What Is Foreign Exchange?

What Is Foreign Exchange?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Foreign exchange, often referred to as forex, pertains to the global marketplace for trading national currencies against one another. Due to the worldwide reach of commerce, trade, and finance, forex markets tend to be the largest and most liquid asset markets in the world. Here, people can trade currencies to profit from changes in the exchange rate, or as a way to hedge against currency risk, among other reasons.

Related Questions

1. What factors influence foreign exchange rates?

Several factors can influence foreign exchange rates. These include economic factors such as inflation rates, interest rates, and economic performance; political stability and performance; market psychology, and speculations.

2. What are the major forex pairs?

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The major forex pairs consist of the seven most frequently traded currencies in the world. They are the Euro (EUR), U.S. Dollar (USD), Japanese Yen (JPY), British Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and Swiss Franc (CHF).

3. How does a forex trade work?

In a forex trade, you buy one currency while simultaneously selling another — it’s essentially a bet on the likelihood of one currency appreciating (going up) in value against the other.

4. What is a currency pair in forex trading?

A currency pair in forex trading is the quotation of the relative value of a currency unit against the unit of another currency. The first listed currency is known as the base currency, and the second is the quote currency.

5. Is forex trading risky?

Yes, forex trading can be risky due to its complex nature and the volatility of global markets. It requires sound knowledge and understanding of financial market trends to make profitable trades.