BBVA API Market
The foreign exchange (Forex) market is the world’s largest financial market. This market trades in the exchange rates of the entire planet through decentralized market mechanisms; this is where the value of each currency is traded. But what is a foreign currency and how is it different from a domestic currency? How and why was Forex created? What adds “value” to a domestic currency today?
To understand the foreign exchange market it is first essential to understand what a foreign currency is. According to the Spanish Royal Academy (RAE), foreign currency is a “foreign currency referring to the unit of the country in question.” Broadly speaking, the term “foreign currency” is used to refer to any foreign currency other than the legal tender in a certain country. Foreign currency is the currency of another region.
In Spain, where the legal tender is the euro, the US dollar, the Chinese renminbi or the UK pound sterling are examples of foreign currencies. However, for the United States, China or the United Kingdom, the dollar, the renminbi or the pound are considered simply local “currency”. For these regions, the euro is a foreign currency.
Every country in the world has one or more official local currencies, sometimes pegged to foreign currencies. This is known as the ‘fixed exchange rate’, and it is the policy followed by countries such as the United Arab Emirates, with a dirham linked to the US dollar, or the Danish krone, which was linked to the German mark at the time and is now linked to the euro. Knowing this is decisive in the world of open banking and its advances.
The Bank of Spain made a key division to understand currency exchange versus foreign currency exchange. While currency exchange is any transaction in which an asset goes from expressing itself in one currency to doing so in another, foreign currency exchange entails a change in currency when a payment or credit is made.
An example of the former is to go to an Exchange (bureau de change) just after landing in London from Spain to exchange euros for pounds is a currency exchange. One currency is exchanged for another currency.
Conversely, when you pay in a London restaurant using your European card (which is associated with an account in euros) and the establishment receives the payment in pounds, we talk about a foreign currency exchange. This is where the foreign exchange market comes into play.
The foreign exchange market, abbreviated as Forex, which comes from the term Foreign Exchange, was created to facilitate these exchanges.
Forex is the decentralized and unregulated market that enables the bilateral exchange of currencies for others.
Forex completely changed the concept of domestic currency and foreign currency. In 2019, about 6.6 trillion US dollars were traded per day compared to 0.005 trillion (500 billion, more than a thousand times less) traded in 1988. Today, the foreign exchange market is the largest financial market in the world.
Its beginnings date back to 1875, when the gold standard was established. At that time, the value of countries’ currencies depended on their relationship to gold. However, this system had several problems such as the instability of the value of gold and the need for banks to maintain reserves in the metal. To address this situation, the bimetallic standard was introduced, which combined gold and silver to give greater stability to the value of coins.
Then came the Bretton Woods Agreement that changed the International Monetary System again: Gold was replaced by the US dollar as the main reference. However, the depreciation of the dollar in the 1960s led to the introduction of the floating exchange market in which currencies fluctuate according to market supply and demand. This system has defined the current forex market.
The Forex market offers a number of benefits such as high liquidity, time flexibility, leverage and transparency. These are its main advantages:
Likewise, the Forex market also entails some risks such as the following:
The foreign exchange market is distinguished by the wide variety of participants, from central banks to private individuals. These are the main players operating:
The foreign exchange market operates globally so that banks may be able to buy and sell different currencies depending on the exchange rate.
For example, you can buy 5 million pounds sterling today paying in euros, and sell it in a week’s time at a profit when the euro loses relative value.
All Forex currencies are identified with an ISO4217 code, and each currency pair is represented with a combination of six letters. For example, EUR/GBP. The ‘major currency’ pairs are those with the highest trading volume, and are the US dollar (USD) paired with: The British pound (GBP), the euro (EUR), the Japanese yen, etc.
In addition, there are several interesting exchange groups. “Commodity pairs” are those affected by commodities such as gold, oil, silver; these include NZD/USD, CAD/USD and AUD/USD. The market is also usually divided between transactions without brokers (direct participants) or individual transactions (indirect participations); as a consequence, the party involved is important.
In recent years, thanks to tools such as APIs, banks such as BBVA (historically, direct participants) have given indirect participants (such as SMEs) the possibility of entering Forex in a simple way, automated manner with integration into their ERP.
In the dynamic world of payments, a new star has emerged in recent years: Buy Now Pay Later (BNPL), i.e. short-term financing that allows you to buy now and pay later. This model allows businesses to purchase goods or services and pay for them in installments, often interest-free, making it an attractive alternative to credit […]
BBVA and Vecttor, Cabify’s subsidiary engaged in managing vehicles with drivers, have entered into an alliance that saves time and provides security to the company and its drivers. The collaboration allows drivers to deposit cash collections at any BBVA ATM and Vecttor to automatically reconcile this activity from their accounts with those in the company’s […]
BBVA has been recognized by Global Finance as the bank with the best global open banking offer for companies. This award comes on top of 12 other recognitions the magazine has bestowed on the company, such as the best bank for corporate clients and the one recognizing its AI factory as one of the best […]
