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Lesson 4: 1.3: Foreign Exchange & Currency Markets
Explore the global forex market, currency pairs, exchange rate determinants, and international trade settlement.
1. The FX Landscape
The foreign exchange (Forex or FX) market is the largest, most liquid financial market in the world, with daily trading volume exceeding $7 trillion. It operates 24 hours a day, five days a week.
Unlike equity markets, FX has no centralized exchange. It is a decentralized, over-the-counter market where transactions are executed electronically through global interbank networks.
★ Key Component: Currencies are always traded in pairs (e.g., EUR/USD), where you buy one currency and simultaneously sell another.
2. Major and Exotic Pairs
In any currency pair, the first currency is the Base currency, and the second is the Quote currency.
• Major Pairs: Consist of the most heavily traded global currencies paired with the US Dollar (e.g., EUR/USD, GBP/USD, USD/JPY). They offer tight spreads and massive liquidity.
• Exotic Pairs: Pair a major global currency with a developing or emerging market currency (e.g., USD/MXN, USD/TRY). They feature lower liquidity and higher transaction costs.
Click to enlargeKNOWLEDGE RECONNAISSANCE
In the currency pair EUR/USD, which currency is the 'base currency'?
Why is the Forex market considered highly liquid compared to other asset classes?
More lessons in this module
- 1.0: Introduction to Financial Markets
- 1.1: Equity Markets & Common Stock
- 1.2: Fixed Income & Debt Instruments
- 1.4: Commodity & Raw Materials Trading
- 1.5: Money Markets & Short-Term Debt
- 1.6: Primary vs. Secondary Markets
- 1.7: Market Indexes & Benchmarks
- 1.8: Trading Venues (Exchanges vs. OTC)
- 1.9: Market Microstructure & Order Types
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