Introduction To Foreign Exchange Melbourne
The foreign exchange Melbourne market is fast-paced and exciting. This used to be the domain of central banks, wealthy individuals, hedge funds, corporations and large financial institutions. The internet has brought about a change to all this and it is now possible for anyone to trade in this market via online brokers.
The high leverage that is available, along with the liquidity of the market has prompted its rapid growth. This market offers great opportunities to traders, but it is important that you understand the market before you start playing with your hard-earned cash.
What is Foreign Exchange Melbourne?
Foreign exchange is the purchasing and selling of currencies. This is a huge financial market that trades 24 hours a day, for five days every week, across the various time zones. There is no central marketplace for this trade. The trades are done electronically which means that all the transactions are done through computer networks rather than on a centralised exchange.
Spot, forwards and futures
There are three essential ways in which individuals, institutions and corporations trade foreign currency. These markets are the forwards, futures and spot market. The spot market is known to be the largest of the three as the other two are based on the spot market. Previously, the futures market was the popular one because investors could stay on it for longer periods of time. The introduction of electronic trading has caused a massive upswing in the activity of the spot market and it has now overtaken the futures market as the preferred market for individual speculators and investors. When reference is made to the foreign exchange market, it means the spot market. Companies tend to use the forwards and futures market more as a limitation to the risks involved with foreign exchange.
The Spot Market
This is the market where the purchasing and selling of currencies takes place at the current set price. The price is determined by demand and supply and is a reflection of other factors, such as the economic performance, socio-political climate and interest rates of a country. When a deal is completed in this market, it is referred to as a ‘spot deal’. This involves a two-way transaction where one side delivers a currency amount that has been agreed upon to another party. The first party receives an agreed upon amount in a different currency at an agreed upon rate. The settlement is made in cash after the position has closed. The spot market is known to deal with current prices, but these transactions generally take about two days to finalise.
Forwards and Futures
These markets do not trade in actual currencies. They deal with contracts that lay claim to a particular currency at a specified price, on a specified future date. The forwards market involves contracts that are bought and sold over the counter by two parties. These two parties determine the terms of the contract. The futures market involves contracts that are bought and sold as a standard size, with a settlement date in the future. It makes use of the public commodities markets.
Both types of contracts are legally binding and will be settled on the date specified at the amount specified. These two types of contracts are suitable as protection against currency risk.