ForexMinute Experts Explain the Role of Forex in the International Stock Market
Foreign Exchange Market, or Forex Market, is all about the purchase and sale of national currencies existing between the economies of nations that are employing national currencies in trades.
The Forex trade is actively involved in international stock markets due to the large trade interaction between several economies. The annual volume of foreign exchange trading is about 60 times larger than annual world trade (approx. $5.5 trillion), and around 12 times larger than the world GNP. With Forex markets’ trading volumes often exceeding $1 trillion daily, the role of Forex in the international stock market is excelling without a doubt.
The reason is explained with an example that follows. Suppose, if there are 10 national currencies, then if all the economies trade with each other, such that all the currencies are used in these trades. Then the number of foreign currency markets that would be required is
N (N-1) / 2 = 10 (10-1) / 2 = 45.
On the other hand, by applying Forex into the scenario, if single currency (called a vehicle currency), then one would need only 9 markets to perform all the transaction between 10 economies, which is much less than those 45 markets. Thus, saving in terms of Forex is enormous and profitable. Traders that engage in Forex trading may make rather large proﬁts.