Components Of Foreign Exchange Deal
The foreign exchange market is by far the largest market in the world, in terms of cash value traded. Including trading between large banks, central banks, currency speculators, where currencies are traded for another, the main aim of every trader is to make profits from the currency movements in the market. Learn in detail about Foreign exchange deal, which is the main focus of this page.
More than 95% of the trade is performed for speculative purposes. The currencies are not physically traded but involve currency contracts for amount and exchange rate of currency pairs. The trader and the trading platform, which are the two parties to such contracts, undertake to fulfill their obligations. While one side undertakes to sell the amount specified, and the other undertakes to buy it. Thus, the contract ends by offsetting it against an opposite position, resulting in the profit and loss of the parties involved.
The foreign exchange deal online is a mutually agreed upon contract between the trader and the market maker. It consists of the following components:
• The currency pair: which currency to buy and which to sell are decide upon
• The principal amount: the amount of currency involved in the foreign exchange deal
• The rate: the exchange rate agreed between the two currencies
Time frame is also to be considered in some deals in foreign exchange. However, some deals can be renewed to the next day for a limited period of time.
To know if you have made a good online foreign exchange deal, it is important to compare this as an investment with other alternative investments. To be on the safest, compare this to the return on a risk-free investment. For example, long-term US government bonds are considered to be a risk-free investment.
It is wise to trade only if you expect the currency you have bought has more chances of getting increased in value relative to the currency you are selling. If in case the currency you have bought is not increasing in value, you must sell it back that currency in order to make profit.