What is Foreign Exchange?

Foreign exchange is the swapping of one currency for another. It is needed to settle transactions between people or entities located in countries that use different currencies. This exchange is needed to complete international transactions. The conversion rate at which these transactions occur is constantly changing for most currencies, based on the supply of each currency and the demand for it.

The Foreign Exchange Market

The foreign exchange (forex or FX) market is a global marketplace for exchanging national currencies. Operating 24 hours a day across major financial centers — such as London, New York, Tokyo, and Sydney — the forex market facilitates international trade, investments, and economic interactions.

Participants in the forex market include banks, corporations, governments, investment firms, and individual traders. They trade currency pairs (e.g., EUR/USD, GBP/JPY), where the value of one currency is quoted against another. The exchange rate between these pairs fluctuates constantly due to economic indicators, geopolitical events, market sentiment, and interest rate changes.

The forex market is divided into spot, forward, and futures markets. Spot trading, the most common, involves the immediate exchange of currencies at current rates, while forward and futures contracts set a specific exchange rate for a transaction to occur at a future date.

Examples of Foreign Exchange

Examples of foreign exchange transactions are as follows:

A business in England pays a supplier in the United States, which requires the business to convert Pounds (GBP) into U.S. Dollars (USD).
A person travels to Canada from the United States, exchanging U.S. Dollars (USD) at the Canadian border for Canadian Dollars (CAD).