speculative market is also indulged in when the situation so warrants. The Forex market basically revolves around the supply and demand theory and any one can buy or sell foreign currency of their choice at the exchange rates prevalent and announced on a daily basis by the financial institutions without any problem.