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Trade in the World's Largest Market

Ever wondered which is the biggest and most liquid market in the world. It is not equites or commodities but foreign exchange market, also known as FX, forex, or currency market. Globally, trading in currencies primarily takes place in Over-the-Counter (OTC) market, where large financial institutions, corporate and hedge funds trade amongst each other depending upon their requirement.

Currency trading at its most basic form is trading in currency of one country vs another. While corporate mainly use this market to hedge their underlying FX exposure on account of export/import, hedge funds and financial institutions use for trading or hedging their overseas investment. What makes FX market unique is its round the clock trading, liquidity, depth and leverage.

Benefits of Currency Derivatives Trading

Currency prices are affected by a variety of economic and political conditions but probably the most important are interest rate, international trade, inflation and political stability. Some of the benefits of Currency Trading are discussed below:-

  • Lower Margin - The margin normally varies in a lower range depending upon currency pairs and volatility. USDINR has the lowest margin of all currency pairs.
  • Longer Trading Hours - The trading hours is longer with respect to other trading as its trading hours is from 9 a.m. to 5 p.m. to reach market development.
  • Lower Transaction Cost - As there is no STT or CTT which leads towards keeping a lower transaction cost overall.
  • Smaller Lot Size - The lot size is usually smaller as USDINR 1 lot = $1000 which in INR terms comes to approx 74000 to 75000 depending upon exchange rate of the day.
  • Weekly Options - In addition to monthly, weekly options also available in USDINR and other INR pairs, expiring every Friday at FBIL Reference Rate.

Types of Foreign Exchange Market

Here are the list of various types of foreign exchange market in India.

Future Market

The Future Market involves transactions in the futures market require future payment and distribution at a previously agreed upon exchange rate which is known as the future rate.

Forward Market

In Forward Market, the parties negotiate the terms of the transactions and the terms agreed upon can be negotiated and altered as per the needs of the concerned parties.

Swap Market

The borrowing and lending of two types of currencies between two investors is called swap transactions. Here, one borrows and pays in form of second currency to second investor.

Option Market

Option Trading allows you to buy and sell stocks. The currency of exchange from one denomination to the other is agreed upon by the investor at a specific rate and on a specific date.



Pros of Currency Market

Currency Market carries along with it some advantages which are discussed below:-

  • High Liquidity - Liquidity is the ease with which you find buyers or sellers for your asset in the market. Higher the trading volume, higher the liquidity, and higher the chances of your trades being successful.
  • High Leverage - Leverage is an investment risk as high leverage in Currency Trading allows traders to borrow funds from a broker, increasing their exposure to the market and generating more with less.
  • Highly Accessible - It is the largest financial market, with an average of $4-5 trillion traded daily. Traders can trade easily in currencies, making forex a truly accessible market for all investors.



Cons of Currency Market

Currency Market carries along with it some disadvantages which are discussed below:-

  • Volatility - All markets can show volatility at one time or another, and the forex market is no different. Traders hoping for short-term profits may be exposed to unexpected extreme volatility at times, which can make their currency trading strategies unprofitable.
  • Risk Factor - High Levearge option involves high degree of risk so one needs to be very focussed while trading as it can either result in better profits or huge losses. Proper knowledge about forex trading is a must in order to make accurate future forecasting.
  • 24 x 7 Market - As Forex Trading Market is the most active market in the world operating on 24 hours basis. Hence investor also need to be active all the time to keep himself updated about every minutes of fluctuations which result in an tiring work without any rest.