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The currency (currency or Forex or FX) market exists wherever one
currency is traded for another. It is the largest financial market in
the world, and includes trading between large banks, central banks,
currency speculators, multinational corporations, governments, and other
financial markets and institutions. The average daily trade in the
global currency and related markets currently is around US$3.98
trillion. Among the total transactions, currency swaps has the maximum
share of 56%, followed by spot transactions constituting 33%, and the
remaining share is accounted for by outright forwards.
The market size and liquidity, which the currency market provides, is
much higher than other markets. A few special features of the foreign
exchange market are given below:
- Huge volumes and extreme liquidity
- Large number and variety of traders
- Geographical dispersion of trade
- Long trading hours, 24 hours a day, except on weekends
- Low profit margins compared to other financial markets
- Higher leverage, as a small amount of money can be used to make a large
investment
Currencies are traded against one another. Each pair of currencies thus
constitutes an individual product and is traditionally represented as
XXX/YYY, where YYY is the ISO 4217 international three-letter code of
the currency into which the price of one unit of XXX is expressed
(called base currency). For instance, EUR/US$ is the price of the euro
expressed in US dollars, as in 1 euro = 1.5012 dollar.
Banks continually provide the market with both bid (buy) and ask (sell)
prices. The bid/ask spread is the difference between the price at which
a bank or market-maker will sell ("ask", or "offer") and the price at
which a market-maker will buy ("bid") from a wholesale customer. This
spread is minimal for actively traded pairs of currencies, usually 0–3
pips. For example, the bid/ask quote of EUR/US$ might be 1.5500/1.5503
on a retail broker. Minimum trading size for most deals is usually
100,000 units of currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will
routinely mark up the difference to say 1.5100 / 1.5300 for transfers,
or say 1.5000 / 1.5400 for banknotes or travelers' checks. In recent
times, competition has greatly increased with larger transactions, and
pip spreads have shrunk for the major currency pairs to as little as 1-2
pips.
The participants in the market include banks, companies, institutions,
investment management firms, hedge funds and retail forex brokers.
Various types of transactions exist in the market such as spot,
forwards, futures, options, swaps, etc.
The main trading centers are in London, New York, Tokyo, Hong Kong and
Singapore, but banks throughout the world participate. Currency trading
happens continuously throughout the day, excluding weekends; as the
Asian trading session ends, the European session begins, followed by the
North American session and then back to the Asian session.
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