Forex Rate Determinants and Different Types of Transactions

Forex which is also called as foreign exchange is one form of currency trading in which the goal is to make profits by doing trades in several different currencies. But there are associated risks also and a forex trader could lose all his investment if he or she is not careful enough.

Forex Rate

Different Types of Transactions

Now we will go through some of the common terms that are used by forex traders such as forward, swap, spot and future. The first one we will look at is spot which means the transaction completes with two days, there is cash transaction only and no interest payment is required. The next term we will explore is forward which is used to managing forex market risks due to changes in forex rates. Here both parties agree upon a fixed rate for transactions that will happen on a future date and the prevailing market rates on that future date are not used.

Next is swap where traders do a transaction and then agree on reversal of the transaction on a particular future date. Another term which is used commonly in forex market is future which means the term of a specific contract will be 3 months and set interest is also part of the transaction. Lastly the term we discuss is options and it is also called FX options and in such transaction the owner is not mandated to perform a currency exchange transaction.

Entities and Rate Determinants

The forex market includes different entities which play their part in functioning of the market. These entities include central banks, forex fixing agencies, commercial companies, hedge funds, nbfc, investment managing companies, money transfer firms and retail foreign exchange traders.

Next we look at the various determinants of forex rates which include political situation in a country, various economic aspects and psychology prevailing in the market. In political situation of a country different things are involved such as internal political events and also the ones occurring in other countries. How stable the government is and the government in neighboring countries also affects the rates.

Similarly in economic factors various things fall such as policies, trade balances, budget deficits, growth of the economy, inflation and fiscal policies. Along with economic factor you have to consider market psychology which imparts its influence on daily forex rates. The market psychology gets influenced by many things such as anchoring, flights to quality and indicators like money supply in the market, inflation rate, trade balances and other similar technical apprehensions.

Conclusion

As a conclusion we can say that it is vital for successful forex traders to remain aware of the forex trends and plan their strategy accordingly. In addition to it, proper knowledge of how the currency and equity market functions will greatly help a forex market trader achieve his goals and maximum profit with minimum investment. By knowing all the technical details and different terms that are used in currency trading, it will also become easier for you to stabilize your position in the market.