The market in which one currency is simultaneously bought or sold at the same time, against a counter currency. The Forex market is the largest, most liquid market on the planet, with an approximate traded value that exceeds $3.9 trillion per day and includes all of the currencies in the world.
There is no central marketplace for currency exchange; trade is conducted in a decentralized “over the counter” (OTC Market). The Forex market is open 24/5 Monday to Friday and currencies are traded worldwide among the major financial centres of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
The Forex Market is the largest market in the world in terms of the total cash value traded, and any person, organisation or country can participate. Financial centres around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.
The foreign exchange market determines the relative values of different currencies
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business’s income is in US dollars. It also supports speculation, and facilitates the carry trade, in which investors borrow lower-yielding currencies and lend (invest in) higher-yielding currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods Agreement.
The foreign exchange market is unique because of
- It has a huge trading volume
- leading to high liquidity; (there is always a buyer and seller)
- Its geographical dispersion; Its worldwide
- Its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
- The variety of factors that affect exchange rates;
- The low margins of relative profit compared with other markets of fixed income;
- The use of leverage to enhance profit margins with respect to account size.
- No one person or organisation can control the market for any length of time.
The $3.98 trillion break-down is approximately is as follows:
- $1.490 trillion in spot transactions
- $475 billion in outright forwards
- $1.765 trillion in foreign exchange swaps
- $43 billion currency swaps
- $207 billion in options and other products