1. The foreign exchange markets : Overview of basics

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From the course by Indian School of Business

Introduction to Financial Markets

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Indian School of Business

Introduction to Financial Markets

748 ratings

Course 1 of 5 in the Specialization Financial Markets and Investment Strategy

Learn the general concepts of financial markets and economy. You will see the difference between primary and secondary markets and learn about markets for different products. You will also look at various economic Indicators and their influence on the markets. After completing this course, you will have a much stronger background of financial markets and ready to go to the next stage in the Specialization. This course is designed to help students with very little or no finance background to learn the basics of investments.

From the lesson

Currency Markets

In this module you will be exposed to currency markets and different currencies traded in these markets. The they are given a brief overview on how to trade in the currency markets.

1. The foreign exchange markets : Overview of basics5:15

2. Around the world in a trading day : A round up8:43

3. Foreign Exchange Markets and Other Financial Markets : The complete spectrum7:53

Meet the Instructors

Vaidya Nathan
Lecturer
Finance

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Learning outcomes.

After watching this video you'll be able to understand the size of the fx market,

how it functions, and be able to compare fx markets related to other markets such

as equity and fixed income markets.

You'll be able to understand what liquidity means and

how it affects currency markets.

>> Foreign exchange market, more often than not called the forex market,

or simply the fx market is the most traded financial market in the world.

We like to think of the forex market as the big boss of financial markets.

The forex market is the crossroads for international capital, the intersection

through which global commercial and investment flows have to move.

International trade flows such as, let's say, a Swiss electronic company

purchases Japanese made equipment were the original basis for

the development of the forex markets.

Today however, global financial and investment flows dominate trade

as the primary non-speculative source of forex market volume.

Whether it's an Australian pension fund investing in US Treasury bonds or

a British insurer allocating assets to the Japanese equity markets.

Or a German Conglomerate purchasing a Canadian manufacturing facility.

Each cross border transaction passes through the forex market at some

stage or the other.

More than anything else, the forex market is a trader's market.

It's a market that's open round the clock,

six days a week, enabling traders to act on news and events as they happen.

It's a market where a half a billion dollar trade can be

executed in a matter of seconds.

And may not even move markets or prices noticeably.

Try having to buy or sell half a billion of anything in any other market and

see how prices react.

Average daily currency trading volume is actually more than $2 trillion per day.

That's a mind boggling number.

That's 2 followed by 12 zeros.

And that's a lot of zeros, no matter how you slice it.

To give you some perspective on that size, it's about 10 to 15 times the size of

daily trading volume on all the world's stock markets combined, all put together.

While commercial and

financial transactions in the currency market represents huge nominal sums,

they still pale in comparison to amounts based on speculation.

By far, the vast majority of currency trading volume is based on speculation.

Traders buying and selling for short turn gains based on minute to minute,

hour to hour, and day to day price fluctuations.

Estimates are that more than 90% of daily trading volume is derived from

speculation.

Meaning commercial or investment based effects trades account for

less than 10% of daily global volume.

The depth and breadth of the speculative market means that the liquidity of

the overall forex market is unparalleled among global financial markets.

The bulk of spot currency trading,

about 75% of volume takes place in the so-called major currencies,

which represents the world's largest and most developed economies.

Additionally, activity in the forex market frequently functions on a regional

currency block basis where the bulk of trades take place between the US block,

yen block, and the euro block,

representing the three largest global economic regions.

Liquidity refers to the level of market interest, the level of buying and

selling volume available at any given moment for a particular asset or security.

The higher the liquidity or the deeper the market, the faster and

easier it is to buy or sell a security.

From a trading perspective, liquidity is critical concentration

which determines how quickly prices move during trades and over time.

A highly liquid market like forex market can see large trading volumes

transacted with relatively minor price changes.

On the other hand, an illiquid or thin market tends to

move prices more rapidly on relatively lower trading volumes.

A market that only trades during certain hours represents a very, very,

very less liquid or a very thin market.

But as I said before, fx market is really the big boss of financial markets.

And the kind of volumes that you get to see more than $2 trillion in a day is

something that you don't get to see in all stock markets combined,

put together, or in bond markets, or in commodity markets.

It's really the big daddy of financial markets.

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