The main function of the foreign exchange market is to support the trading of assorted global currencies. Although the majority of trades concern only a small number of currencies, including the U.S. Dollar, Yen, Euro, Swiss Franc, Pound Sterling, Australian Dollar, and Canadian Dollar, many other different types of currency are exchanged on a smaller scale. Over 90% of all exchanges on the forex markets involve the U.S. Dollar.
The forex market is, despite the popular impression, a composite of several contrasting markets, each of which sustains its own rules and regulations, with no one centred market in which all currency trading takes place. The major markets, the U.S., London, and Tokyo, open during different hours because of the different time zones. When the New York market opens, and while the European markets are still operating, is when trading is heaviest and nearly two thirds of the trading action happens during this convergence.
An individual exchange rate for a given currency does not subsist since there is no centred market. The bid and ask rates for a currency whilst normally reasonably close to each other, can, because of the over-the-counter (OTC) nature of the markets, deviate among dissimilar geographic markets and market makers.
Three letters express an international currency code for every currency and because the price of a currency must be applied in reference to another currency, it is displayed in the form XXX/YYY. The price of the British Pound in U.S. Dollars is recorded as GBP/USD, for instance. Acknowledged as the base currency, and the securest currency when the pair was made, is the first in the pair while the other currency is known as the counter currency. Presented in decimal form the real prices themselves are normally rounded to the nearest ten-thousandth of a unit.
Close to $2 trillion is exchanged each day in the forex market and it comprises the largest market in the world. With more than three quarters of deals surviving less than a week forex trading is, for the most part, a high-risk, short-term market. It is a highly fluid market, a good deal more so than equities, with the many traders worldwide and the very high daily turnover rate.
The top ten most active traders, however, are responsible for nearly three quarters of total dealing volume. The trading activity that happens within the interbank market, which is formed by international banks, provide the market with bid and ask prices that are far closer than retail customers can get.
In 1972, at the Chicago Mercantile Exchange, forex futures contracts, that are derivatives, were introduced and now make up around seven percent of the all foreign exchange volume.
Something else that has also taken hold and is another popular hedging strategy is foreign exchange options. Investors often buy these derivatives, which are contracts to purchase currency at a certain price on a future date, to counterbalance the decline in the price of a currency and any possible losses they might endure.
An additional means by which traders are capable of mitigating risk is through an exchange, in which both parties agree to switch one currency for another for a set period of time, and will then reverse the transaction after the period runs out.
Amongst financial markets the foreign exchange market is without competition and is a fast-paced, international currency exchange. International companies, prominent banks and financial organisations will ensure its huge popularity continues and its growth is guaranteed into the future.
