We all get involved in trading foreign exchange (aka Forex or FX) whenever we change our money to go on holiday.
But trading foreign exchange is done at all levels, by central banks, high street banks, speculators and businesses. Without a foreign exchange mechanism in place it would be difficult to trade internationally.
Foreign exchange trading is usually considered to be the largest and most liquid market in the world. It happens everywhere, around the world, in every currency.
You hear about foreign exchange daily in the news, whenever there’s an update of, say, how much the pound is worth against the dollar or the euro. You can also see exchange rates on display in currency bureaux and banks.
The primary centres for trading forex are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney and Singapore.
On the Forex market one currency is always bought or sold in exchange for another. Forex is traded in currency pairs which means that the value of one currency is compared to the value of another currency. In a currency pair, the base currency is the currency that you're looking to buy or sell and the quote currency is the amount that one unit of base currency will cost you to buy.
As well as dealing in physical currencies, some traders use derivatives, such as futures and options, to take a bet on which way they think the market is moving.
Businesses with international operations will often use currency hedging, an investment strategy designed to minimise their exposure to potential losses from currency fluctuations.