Forex is a combination of two words: foreign currency and exchange. Foreign exchange involves changing one fiat currency into another one for a number of reasons, generally for trading, commerce, or tourism. According to a veritable report conducted by the Bank for International Settlements, around $5.1 trillion worth of transactions are made daily in the forex market.
The Foreign Exchange market or FX market is where different fiat currencies are traded. Currencies are crucial to everyone on this planet, whether they recognize it or not because fiat currencies need to be swapped to perform foreign trades and run business. For instance, if you’re living in Singapore and want to purchase a perfume from France, either you or your supplier will buy that perfume from France in Euros. A Pakistani tourist can’t pay in PKR to see pyramids in Egypt, because it is not a locally accepted currency.
Important Takeaways
- The FX market (also known as Foreign Exchange or Forex Market) is an international marketplace for exchanging fiat currencies against each other.
- Thanks to the global reach of commerce, finance, and trade, foreign exchange market tend to be the most liquid and largest asset market in the world.
- Foreign exchange markets exist as cash markets as well as derivatives markets that offer futures, options, forwards and currency swaps.
- Currencies are traded in the pair form such as EUR/USD.
- Market users use Forex to hedge against gloal currency and interest rate risk to diversify portfolios and to speculate on geo-political events, among many other reasons.
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