The foreign exchange market allows two currencies to be exchanged, at an exchange rate which is floating or fixed. This allows businesses from around the world to complete transactions across currencies.

Currencies need to be exchanged to import produce from different countries, for example: a wine merchant in England exchanges their pound sterling (GBP) for Rand (ZAR) in order to purchase wine from South Africa. Exchanging currencies is the basis for all international trades.

Unlike the stock market, the forex market is decentralised – this means that there is no central trading area. Most foreign exchange transactions are executed over-the-counter (OTC) by banks, on behalf of their clients.

KEY NOTES:

• The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.
• Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world.
• Currencies trade against each other as exchange rate pairs. For example, EUR/USD.
• Forex markets exist as spot (cash) markets as well as derivatives markets offering forwards, futures, options, and currency swaps.
• Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among several other reasons.