Foreign exchange market

The global, decentralized network where participants buy, sell, and exchange currencies. Its transactions establish exchange rates and enable cross-border payments, investment, and risk management.

Currency pair: A quotation expressing the value of one currency in units of another. Foreign exchange trades quote one currency against another, such as euros against dollars.
Foreign exchange dealer: A financial institution or firm that quotes prices and trades currencies as principal or intermediary. Dealers connect buyers and sellers and provide much of the market’s liquidity.
Foreign exchange risk: The possibility that currency movements will change the value of assets, liabilities, income, or costs. Businesses and investors use the market to manage exposure to changing exchange rates.
Stock market: A market where shares in publicly traded companies are issued and traded. Unlike many stock exchanges, foreign exchange trading is decentralized and operates across global dealing networks.
Foreign exchange turnover: The total value of foreign exchange transactions conducted over a specified period. Turnover measures the market’s exceptional scale and how trading activity changes over time.
Exchange rate: The price of one currency expressed in units of another currency. Trades across the market determine the prices used to value currencies against each other.
Interbank market: The network through which banks and other large financial institutions trade currencies with one another. Interbank dealing is a central wholesale layer of the foreign exchange market.
Currency hedging: The use of financial positions to reduce losses from adverse currency movements. Forwards and other foreign exchange instruments can offset expected currency exposures.
Futures exchange: A regulated marketplace where standardized futures contracts are traded. Currency futures trade on organized exchanges, unlike most over-the-counter foreign exchange transactions.
Purchasing power parity: A theory that exchange rates adjust so identical goods cost the same across countries when expressed in one currency. It offers a long-run benchmark against which market exchange rates are compared.

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