What is Foreign Exchange Market?
Foreign Exchange Market is also like other normal market. In normal market we buy or sell something like clothes and other thing of our need. Similarly, in forex market we buy or sell or exchange or convert currencies of different country.
This is a global market place. The market standard abbreviation for foreign exchange is ‘FOREX’. In terms of volume it is the largest market in the world. The foreign exchange market is a two-tier market the first one is Interbank Market (IB Market) and other one is Retail Market.
According to the Bank for International Settlements, the preliminary global results from the 2019 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $6.6 trillion per day in April 2019. This is up from $5.1 trillion in April 2016.
Under this market currencies are always traded in pairs. Currency pair comprise two concepts the first one is Base Currency and second one is Quote or Price Currency.
Base Currency is the currency that is priced in the market or in simple word the currency that the buyer (Importer or Exporter) want to buy.
Price or Quote Currency is the currency that the buyer will pay to buy the Base Currency.
Interbank Market: In this market only, banks sell or buy or exchange currencies with each other. This market is global in nature. Here banks quote their prices that is at what price they want to buy a currency and at what price they want to sell a currency which is two-way quote. The price at which bank is ready to buy a currency is called bid price and price at which bank is ready to sell the currency is called ask price.
Retail Market: In this market customers of banks (exporter, importer) buy or sell or exchange currency with banks. This market is local in nature and it is localised in each country. Example, if I am an Importer and I am importing goods from USA (America). Now I have to pay the amount in $. In this case I will approach to a bank in India and I will buy $ by paying Rupees. And then I will make payment for my consignment.
If you want to know history of Foreign Exchange Market then click here.