The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world.[1] The main participants in this market are the larger international banks. Financial centres
around the world function as anchors of trading between a wide range of
multiple types of buyers and sellers around the clock, with the
exception of weekends. The foreign exchange market determines the
relative values of different currencies.[2]
The foreign exchange market works through financial institutions, and
it operates on several levels. Behind the scenes banks turn to a smaller
number of financial firms known as “dealers,” who are actively involved
in large quantities of foreign exchange trading. Most foreign exchange
dealers are banks, so this behind-the-scenes market is sometimes called
the “interbank market”, although a few insurance companies and other
kinds of financial firms are involved. Trades between foreign exchange
dealers can be very large, involving hundreds of millions of dollars.
Because of the sovereignty issue when involving two currencies, Forex
has little (if any) supervisory entity regulating its actions. The
foreign exchange market assists international trade and investments by
enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.