Business, Legal & Accounting Glossary
The ”’foreign exchange market”’ is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies.
Forex stands for foreign (FOR) exchange (EX).
The FOREX or Foreign Exchange market is the largest financial market in the world, with a volume of more than $1.5 trillion daily, dealing in currencies. Unlike other financial markets, the Forex market has no physical location, no central exchange. It operates through an electronic network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another across the major financial centres.
The Forex market trades currencies from all over the world.
There are five major Forex trading areas which in order of opening hours are Sydney (Australia), Tokyo (Japan), Frankfurt (Germany), London (UK), and New York (USA). Although the Forex market is open 24 hours/day, in order to get the highest liquidity, Forex market participants prefer trading when several Forex trading areas are open simultaneously. Market participants in the Forex market include banks, brokers, central banks, hedge funds, investment firms, investors, and multinational corporations.
Traditionally, investors’ only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.
Market participants in the Forex market trade over the counter. Most Forex market participants speculate on the exchange rate to extract some profits. Other Forex market participants, such as corporations, for example, may seek to exchange a currency earned in another country for their home currency. Central banks are also known to trade large volume in the Forex market to impact a particular currency exchange rate. The Forex market is considered the world’s largest market given the level of cash traded daily. The Forex market is also referred to as the FX market.
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This glossary post was last updated: 14th February, 2020