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What makes the forex markets different from other asset classes?


Jane Goodwin

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Currency has an attractive position in investor portfolios according to researchers, primarily due to the diversification provided by holding currencies, which have different characteristics from other assets. Despite that, until recently very few investors held currencies or participated in forex markets. The forex market differs from other traditional asset classes, with many unique characteristics that sometimes surprise those new to financial markets. One of the characteristics is that the forex markets operate 24-hours a day, five-and-a-half days a week around the globe. A second is that currency trades through options, swaps, forwards, futures, and spot transactions. The forex market also differs from other asset classes because it is not a single regulated exchange. There is no central location or control over the forex market, and there are no clearing houses guaranteeing trades. All participants trade with each other based on credit agreements and if a dispute arises there is no arbitration panel. In essence the world’s largest financial market, which trades over $5 trillion daily, is regulated by little more than the trust of its participants. And those participants are very diverse. They include banks and central banks, hedge funds and investment managers, corporations and individual investors. With all these different groups coming together the forex market is extremely liquid with a global reach that impacts businesses and governments around the world. The forex market influences corporate earnings, inflation rates and even a country’s GDP. There’s a reason for the size and scope of the forex markets. Anyone from an individual to a global central bank can speculate and profit from currency fluctuations. Each uses different strategies based on their focus and reason for being involved in the forex market. And those reasons are as varied as the number of traders in the forex market. Many speculative trades are purely for profit, but they make up less than half of all forex trade volume. Central banks can significantly impact forex markets through their monetary policy, but they also buy and sell currencies as part of that policy. Corporations also have a strong involvement in the forex market, buying and selling currency to fund their global operations and to hedge against global risks.
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