“What Is” Foreign Exchange (FX)?

Foreign Exchange (FX) transactions involve the exchange of two currencies. Investors, companies, individuals and government officials use FX for varying purposes. Currencies are traded through global, over-the-counter (OTC) markets and exchanges to buy, sell and speculate on FX transactions.

The FX market was established in the 1970’s when international trades transitioned to floating exchange rates. The Foreign Exchange Committee (FXC) was established in 1978 to guide and monitor transactions in the FX market.

FX trading has become the world’s largest and most liquid market with an average daily turnover of approximately $4 trillion, according to the Bank for International Settlements (BIS). The turnover includes spot transactions, FX forwards, FX swaps, currency swaps, and options, and other FX-related offerings.

Most FX trading is now done 24 hours per day. The four largest FX trading hubs in the world are in New York, London, Tokyo and Singapore.

The primary volume in the FX is made up of trading and speculative transactions, consisting of 95% of the daily volume. The remaining 5% of the volume is made up of government and commercial companies, primarily for the use of converting currencies and selling goods or services.

The three major FX services are spot, forwards and futures transactions. These contracts are used to hedge against or speculate in global currency rates.

The FX spot market relies upon the current exchange rate that governs how a currency pair is bought or sold. Trading at the spot rate is common with online retail FX brokerages.

FX forwards trading focuses on locking in prices for nontransferable contracts that require all parties to the transaction to buy or sell the currency at a negotiated price, quantity and future date.

Exchange-traded FX futures contracts are agreements to buy or sell currencies at a future date that have negotiated sizes, rates and prices.

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