Background of the emergence of foreign exchange margin Although the margin system has a long history, the emergence of foreign exchange margin trading is not long in fact, it emerged in the 1980s due to the dramatic growth of international trade.
In the mid-20th century, global free trade multiplied.
And all international commerce needs a stable currency as the standard of trade.
Before the 1970s, most international trade was quoted in sterling and London was the international financial hub.
But as the power of Britain and the United States gradually changed, the dollar slowly replaced the pound.
The dollar began to replace the pound as the settlement of international commerce.
Since fixed exchange rates are not feasible, businesses are more aware of the impact of exchange rates on costs and profits as free trade becomes stronger.
At that time, many foreign trade transactions were conducted through bank credit cards.
The merchants give all the foreign exchange income to the bank for settlement, the public takes the settlement of foreign exchange as the only normal operation, without any speculation, and the bank collects all the foreign exchange surplus for trading.
By the 1970s and 1980s, trading foreign exchange was the preserve of banks, making it difficult for ordinary investors to enter this high-barrier trade.
Back then, when two banks entered into a contract to trade a foreign currency, both parties would be paid in physical currency.
The Inevitability of the Emergence of Foreign Exchange margin — Hedging risk The original foreign exchange margin trading is used to hedge risk.
GMI has just mentioned the rise of foreign currency trading contracts between banks, but in practice, dollar settlement takes place in the United States and pound settlement in the United Kingdom.
Because of the time difference in the region, the hidden risks are actually quite large.
In the 1980s and 1990s, under the influence of global financial risks, many small banks were closed in countries all over the world, and banks immediately found that the exchange risk of physical currency was very big.
Due to the irregular exchange in the actual foreign exchange, such as the position allocation between bank branches, in order to avoid the exchange rate fluctuation risk caused by such irregular exchange, traders often use a forward transaction to hedge the risk after converting the actual currency.
However, it is not clear when the exchange will mature, so the interest rate is LIBOR overnight.
Forward contracts, on the other hand, are indefinite contracts that require only a certain amount of margin to trade.
Forex margin derivatives – Forex margin trading is closer to forward non-deliverable non-contract trading.
Since the trading could be kept off the banks’ books, with the development of derivatives, banks pushed the trading model out to the public.
GMI finds this interesting: that is, the rise of forex margin trading between banks gave rise to forex margin trading, which eventually made forex margin trading more widely known to retail investors.
GMI looks back at the Bretton Woods System, which was signed in 1944 to prevent currency flight between countries and to limit international currency speculation in order to achieve international monetary stability.
Under the Bretton Woods agreement, signatories agreed to try to maintain their currencies against the dollar and, if necessary, against gold, allowing only small fluctuations.
Countries are prohibited from devaluing their currencies for trade gain and are only allowed to depreciate by 10 percent.
In the 1950s, the ever-increasing volume of international trade led to a massive transfer of funds for post-war reconstruction, which destabilized the foreign exchange rates established by the Bretton Woods system.
In the end, the Bretton Woods agreements were scrapped in 1971.
By 1973, the currencies of the major industrial countries were floating more freely, controlled mainly by the supply and demand of money in the foreign exchange markets.
As volume, speed, and price variability increased across the board in the 1970s, prices fluctuated from day to day, new financial instruments were introduced, and market and trade liberalization took place.
In the 1980s, with the advent of computers and related technologies, cross-border capital flows accelerated, linking markets in Asia, Europe and the United States.
Foreign-exchange trading has soared from about $70 billion a day in the mid-1980s to $1.5 billion a day today.
