Foreign Exchange

Business, Legal & Accounting Glossary

Definition: Foreign Exchange



Full Definition of Foreign Exchange


Foreign exchange relates to the trading of currencies between two different nations. It includes money instruments like notes, checks, and paper currency. The foreign exchange rate between the currencies of any two nations has to be calculated on an accurate and timely basis in order to facilitate global commerce transactions. Banks, central banks, multinational organizations, governments, and investment management firms are some of the entities that trade on the foreign exchange market.

For any other financial market, investors would have to wait for exchanges to open to carry out their activities. However, the foreign exchange market allows one to immediately react to fluctuations caused by economic, political or social occurrences. In recent times, small and medium-sized investors have been provided easy access to the foreign exchange market.

Foreign exchange market

Foreign exchange market relates to the financial market where trading of currencies takes place. Foreign exchange market operates on a 24×7 basis. Exchange dealings are carried out through global banks, individuals, and corporations.

Foreign exchange rate

Foreign exchange rate provides the factor by which worth of a specific currency can be ascertained in terms of another currency. Rough estimates indicate that currency worth nearly 2 trillion US dollars is traded in the foreign exchange market on a daily basis.

Banks

Large banks trade heavily in the foreign exchange market. They are major contributors to speculative trading that takes place in the exchange market. Large banks can trade more than a billion dollars in the market on a daily basis.

Central Banks

Central banks are responsible for controlling factors like money supply, interest rates, and inflation. They work towards stabilization of the foreign exchange market. Central banks try to stabilize the market by using their foreign exchange reserves.

Investment management firms

Investment management firms trade in the foreign exchange market on behalf of the customers. These firms help in smoothening up the process of foreign securities transactions in the foreign exchange market.


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Definition Sources


Definitions for Foreign Exchange are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 27th March, 2020 | 2 Views.