WHAT DOES IT MEAN?
Foreign exchange, commonly referred to as FX or forex, is the relative value of one country's currency to another.
WHY IS IT IMPORTANT?
Foreign exchange facilitates the cross-border movement of goods and services connecting the global economy. The FX market is the most liquid and largest market in the world. According to the Bank of International Settlements Triennial Central Bank Survey, daily FX turnover is estimated at over US$5 trillion (S$6.5 trillion).
FX trading is largely 24 hours and markets are accessible from Monday morning in Asia to Friday afternoon in the Americas. Common FX products include: spot, outright forwards, swaps, non-deliverable forwards and options.
Major market participants include central banks, sovereign wealth funds, global corporations, trading firms, investment managers, hedge funds and trading banks.
The reasons for engaging in foreign exchange markets can vary in purpose and size, ranging from global trade and overseas investing to tourism and speculation. Companies that import or export goods and services are either making or receiving payments in a currency different from their own. This requires them to exchange one currency for another. Some companies will also use FX to protect overseas assets against changes in the exchange rate, a process known as hedging.
Currencies are largely grouped into three categories: free floating, pegged and restricted. Free floating currency values are determined by market supply and demand. Pegged currencies are managed to keep the value consistent relative to another country's currency or a basket of currencies. The value and trading capabilities of restricted currencies are controlled by governments and/or central banks.
IF YOU WANT TO USE THE TERM, JUST SAY:
Foreign exchange is the mechanism that determines the value of one currency to another, facilitating the flow of goods and services across borders.
•The writer is Apac head of FX sales, trading and research, State Street Global Markets.