What is the foreign exchange market?

What is the foreign exchange market?

Foreign Exchange, sometimes abbreviated to ForEx, refers to the market in which different currencies are bought and sold.

The exchange rate that's used in ForEx is the domestic price of one unit of foreign currency.

So, whilst most of us only get involved with foreign exchange when we go on holiday, there is a whole market around foreign exchange that is used to trade currencies.

The reason why is simple to grasp, and you can see it almost as either a type of bet or a form of insurance, and particularly for companies who have assets in different companies.

Simply put, if you buy a currency and it increases in value versus your base currency, then you can convert the money back into the base currency for more than you spent to buy the currency, and if your currency gets stronger against the foreign currency, then the opposite is true.

In this way you can hedge your bets between the movements between different currencies and if you have a strong feeling a currency will go one way relative to another, you can buy it now and sell it later and get back more base currency.

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