Currency Trading
To exchange one currency for another currency is termed as currency trading. This industry is one of the largest in the world with regards to trading volume.
Foreign currency is the ratio of one currency in consideration with another. How does the process take place? Take an interbank currency trade for instance. Bank A will call Bank B and ask for the quote of a currency. Say the rupee against the dollar. Bank B will then reply to the written mail with the standing rate of his bank. If the rate seems attractive to Bank A then they will enter a deal. All the basic information like price, amount, purchased amount etc. will be entered in their systems. When the actual settlement takes place Bank A will depart with the specified rupee amount and Bank B will follow suit by turning in the dollar amount. If the rupee rises against the dollar then Bank A will gain the difference as profit.
When traders enter into currency trading they give a two-way quote. One of them is at the rate of purchase and the other is the price of sale. The two prices are normally separated by a hyphen. On the left is the price that the trader will purchase at and on the right is the price at which he will sell. The difference between the purchase rate and sale is called the bid-ask spread. The trader expects slight variations on the sale and purchase rate. He will also trade in similar amounts of what he had purchased. There will not be any drastic differences. The margin thus earned by the trader is the difference of the bid-ask spread.
The profit gained depends on the variation in the exchange rate and the size of the position. Speculating over a period of time can be dangerous and hence every government has strict rules laid down which have to be adhered to, to prevent chaos and embezzlement of money.
It is this industry that no fees are charged. The bid-ask spread is considered as the transaction fee. There is no biasness for an extra amount on the basis of creditworthiness. Every player is considered equal. Hence stringent rules are in place to curb out of hand activities.