A:

There is no central location of the foreign exchange market, often referred to as the forex (FX) market. Transactions in the FX market take place in many different forms, 24 hours a day, through different channels all over the globe; existing wherever one currency is exchanged for another.

The forex market is situated within the following areas:

  • retail forex brokers
  • central banks
  • commercial businesses
  • banks

Retail Forex Brokers
These brokers offer speculative trading to the individual retail trader. This area of the forex market is very small compared to the total volume of currency exchanged worldwide.

Central Banks
By purchasing and selling currencies, central banks try to control their money supply, interest rates and inflation. Whether official or not, nations often have target exchange rates for their currencies, and a nation's central bank can often use their reserves of national and foreign currency to try and stabilize the market for their currency.

Commercial Businesses
Whenever a company has to purchase from, or sell to a company in a foreign nation, a foreign exchange transaction is likely to occur. For example, a U.S. based company may need to purchase Euros to pay an invoice to a French company; or the French company may have to purchase U.S. dollars to pay a U.S based invoice. In both of these cases a foreign exchange transaction needs to occur. Companies that deal with foreign customers or suppliers often take this one step further, and purchase or sell currencies as a hedge against future exchange rate movement. By locking in today's exchange rates, companies can take exchange rate risk out of the equation.

Interbank Market
The interbank market makes up the largest portion of the forex market, and is inclusive of the above areas of trading. Customers often turn to the banks to intermediate their foreign exchange transactions, and banks often trade their own accounts as well.

There is no central location that forex trading occurs in. For this reason, there is no central body controlling prices and actions of many players. This is a new and lucrative area for speculation, but investors must heed the risks that are taken when entering it.

To learn more, read Getting Into The Forex Market and our Forex Market Tutorial.

RELATED FAQS
  1. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  2. Will technology ever disrupt the role of the custodian bank?

    Custodian banks, along with other financial institutions that hold custodian accounts, are likely to be disrupted but not ... Read Full Answer >>
  3. How do I close a long position in forex?

    Closing a long position in forex trading depends on whether you are using a broker operating under U.S. trading regulations. In ... Read Full Answer >>
  4. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
  6. What is the difference between pips, points, and ticks?

    Point, tick and pip are terms used to describe price changes in the stock market and other markets. While traders and analysts ... Read Full Answer >>
Related Articles
  1. Forex Strategies

    Benefits & Risks of Trading Forex with Bitcoin

    Want to trade forex using bitcoins? Don’t jump on the bandwagon until you compare the risks to the benefits.
  2. Forex Strategies

    How To Trade Forex With Bitcoin

    We look at ways to trade forex with bitcoin and the pitfalls in doing so.
  3. Investing Basics

    5 Tips For Investing In IPOs

    It’s not easy to profit from IPO​s, but the money is there.
  4. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  5. Term

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
  6. Investing Basics

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  7. Investing Basics

    Understanding Arbitrage Pricing Theory

    Investors use the arbitrage pricing theory to identify an asset that’s incorrectly priced.
  8. Forex Strategies

    Can Forex Trading Make You Rich?

    Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses.
  9. Forex Fundamentals

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
  10. Investing Basics

    What Happens in a Rollover?

    In the retirement savings realm, rollover refers to transferring the holdings in one retirement account into another.
RELATED TERMS
  1. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  2. ICE LIBOR

    See LIBOR
  3. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  4. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  5. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  6. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!