Reviewed by Vishnava | Updated on Aug 30, 2021


Definition for FOREX

  • Foreign exchange, very simply put, is the exchange or trade of one currency with another.
  • Foreign currencies as an asset class can be used to earn the interest rate differential between currencies in question and one can also profit from the changes in exchange rate.
  • These exchanges usually take place in the foreign exchange markets – which need not be physical marketplaces necessarily.
  • A foreign exchange market is one of the most liquid markets in the world and has no centralised location.
  • The market determines the value of a majority of the currencies – this quantification is known as the exchange rate.

Trading in FOREX

  • Foreign exchange is traded 24 hours a day, 5 days a week and is done on a host of different networks.
  • Some of the major financial centres that trade in currencies are New York, Tokyo, Hong Kong, Singapore, London, Paris Frankfurt, Zurich, and Sydney.
  • There is no physical exchange of currency in a forex market like a foreign exchange kiosk. Currency is traded electronically over-the-counter.
  • Trading currencies are usually listed in pairs. Example, USD/CAD, USD/JPY etc.
  • These currencies are usually traded in lots. The lots may be categorised as micro, mini and standard lots measured as 1000 worth of a given currency, 10000 worth of a given currency and 10000 worth of a given currency respectively. One can choose to trade in multiples of a lot, like 3 micro lots and 79 standard lots.
  • Trading volume in foreign exchange market is very high.
  • There exist sport markets for currencies too, wherein the transactions of the pairs are settled within a period of two days. The price is established on the trade date, but money is ideally exchanged on the value date. And the prices of currencies are rather volatile in this market.
  • Currencies can also be traded in the futures market.

Difference Between Foreign Exchange and Other Markets

  • There is no clearing house present in forex markets like other markets.
  • No central body or regulator oversees the functioning of the forex markets.
  • There is no cut off time unlike other traditional markets.
  • Forex markets are more liquid and have easier trading access than other markets.
  • There are no fees and commission charged unlike other markets.

Related Terms

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