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Foreign exchange market. The Forex currency market is a system of stable economic and organizational relations arising from the operations of buying or selling foreign currency, payment documents in foreign currencies, as well as capital movements of foreign investors. In the foreign exchange market, the interests of investors, sellers and buyers of currency values ​​are coordinated. Western economists characterize the Forex market from an organizational and technical point of view as an aggregate network of modern means of communication connecting national and foreign banks and brokerage firms. Forex operations on targets can be trading, speculative, hedging and regulatory (currency interventions by central banks). Story. Preconditions for the formation of the foreign exchange market. Currency exchange operations existed in the ancient world and in the Middle Ages. However, modern currency markets arose in the 19th century. The main prerequisites that contributed to the formation of the Forex market in the modern sense were the following: - wide development of various international economic relations; - the creation of a global monetary system based on the organization and regulation of currency relations, enshrined in interstate agreements; - widespread lending funds of international payments and payments; - consolidation and centralization of bank capital, wide development of correspondent relations between banks of different countries, including maintaining correspondent accounts in foreign currency; - development of information technologies and communications: telegraph, telephone, telex, which simplified contacts between the foreign exchange markets and reduced the time for receiving information about transactions. The developing national currency markets and their interaction formed a single global currency market, in which leading currencies in world financial centers began to circulate freely. Development of operations in the Forex market. Historically, in international circulation, two main methods of payment were distinguished: tracing and remittance, which were used in international circulation before the First World War and partially (to a lesser extent) between the First and Second World Wars. The term “tracing” is associated with the use of a bill of exchange - drafts. When paying by this method, the lender writes out a draft to the debtor in his currency (for example, a lender in London presents a debtor in Chicago with a demand to pay the debt in dollars) and sells it in his foreign exchange market at the buyer's bank rate. Thus, when tracing, the creditor acts as an active party, he sells the bill in the currency of the debtor in its Forex market. When remitting, the debtor acts as an active person: he buys the creditor’s currency in his foreign exchange market at the seller’s rate. In the first years after World War II, until the end of the 1950s, when currency restrictions were in effect, spot currency transactions (with immediate delivery of currency) and forward forward transactions prevailed in industrialized countries. Since the 1970s, futures and option currency transactions began to develop. This kind of transaction provided new opportunities for all participants in the Forex market for both currency speculators and hedgers, that is, to protect against currency risks and obtain speculative profit. Banks began to make foreign exchange transactions in combination with “swap” operations with interest rates. The modern Forex market. On August 15, 1971, U.S. President Richard Nixon announced a decision to abolish the free convertibility of the dollar into gold (abandoned the gold standard), thus refusing unilaterally to comply with the Bretton Woods agreements (according to which the dollar was provided with gold, and all other currencies were dollar). In December 1971, the Smithsonian Agreement was reached in Washington, according to which instead of 1% fluctuations in the exchange rate of the currency against the US dollar, fluctuations of 4.5% began to be allowed (9% for non-dollar currency pairs). This destroyed the system of stable exchange rates and became the culmination event in the crisis of the post-war Bretton Woods monetary system. It was replaced by the Jamaican monetary system, the principles of which were laid down in March 1971 on the island of Jamaica with the participation of the 20 most developed states of the non-communist bloc. The essence of the changes came down to a looser policy regarding gold prices. If earlier exchange rates were stable due to the gold standard, then after such decisions the floating gold rate led to inevitable fluctuations in exchange rates between currencies. This gave rise to a relatively new area of ​​activity - currency trading, when the exchange rate began to depend not only on the gold equivalent of the currency, but also on the market supply / demand for it. A number of problems emerged quickly enough, for discussion in 1975 by French President Valerie Giscard d'Estaing and German Chancellor Helmut Schmidt (both former finance ministers) invited the heads of other leading Western states to gather in a narrow informal circle for face-to-face communication. The first G7 summit (then only of six participants) was held in Rambouillet with the participation of the USA, Germany, Great Britain, France, Italy and Japan (Canada joined the club in 1976, Russia was a member of the club from 1998 to 2014) . One of the main topics of discussion was the structural transformation of the international monetary system. On January 8, 1976, at a meeting of the ministers of IMF member countries in Kingston (Jamaica), a new agreement was adopted on the arrangement of the international monetary system, which had the form of amendments to the IMF charter. The system replaced the Bretton Woods monetary system. Many countries have actually refused to peg the national currency to the dollar or gold. However, only in 1978 did the IMF officially allow such a refusal. From this moment on, free-floating rates have become the main currency exchange method. In the new currency system, the principle of determining the purchasing power of money based on the value of their gold equivalent (Gold Standard) has finally been abandoned. The money of the countries participating in the agreement ceased to have official gold content, the exchange began to take place in the free currency market at free prices. The establishment of a floating exchange rate system led to three significant results: - Importers, exporters and