Forex/FX

Foreign Exchange Market

The foreign exchange market (commonly referred to as forex or FX) is a global decentralized marketplace for the trading of national currencies. It is the largest and most liquid financial market in the world, with a daily turnover exceeding USD 7 trillion in recent years. Transactions occur over‑the‑counter (OTC) rather than through a centralized exchange, enabling continuous trading across international time zones.

Overview and Function

Forex facilitates the exchange of one currency for another at agreed exchange rates, which are determined by supply and demand in the market. Its primary purposes are to support international trade and investment, enable currency conversion for travelers and businesses, and provide avenues for speculation and hedging. The market operates through a network of financial institutions, including major banks, central banks, corporations, investment funds, and individual traders.

Trading is conducted in currency pairs—such as EUR/USD or USD/JPY—where the first currency is bought while the second is sold. Rates fluctuate based on economic data, interest rates, geopolitical events, and market sentiment.

Historical Development

The modern foreign exchange market emerged in the 1970s following the collapse of the Bretton Woods system, when countries shifted from fixed to floating exchange rates. This change allowed currency prices to be determined by market forces, with limited intervention from central banks. Over the decades, technological advancements and deregulation have further expanded participation, making forex accessible to a wider range of institutions and retail traders.

Market Structure

Forex has no central marketplace; instead, it functions through electronic trading platforms and interbank networks. Major trading centers include London, New York, Tokyo, Singapore, and Hong Kong. Trading sessions overlap, creating near‑continuous operation from Sunday evening to Friday night (UTC).

Participants operate in several interconnected segments:

• Interbank market – large commercial and investment banks trading directly with one another.
• Brokers and electronic communication networks (ECNs) – intermediaries connecting buyers and sellers.
• Corporations – conducting currency exchanges for international business operations.
• Central banks – influencing currency value through monetary policy or direct intervention.
• Retail traders – individuals trading via brokers, often using leveraged accounts.

Instruments and Transactions

Common transaction types include:

• Spot transactions – immediate currency delivery, typically within two business days.
• Forward contracts – agreements to exchange currencies at a future date at a set rate.
• Swaps – simultaneous purchase and sale of currencies for different value dates; the most traded forex instrument.
• Futures and options – standardized contracts used for speculation or hedging.

Leverage is widely used in forex, allowing traders to control large positions with relatively small amounts of capital. While leverage amplifies potential returns, it also magnifies losses, making risk management essential.

Regulation and Oversight

Forex markets are regulated at the national level, with frameworks varying by jurisdiction. Agencies such as the U.S. Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA), the UK‘s Financial Conduct Authority (FCA), and Australia’s ASIC oversee certain aspects of currency trading, particularly for retail participants. Despite regulatory oversight in key regions, much of the interbank market remains lightly regulated due to its institutional nature.

Risks and Economic Impact

Forex trading carries risks, including exchange rate volatility, leverage‑related losses, and counterparty default. For economies, the forex market plays a critical role in determining exchange rates, affecting import and export competitiveness, inflation, and monetary policy effectiveness.

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