Foreign exchange market

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Currency trading takes place in the foreign exchange market, which is a worldwide decentralised (also known as over-the-counter (OTC) market) where currencies are traded between traders. This market is responsible for determining the foreign exchange rates for all currencies. Buying, selling, and exchanging currencies at current or predetermined values are all included in this definition of currency trading. According to trade volume, it is the biggest market in the planet, with only the credit market coming close behind it (see chart).

The major players in this industry are the bigger multinational financial institutions. Without exception, financial centres across the globe serve as trade hubs for a diverse spectrum of buyers and sellers, operating around the clock (with the exception of weekends) to facilitate transactions between them. Because currencies are constantly exchanged in pairs, the foreign exchange market does not establish a currency's absolute worth; rather, it defines a currency's relative value by determining the market price of one currency if it is purchased with another currency. For example, one US dollar is worth X Canadian dollars, or Swiss francs, or Japanese yen, and so forth.

The foreign exchange market is mediated by financial institutions and operates on a number of different degrees of sophistication. Banks rely on a limited number of financial organisations known as "dealers," who are engaged in high volumes of foreign currency trading, to handle their foreign exchange transactions behind the scenes. Because the vast majority of foreign currency traders are financial institutions, this behind-the-scenes industry is frequently referred to as the "interbank market" (although a few insurance companies and other kinds of financial firms are involved). Currency trades between foreign exchange dealers may be quite big, including hundreds of millions of dollars in value. Because of the question of sovereignty that arises when two currencies are involved, there is minimal (if any) oversight over the conduct of the Forex market.

The foreign exchange market facilitates worldwide commerce and investment by providing the ability to convert between different currencies. For example, it allows a firm in the United States to buy items from European Union member states, particularly Eurozone members, and pay in Euros, even if the majority of the company's revenue is in United States dollars. It also encourages direct speculation and assessment in relation to the value of currencies, as well as carry trade speculation, which is based on the difference between the interest rates of two currencies, among other things.