The Foreign Exchange Market allows for the exchange of one currency for another. The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies.
This kind of market includes all aspects of buying, selling and exchanging currencies at current or determined prices. Large commercial banks serve this market by holding inventories of each currency so that they can accommodate requests by individuals or MNCs.
Individuals rely on this market when they travel to foreign countries. The exchange rates are determined in the foreign exchange market.
The foreign exchange market provides the physical and institutional structure through which the currency of one country is exchanged for that of another country, the rate of exchange between currencies is pre-determined, and foreign exchange transactions are physically completed.
It is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.
This market consists of two tiers, such as:
- The interbank or wholesale market and
- The client or retail market
Five broad categories of participants operate within these two tiers, such as:
- Bank and non-bank foreign exchange dealers
- Individuals and firms conducting commercial or investment transactions
- Speculators and arbitragers
- Central banks and treasuries and
- Foreign exchange brokers
Use of the Term in Sentences
- The ups and downs in the foreign exchange market are always unpredictable.