Foreign Exchange

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Definition

What is the foreign exchange market?

The foreign exchange (FX or “forex”) market is where currencies are traded. The FX market is today the largest and most liquid financial market in the world in terms of volume. 

 

How does currency trading work?

Currency trading involves the simultaneous buying of one currency and selling of another.  The value of one currency (called the base currency) is expressed in terms of another currency (quote currency). 

 

How does the Foreign Exchange (FX) market operate?

The price at which a currency can be exchanged for another currency is called its exchange rate. The most traded currency pairs are EUR/USD, USD/JPY, GBP/USD and USD/CHF. 

99% of FX market transactions are carried out conducted over the counter (OTC). There is no central market to trade currencies. The FX market operates 24 hours a day, 5 days a week (the market only closes on weekends), and all main currencies are exchanged in all key financial centers. It operates on a “rotating book” principle: when one major FX center closes, another one opens in another part of the world. The FX market is composed of three main segments: Trading starts in Australasia (Sydney, Tokyo, Hong Kong, Singapore, Bahrein) and continues in Europe (Zurich, Frankfurt, Paris, Brussels, London, Amsterdam). The third segment, North America (New York, Montréal, Toronto, Chicago, San Francisco, Los Angeles), completes the cycle and hands over to Australia. 

Liquidity in the foreign exchange markets is therefore always available, adding to its appeal to investors as the largest asset class available.