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What are foreign exchange and derivative markets? How do the foreign exchange and derivative markets differ? How have they evolved over time?

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Foreign exchange Markets-

The foreign exchange (currency or Forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market. They may only participate indirectly through brokers or banks and may be targets of Forex scams.

Derivative Markets-

The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Difference between foreign exchange and derivative markets-

A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather conditions). The derivatives markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both

The foreign exchange market is different from derivatives markets because of:

? its trading volume,
? the extreme liquidity of the market,
? the large number of, and variety of, traders in the market,
? its geographical dispersion,
? its long trading hours - 24 hours a day (except on weekends).
? the variety of factors that affect exchange rates

IN foreign exchange market there is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded.

Derivatives are traded in two kinds of markets: exchanges and OTC markets. Exchanges have traditionally been defined by "pit" trading through open outcry, but exchanges have recently adopted electronic trading platforms that automatically match the bids and offers from market participants to execute trades in a multilateral environment. The trading of derivatives (traditionally futures and options) on exchanges is conducted through brokers and not dealers.

The OTC markets are organized along several different lines. The first is called a "traditional" dealer market, the second is called an electronically brokered market and the third is called a proprietary trading platform market.

Evolution of Foreign Exchange Markets-

The Bretton Woods Agreement, established in 1944, fixed national currencies against the dollar, and set the dollar at a rate of USD 35 per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound sterling to a college professor by the name of Milton Friedman because he ...

Solution Summary

The 1971 word cited solution clearly explains all the concepts together with history and examples.

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