their banking institutions were forced to become regular participants in the Forex market, since changes in foreign exchange rates can affect the financial results of their work, both positively and negatively. - Central banks got the opportunity to influence the exchange rates of the national currency and influence the economic situation in the country by market methods, and not just administrative ones. - Rates of the most liquid national currencies are formed on the basis of a market search for an equilibrium point between current demand and available supply, and a change in supply and demand in the market causes the exchange rate to shift in one direction or another. Description of modern world currency markets. Modern global currency markets are characterized by the following main features: - The international nature of Forex markets based on the globalization of world economic relations, the widespread use of electronic communications for operations and settlements. - The continuous, non-stop nature of operations during the day alternately in all parts of the world. - The unified nature of foreign exchange transactions. - The use of operations in the Forex market for the purpose of protection against currency and credit risks through hedging. - A huge proportion of speculative and arbitrage operations, which are many times greater than foreign exchange transactions related to commercial transactions. The number of currency speculators has risen sharply and includes not only banks and financial-industrial groups, TNCs, but also many other participants, including individuals and legal entities. - The volatility of exchange rates, which does not always depend on fundamental economic factors. The modern Forex market performs the following functions: - Ensuring the timeliness of international payments. - Creation of opportunities for protection against currency and credit risks. - Ensuring the interconnection of world currency, credit and financial markets. - Creation of opportunities for diversification of foreign exchange reserves of the state, banks, enterprises. - Market regulation of exchange rates based on the interaction of supply and demand of currencies. - The ability to implement monetary policy as part of state economic policy. The possibility of implementing concerted actions of different states in order to achieve the goals of macroeconomic policy in the framework of interstate agreements. - Providing opportunities for participants in the Forex market to obtain speculative profits through arbitration operations. Currency market instruments. In the modern foreign exchange market, the following types of transactions can be distinguished: Foreign exchange transactions with immediate delivery (“spot”). Spot transactions are transactions on the purchase and sale of currency on the terms of its immediate delivery by counterparty banks no later than the second business day from the date of the transaction, during which the sale / purchase rate is fixed. Currency operations with immediate delivery are the most mobile element of the currency position and involve a certain risk. Using the “spot” operation, banks provide their customers with foreign currency needs, transferring capital, including “hot” money from one currency to another, carry out arbitrage and speculative operations. Derivatives transactions with foreign currency. Derivatives currency transactions include forward, futures and option transactions, as well as currency swaps. Forward transactions. Forward transactions include the purchase and sale of currency, in which the price (purchase and sale rate) is determined at the time of the transaction, and the supply of currency, that is, the fulfillment of obligations by the parties, is provided for in the future. Forward transactions are concluded under contracts whose terms (purchase / sale volume, date and place of fulfillment of obligations) are individual and not standard. Futures transactions. Futures transactions include standard contracts for the sale of currencies that are traded on the exchange. Such transactions are made on the conditions that the exchange develops and which are binding on all who make transactions with futures. Futures have standard maturities. The most common is three-month futures. The leading exchanges for trading futures contracts are the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), London (LIFFE), Singapore (SGX), Eurex, Paris (MATIF). Since April 1998, on the Chicago Mercantile Exchange (CME), with the technological support of the MICEX, ruble futures contracts (face value of 500 thousand rubles, six-month period) were first entered into. To assess the trading positions of the participants of the offsets, the ruble to dollar exchange rate, which is formed at the MICEX, is used. Physically, rubles are not exported. The one who correctly predicts the exchange rate wins. Futures trading is carried out through the clearing house, which is a seller for each buyer and a buyer for each seller. Options transactions. An option (from lat. Optio, optionis - choice) is a derivative financial instrument, a contract under which the buyer of the option acquires the right, but not the obligation to buy or sell a certain amount of currency in the future at a fixed price (strike price). The buyer of the option, when paying the premium on the option to the seller, which is essentially the price of the option, acquires the right to either buy (call option) or sell (put option) on any day, if it is an American option; or on a specific date once a month, if it is a European option). Currency options contracts are traded in: the world's largest Chicago Board Options Exchange, the European Options Exchange in Amsterdam, and the Austrian Derivatives Options Exchange in Vienna. Currency swaps transactions. Currency swap (eng. Swap - exchange) is a transaction that combines the purchase and sale of two currencies on the basis of immediate delivery with simultaneous counter-transaction for a certain period with the same currencies. Each side is both a seller and a buyer of a certain amount of currency. Currency swap is not a standard exchange contract. For swap operations, the cash transaction is carried out at the spot rate, which in the counter-transaction (urgent) is adjusted for the premium or discount depending on the dynamics of the exchange rate. At the same time, the client saves on margin - the difference between the rates of the seller and the buyer in a cash transaction. Swap operations are convenient for banks: they do not create an open position (the purchase