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What are the forex trading hours for the US session?

The US trading session begins at around 12 PM and ends at 9 PM GMT. *Session timings will differ during the daylight saving period

Who are the participants in the Forex market?

There are a number of active participants in the forex markets. The foremost among them are the central banks.

Central banks play a very vital role in the forex markets. They use these markets to manage money supply, inflation and interest rates. Since the role of the -++central banks is limited to the stability of the exchange rate and not to profit from it, their actions are completely non- commercial in nature.

Besides central banks, the other participants can be broadly divided into two categories; those who utilize the forex markets to safeguard their business interests from losses in the event of the exchange rate moving erratically and those that exploit the forex markets to profit from them.

Commercial:

These categories of participants are in the forex markets to protect their business interests from price variations in the exchange rates and not to profit from speculation.

  • a) Corporations
  • b) Hedge funds
Non-commercial:

These categories of participants are in the forex markets to profit from speculation. Among them too, there are participants who do not speculate but are in the markets to profit from price discrepancies between exchange rates (arbitrage).

  • a) Commercial and investment banks
  • b) Non bank forex companies
  • c) Fund managers
  • d) Money transfer/ remittance companies
  • e) Arbitragers
  • f) Speculators

Is there a centralized place for forex trading?

Forex markets are traded ‘over the counter’ and do not have a centralized trading floor. Trading takes place on a massive global telephone and electronic communication network (ECN), where participating banks and other market participants trade 24/7 and five days a week. Since most of the trading is bilateral, the trade is conducted by telephone and sophisticated electronic trading networks.

What are direct and indirect currencies?

When an exchange rate is quoted in fixed units of the domestic currency and variable units of the foreign currency, it represents a direct quote.

Example-1: EUR/USD= 1.3150.
In the above example, one EURO is equal to 1.3150 US dollars

When an exchange rate is quoted in fixed units of the foreign currency and variable units of the domestic currency, it represents an indirect quote

Example-2: USD/JPY= 88.20
In the above example, 88.20 Japanese yen is equal to one US dollar

Among the major currencies, Euro, Pound sterling, Australian dollar and the New Zealand dollar are quoted directly while the Japanese yen, Swiss franc and the Canadian dollar are quoted indirectly VERSUS the US dollar.

What is the dollar index?

The US dollar index determines the value of the US dollar with respect to a basket of global currencies. The index is formed by calculating the exchange rates of six major global currencies. The index is measured using weighted geometric mean.
The currencies along with their weightings are mentioned below

The currencies along with their weightings
Currency Weight age in %
EURO (EUR) 57.6
JAPANESE YEN (JPY) 13.6
BRITISH POUND (GBP) 11.9
CANADIAN DOLLAR (CAD) 9.1
SWEDISH KRONA (SEK) 4.2
SWISS FRANC (CHF) 3.6

What are OTC markets?

Over the counter markets are decentralised markets where trading takes place round the clock. Trading takes place in the form of bilateral agreements without any intermediation by a third party and is conducted by a global network of telephones and electronic trading systems.

What are the financial instruments traded on the OTC markets?

There are a variety of financial instruments traded on the OTC markets. They can be segregated into

  • (I)Foreign exchange markets:

    Spot forex

    Spot forex- Is an bilateral agreement between two parties to buy one currency by selling another currency at an agreed price for settlement on the spot date (T+2, except for USD/CAD where the spot date is T+1)

    Forwards

    Is an agreement to purchase or sell a certain amount of foreign currency at a future date and time at a predetermined price.

    Swaps

    A forex swap is the simultaneous purchase and sale of one currency for another with two different dates, with one of them being a spot date. A forex swap therefore is a combination of a spot and a forward forex transaction.

  • (II)Commodities

    Spot commodities

    Is a transaction between two counterparties where delivery of the commodity either takes place immediately, or with a minimum lag between the trade and delivery. Spot commodity trading normally involves physical/ visual inspection of the commodity or a sample of the commodity.

    Forwards

    A forward contract in commodities is an agreement between two parties to exchange a given quantity of a commodity at a defined future date at a predetermined price. The predetermined price is known as the forward price.

    Commodity swaps

    Is a transaction where two counter parties agree to exchange cash flows on an underlying commodity over a period of time. Commodity swaps are normally traded when the demand and supply of a commodity is extremely uncertain.
    A vast majority of commodity swap transactions involve crude oil.

Besides the above two, mentioned below are the some of the other financial instruments that are traded over the counter (OTC)

  • (III)Equities

    Equity forwards

    Equity swaps

    Index swaps

  • (IV)Interest rate

    Interest rate forward

    Interest rate swaps

    Swaptions – Options on swaps

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