Foreign exchange market (Forex)

Characteristics and structure

Forex is primarily an over-the-counter (OTC) market rather than a single central exchange. Trading occurs via banks, brokers and electronic platforms, and it spans multiple time zones so trading moves from Asia to Europe to North America during each 24-hour period. Instruments commonly traded include spot transactions, forwards, swaps and options.

Who participates

• Commercial firms: importers and exporters who convert money for international trade.
• Financial institutions: banks, hedge funds and asset managers conducting investment and arbitrage.
• Central banks: intervening to influence exchange rates or to manage reserves.
• Retail traders: individual investors accessing FX through brokers and platforms.

Brief history

The modern FX market expanded after the breakdown of the Bretton Woods system in the early 1970s, when many countries adopted floating exchange rates. Prior to this, exchange rates were often fixed to gold or a dominant currency; the shift to flexible rates created the environment for today's continuous global trading.

Uses, examples and importance

Foreign exchange facilitates cross-border commerce, capital flows and tourism. Companies hedge currency risk with forwards or options; investors and speculators seek profit from changes in pair prices such as EUR/USD or USD/JPY. Central banks may buy or sell their currency to stabilise markets.

Key features and risks

Notable aspects include very high liquidity, 24-hour coverage on weekdays and a tiered market structure. Currency values respond to interest rates, economic data, political events and market sentiment. Risks include leverage-related losses, counterparty exposure and sudden volatility. For more on the role of currencies in the global economy, see further resources.