is covered by the sale), they temporarily provide the necessary currency without the risk associated with a change in its exchange rate. Daily turnover. It is believed that the daily turnover in the Forex market was: - in 1977 - $ 5 billion. - in 1987 - $ 600 billion. - at the end of 1992 - 1 trillion dollars. - in 1997 - $ 1.2 trillion. - in 2000 - $ 1.5 trillion. - In 2005-2006, the volume of daily turnover in the Forex market fluctuated, according to various estimates, from 2 to 4.5 trillion dollars. - in 2010 - 4 trillion dollars. - in 2013 - 5.3 trillion dollars. - in 2016 - 5.1 trillion dollars. - in 2019 - 6.6 trillion dollars. The Bank for International Settlements periodically conducts a large-scale study of the Forex market every three years, starting in 1989. The final report contains information on market turnover, structure and dynamics. The latest report was released in September 2019 and is available on the official website. However, there is no exact data, since it is an over-the-counter market, and there is no requirement for the mandatory registration and publication of transaction data. A part of this volume is provided by margin trading, under the terms of which it is allowed to conclude contracts for amounts significantly exceeding the actual capital of the transaction participant. Regardless of the nature and purpose of transactions, a large daily turnover is a guarantee of high liquidity of this market. Participants in the Forex market. Participants in the foreign exchange market are: central and commercial banks, currency stock exchanges, brokers, firms and other economic agents. Central banks. Central banks - their function is to manage state currency reserves and ensure exchange rate stability. To implement these tasks, both direct foreign exchange interventions and indirect influence can be carried out through regulation of the refinancing rate level, reserve standards, etc. Commercial banks. Commercial banks - they conduct the bulk of foreign exchange transactions. Other market participants hold accounts in banks and carry out through them the conversion and deposit-credit operations necessary for their purposes. Banks concentrate the aggregate needs of commodity and stock markets in currency exchange, as well as in raising / placing funds. In addition to satisfying customer requests, banks can conduct operations on their own at their own expense. Ultimately, the international currency exchange market (Forex) is a market for interbank transactions. The largest influence is exerted by large international banks, whose daily volume of operations reaches billions of dollars. The volume of one interbank contract with a real supply of currency on the second business day (spot market) is usually about 5 million US dollars or their equivalent. The cost of one conversion payment is from 60 to 300 dollars. In addition, you have to bear the cost of up to 6 thousand dollars a month at the interbank information and trading terminal. Due to these conditions, small amounts are not converted at Forex. To do this, it’s cheaper to contact financial intermediaries (a bank or a currency broker) who will convert for a certain percentage of the transaction amount. With a large number of clients and multidirectional orders, a situation of internal clearing regularly arises, when the intermediary does not need to contact a third-party counterparty (there is no need to conduct a real conversion through Forex). But intermediaries always receive their commission from customers. Due to the fact that not all client applications fall on Forex, intermediaries can offer clients commissions that are significantly lower than the cost of direct Forex transactions. At the same time, if intermediaries are eliminated, the cost of conversion for the end customer will inevitably increase. Currency stock exchanges. Currency stock exchanges - in a number of countries there are national currency stock exchanges whose functions include the implementation of currency exchange for legal entities and the formation of a market exchange rate. The state usually actively regulates the level of the exchange rate, taking advantage of the compactness of the local exchange market. Currency brokers. Currency brokers - their function is to bring together the buyer and seller of foreign currency and carry out a conversion or loan and deposit operation between them. For their mediation, brokerage firms charge a brokerage fee as a percentage of the transaction amount. But the amount of this commission is often less than the difference between the loan interest of the bank and the bank deposit rate. Banks can also perform this function. In this case, they do not give out a loan and do not bear the corresponding risks. Firms. Firms engaged in foreign trade operations - aggregate applications from importers form a steady demand for foreign currency, and from exporters - its supply, including in the form of foreign currency deposits (temporarily free balances in foreign currency accounts). As a rule, firms do not have direct access to the Forex market and conduct conversion and deposit operations through commercial banks. Other legal entities. International investment companies, pension and hedge funds, insurance companies - the main task is diversified asset portfolio management, which is achieved by placing funds in securities of governments and corporations in different countries. At dealer slang they are called simply funds. This type can also include large multinational corporations engaged in foreign production investments: the creation of branches, joint ventures, etc. Private individuals. Private individuals - citizens carry out a wide range of operations, each of which is small, but in total they can form a significant additional demand or offer: payment for foreign tourism; remittances of salaries, pensions, fees; purchase / sale of cash currency as a means of saving; speculative foreign exchange transactions. Regulation of speculative trade. Forex is based on the principle of free currency conversion, which implies the absence of government intervention in the conclusion of foreign exchange transactions (there is no official exchange rate, there are no restrictions on the direction, prices and volume of transactions), and guarantees of freedom of such operations. At the same time, the rules and restrictions on the provision of intermediary services are usually set, which regulate, first of all, the relations between the client (trader) and the intermediary (broker).

References:
Foreign exchange market Wikipedia  CC BY-SA