History of Forex
Today’s Forex market began to develop in 1973; however, foreign currency trading has been
around since Pharaonic Egypt's advent of coinage, and the ancient Babylonian's usage of paper
money. More relevant to today’s market however, are the post World War II alterations to the
international exchange rate. World War II left the United States an industrial giant unscathed by the
war, at least in comparison to the European powers. Worldwide confidence in the dollar made it the
reserve currency of choice. To prevent a recurrence of the global depression, the Bretton Woods
System, ratified by all the major capitalist countries, pegged international currencies to the dollar,
which had its value, in turn, fixed in gold. This led to a system of fixed exchange rates, and the
dollar's role as de facto reserve currency was formalized.
This arrangement lasted for the next three decades. In the early seventies, however, deteriorating
confidence in the strength of the dollar led to market-driven currency values, and a new system of
floating exchange rates took hold. The modern Forex market arose from this new arrangement.
Forex Trading Instruments
Spot market: The most popular of the Forex trading instruments, the spot market deals exclusively
with the current price of a financial instrument. A spot deal consists of a bilateral contract based on
an agreed exchange rate to be delivered within two business days. The spot market is
characterized by a large degree of liquidity and currency fluctuation.
Forward market: Forward trades involve future currency exchanges at a predetermined rate, based
on the interest rate differential between the two relevant currencies.
