Forex
The foreign exchange market, or forex, is an international, over-the-counter, or decentralized market for currency exchange. The currency market is by far the largest market in the world in terms of transaction value, encompassing exchanges between major banking institutions, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. It was established in 1971 when floating exchange rates began to emerge, following the abandonment of the Bretton Woods agreements, which aimed to stabilize exchange rates at a fixed value against the dollar, which in turn was pegged to the value of gold (the gold exchange standard).
The Eurodollar market came into being during the 1950s when the proceeds from Soviet oil sales, all denominated in dollars, were deposited outside the USA due to fears that they would be frozen by US authorities. This practice led to a large quantity of US dollars being outside the control of the United States. These vast liquidity reserves were very attractive to investors worldwide as they were subject to much less pervasive regulation and offered higher profitability. Having become the most traded asset class globally, speculative or hedging strategies are implemented through the use of various financial instruments, principally derivatives such as futures, options, and forwards.
The growth of global commercial and financial exchanges has made it essential to understand the dynamics influencing exchange rates, especially for central banks, whose primary objective is price stability. The appreciation (or depreciation) of the national currency against foreign currencies influences the monetary policy choices of central banks, which must intervene in cases of high fluctuations to safeguard the balance of trade (the difference between imports and exports).
The various market participants involved in currency exchange transactions are capable of causing significant oscillations in currency markets. In the history of the European economy, Black Wednesday, also known in the United Kingdom as the Sterling Crisis, was a sudden devaluation of the Italian lira and the British pound that occurred on Wednesday, September 16, 1992, due to capital flight from both countries. As a result of this devaluation, both currencies had to temporarily exit the European Monetary System (EMS) because they were unable to maintain their exchange rates above the minimum fluctuation threshold required for central banks affiliated with the EMS. In 1997, the UK Treasury estimated the cost of Black Wednesday at £3.14 billion.
