Forex, also known as the foreign exchange market, is where currencies are traded. For most people around the world, currencies play a crucial role in international trade and business, even if they are unaware of it. Imagine you live in the United States and want to buy cheese from France. You or the business you’re buying from must pay in euros (EUR). This means the American buyer has to convert an equivalent amount of USD into EUR. The same applies to travel. For instance, an Egyptian tourist in France can’t use euros to visit the pyramids in Egypt because euros are not accepted there. Therefore, the traveler has to exchange euros for the local currency, in this case, the Egyptian pound.
The forex market is the largest and most liquid financial market globally due to the necessity of exchanging currencies. Its average daily traded value is almost US $2,000 billion, far surpassing other markets like the stock market. In fact, according to the Bank for International Settlements (BIS) as of August 2012, the currency market transacted more than US$4.9 trillion each day.
Unlike other markets, the forex market doesn’t have a central exchange. Instead of occurring on a single centralized platform, currency trading happens electronically over-the-counter (OTC), meaning transactions occur over computer networks among traders worldwide. The market operates 24 hours a day, five and a half days a week, across major financial hubs like London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. Consequently, the currency market remains active throughout the day, with constantly shifting price quotations.
There are three primary ways institutions, businesses, and individuals can trade foreign exchange: the spot market, forwards market, and futures market. Historically, FX trading has been the largest market, serving as the underlying actual asset for the forwards and futures markets. The futures market was once more popular among individual investors due to its earlier accessibility. However, with the rise of computerized trading, the spot market has gained significant traction and surpassed the futures market as the preferred trading venue for speculators and private investors. When people mention the foreign exchange market, they typically refer to the spot market. Companies looking to hedge their foreign exchange risks until a specified future date often utilize the forwards and futures markets.
More courses from this author: Clay Marafiote
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- Duration 10 weeks
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