FOREIGN EXCHANGE:

Foreign Exchange (forex or FX) is the trading of one currency for

another. For example, one can swap the U.S. dollar for the euro.
Foreign exchange transactions can take place on the foreign
exchange market, also known as the forex market.

The forex market is the largest, most liquid market in the world,

with trillions of dollars changing hands every day. There is no
centralized location. Rather, the forex market is an electronic
network of banks, brokers, institutions, and individual traders
(mostly trading through brokers or banks).

 Foreign Exchange (forex or FX) is a global market for

exchanging national currencies with one another.

 Foreign exchange venues comprise the largest securities

market in the world by nominal value, with trillions of dollars
changing hands each day.

 Foreign exchange trading utilizes currency pairs, priced in

terms of one versus the other.

 Forwards and futures are another way to participate in the

forex market
Foreign Exchange Rate:
Foreign Exchange Rate is defined as the price of
the domestic currency with respect to another currency. The
purpose of foreign exchange is to compare one currency with
another for showing their relative values.
Foreign exchange rate can also be said to be the
rate at which one currency is exchanged with another or it can be
said as the price of one currency that is stated in terms of another
currency.
Exchange rates of a currency can be either fixed
or floating. Fixed exchange rate is determined by the central bank
of the country while the floating rate is determined by the
dynamics of market demand and supply.

Factors Affecting the Exchange Rate

Exchange rate is impacted by some factors which
can be economic, political or psychological as well. The economic
factors that are known to cause variation in foreign exchange
rates are inflation, trade balances, government policies.
Political factors that can cause a change in the
foreign exchange rate are political unrest or instability in the
country and any kind of political conflict.
Psychological factors that impact the forex rate is
the psychology of the participants involved in foreign exchange.

Types of Exchange Rate Systems

There are three types of exchange rate systems
that are in effect in the foreign exchange market and these are as
follows
Fixed exchange rate System or Pegged exchange rate syst
em: 
The pegged exchange rate or the fixed
exchange rate system is referred to as the system where the
weaker currency of the two currencies in question is pegged or
tied to the stronger currency.
Fixed exchange rate is determined by the
government of the country or central bank and is not dependent
on market forces.
To maintain the stability in the currency rate, there
is purchasing of foreign exchange by the central bank or
government when the rate of foreign currency increases and
selling foreign currency when the rates fall.
This process is known as pegging and that’s why
the fixed exchange rate system is also referred to as the pegged
exchange rate system.

Advantages of Fixed Exchange Rate System

Following are some of the advantages of fixed exchange

rate system
1. It ensures stability in foreign exchange that
encourages foreign trade.
2. There is a stability in the value of currency which
protects it from market fluctuations.
3. It promotes foreign investment for the country.
4. It helps in maintaining stable inflation rates in an
economy.
Disadvantages of Fixed Exchange Rate System
Following are some of the disadvantages of the fixed
exchange rate system
1. There is a constant need for maintaining foreign
reserves in order to stabilise the economy.
2. The government may lack the flexibility that is required
to bounce back in case an economic shock engulfs the
economy.

Foreign Exchange Market:

The market determines the value, also known as

an exchange rate, of the majority of currencies. Foreign
exchange can be as simple as changing one currency for another
at a local bank. It can also involve trading currency on the foreign
exchange market. For example, a trader is betting a central bank
will ease or tighten monetary policy and that one currency will
strengthen versus the other.

The market is open 24 hours a day, five days a

week across major financial centres across the globe. This
means that you can buy or sell currencies at any time during
this.
The foreign exchange market isn't exactly a
one-stop-shop. There are a whole variety of different avenues
that an investor can go through in order to execute forex trades.
You can go through different dealers or through different financial
centres which use a host of electronic networks.
 From a historical standpoint, foreign exchange
was once a concept for governments, large companies,
and hedge funds. But in today's world, trading currencies is as
easy as a click of a mouse—accessibility is not an issue, which
means anyone can do it. Many investment companies offer the
chance for individuals to open accounts and trade currencies
however and whenever they choose.

When we are making trades in the forex

market, you're basically buying or selling the currency of a
particular country. But there's no physical exchange of money
from one hand to another. That's contrary to what happens at a
foreign exchange kiosk—think of a tourist visiting Times Square
in New York City from Japan. They may be converting their
(physical) yen to actual U.S. dollar cash (and may be charged a
commission fee to do so) so they can spend their money while
they're traveling.

But in the world of electronic markets, traders are

usually taking a position in a specific currency, with the hope that
there will be some upward movement and strength in the
currency that they're buying (or weakness if they're selling) so
they can make a profit.