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Forex Basics

If everyone in the world used the same currency, there would be no need for a foreign currency exchange market or foreign exchange rates. However, our world economy functions primarily on a handful of national currencies and as individuals or companies from one country trade across borders, the need for foreign currency arises. For example, when a U.S. importer buys French wine, either the importer needs Euros to pay the French merchant or the French merchant must accept US Dollars and then convert them to Euros. The foreign exchange (FOREX for short) market plays a key role in transferring financial payments across borders and moving funds and purchasing power from one currency to another. This international market has played an extensive and direct role in national economies and has a major impact that affects our lives and our prosperity.

Most multinational corporations use the Foreign Exchange Market to hedge their currency exposure to long term contracts. As an example, large corporations such as Boeing or Caterpillar which routinely negotiate large multi million dollar contracts with buyers around the world, have a need to hedge their currency exposure against movement between the Dollar and the international currency of their clients.

The movement of different currencies between countries determines a very important price: the exchange rate. It is the exchange rate that allows the currencies to be traded for profit. The foreign exchange is not traded on a physical exchange like the stock market. It is traded via the telephone or thru the internet. This electronic structure has contributed to making the Foreign Exchange Market the largest marketplace in the world. With $2-3 trillion dollars traded per day versus tens of billions per day traded on the New York Stock Exchange, the Foreign Exchange Market offers many trading opportunities due to the low cost of executing transactions and the speed at which the execution occurs. The (spot) FOREX market is open 24 hours a day, six days a week, Sunday evening thru Friday afternoon. Virtually all large institutions and professional traders conduct most of their foreign exchange dealing in the (spot) FOREX market. The (spot) FOREX market pairs together currencies from different countries and quotes them according to the values of the respective currency.