Forex, The Foreign exchange market is one of those entities you either hate or love, what nobody argues about is that it is vital for international trade and investments to function.
Interestingly, Forex is not a centralized institution but a network of financial centers that manage currency trading between buyers and sellers around the clock from Monday to Friday. The role of this market is to enable businesses and individuals to convert one currency into another.
If a French company, for instance, wants to buy surfboards in the United States they will have to pay in dollars. However, the company’s income is in Euros. Thanks to Forex this is not an issue and the operation can be carried out instantly. As you already guessed there are a lot of companies that use this service and not only from France.
Forex, is huge. The last Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2007 reported that the average daily turnover was 3.2 trillion dollars. This year we will receive the 2010 Triennial report figures and nobody is expecting them to be dropping.
It is not only big it is also highly liquid, because the product being traded is cash. The profit margins are low compared to other markets and it can be accessed from practically anywhere at any time, except weekends.
This has made some analyst describe it as the market closest to the ideal perfect competition, the Utopia of a capitalistic free market society. However, others would beg to differ and accuse the whole market of being an unchecked speculative playground for the rich and powerful.
Hedge Funds have received their fair share of criticism are Hedge Funds. Hedge Funds are basically clubs of investors that pool their resources and invest strategically in an effort to “hedge” or reduce the risk of market movement. These funds often have billions of dollars in their portfolios and are very willing to use the leverage this affords them in their own interest.
The most serious accusation against Hedge Funds and other large investors is that their aggressive speculation can often overwhelm central banks effort to intervene to assist any specific currency. What makes them so dangerous, in some analysts eyes, is that because they overlap various definitions and categories some of their activities are lightly regulated or not at all.
This is, of course, the natural effect of market forces that control Forex and most other economic entities. However, it must be said that hedge funds are allowed to continue in their pseudo-regulated existence due to specific exemptions created by lawmakers.
Should Hedge Funds and other large investors be regulated in their use of the foreign exchange market? Does this market provide a haven for rich and powerful investors giving them an unfair advantage? Probably. Nevertheless, this is also an issue in other strictly regulated markets.
A fair comment might be that like democracy the foreign exchange market is the worst type except for all the rest that have been tried.
