Forex, or foreign exchange (FX), means exchanging one currency for another. The foreign-exchange market supports international payments, investment, funding, risk management and speculation.
A business paying an overseas supplier may need foreign currency. An investor can use an FX contract to reduce currency exposure, while a trader may take a position hoping to profit from an exchange-rate move. Hedging means managing an existing risk; speculation takes exposure to pursue a return.
How currency pairs work
A currency quote expresses a price in another currency. In EUR/USD, the euro is the base currency and the US dollar is the quote currency. A hypothetical quote of 1.10 means one euro is worth $1.10.
At that rate, €1,000 has a dollar value of $1,100. If the quote falls to 1.05, the same €1,000 is worth $1,050, a $50 reduction. This comparison ignores costs and interest and does not use live market prices.
Actual dealing prices normally include a bid-ask spread, the difference between prices for selling and buying. Fees and financing can also affect the result. An exchange-rate calculation alone is not a complete trading-profit calculation.
Spot and derivative contracts
The Basel Committee’s FX definitions distinguish several transactions. Spot involves exchange for near-term settlement, commonly within two business days depending on the pair and conventions. It is a contract, despite its short settlement period.
An outright forward agrees an exchange rate for a future transaction. An FX swap combines an exchange with an agreed reverse exchange later. Currency swaps generally exchange cash flows in different currencies over time; their structure differs from a simple FX swap.
An option gives its buyer a right under specified terms rather than the same obligation as a forward. Currency futures are standardized exchange-traded contracts. The product’s own rules determine size, maturity and settlement; there is no universal three-month contract length.
How the market is organized
Much FX activity is over the counter, or OTC, through a network of dealers and trading venues. This does not mean all currency products lack organized exchanges, clearing or settlement infrastructure.
The Reserve Bank of Australia’s market analysis discusses banks, other financial institutions, non-bank dealers and non-financial customers. Large banks are important intermediaries, but saying they “control” the whole market oversimplifies its structure.
Floating and fixed exchange rates
The RBA’s exchange-rate guide distinguishes systems where market forces determine the rate from pegs maintained by authorities. Managed arrangements lie between those extremes. A market depreciation differs from an official devaluation of a fixed rate.
Market size needs a date and definition
The BIS’s December 2025 analysis reported average global FX turnover of about $9.5 trillion a day in April 2025, up 27% from April 2022. This revised figure differs from the preliminary $9.6 trillion estimate.
Turnover is transaction volume, not investors’ profits, money held in accounts or the value of all outstanding positions. It includes instruments beyond spot trading. Survey coverage and adjustments matter when comparing totals.
Liquidity and trading risk
A heavily traded currency pair can still move sharply, and liquidity varies by product, time and market conditions. Global FX dealing spans time zones through the business week; a particular provider’s opening hours and available prices can differ.
The CFTC’s retail-forex explanation describes how leverage amplifies exposure and losses. In OTC retail trading, the dealer is the counterparty. A small margin deposit does not make the position’s economic risk equally small.
Last checked and updated on November 6, 2026 by the MBN editorial team.