This term refers to exchange of one international currency for another. Forex is basically an over-the-counter calculation. It generally refers to trading in the foreign exchange currencies in the cash market. It is essentially about converting one international currency into another at an agreed rate. Understandably, every foreign-exchange transaction will involve two currencies. The exchange rate is simply the price of the base currency in terms of another currency (referred to as the “terms currency").

Let us take an example. If the current exchange rate for the Indian rupee as against the US dollars is INR/USD 0.0208, it means that one US dollar is equivalent to or exchanged for 48 odd Indian rupees.
A variation of this is the margin foreign exchange where the investor is allowed an opportunity to trade foreign exchange on a margined basis as against paying for the full value of the currency.

History of forex

The forex market was set up back in 1971. This was the time when floating exchange rates began to appear. This market is basically an inter-dealer or inter-bank market in cash basis. Volumes in this market have always been heavy. For example, $315 billion was the figure of the average daily trading volume of US treasury bonds. As compared to this, the US equity market had average daily trading volume of less than $15 billion. Predictions made by Forex experts to see the daily trading volume of forex markets in excess of $1 trillion have been surpassed easily, with the same figure as $1.9 trillion now.

Structure of the forex market

The forex market is unique on the basis of the following factors:
• volume of the trades that take place
• extremely high liquidity existing in the market
• the big quantity, quality and variety of traders that exists in the market
• the environmental diffusion of the market
• trade timings - 24 hours in a day except on weekends
• the number and variety of factors that affect the exchange rates
• heavy average daily turnover is equivalent to:
- more than 10 times the average daily turnover of global stock markets
- an annual turnover more than 10 times of world GDP

Purpose of forex trading

There are a variety of reasons for which people indulge in Forex trading. Speculation is one of the key reasons, that is, to simply earn from daily fluctuations in the price/value of the intrinsic instrument/security. Most Forex traders are short-term traders who are simply interested in profiting from intraday movements or overnight market movements in the concerned currency. Some others deal in Forex to hedge their exposures to the concerned currency.

The foreign exchange markets exist whenever one international currency is to be traded in terms of another. Most of the participants involved in the foreign exchange trading are respective countries’ Central banks, multinational corporations, currency speculators, governments, large banks and other financial markets and institutions. A small part of this is also the retail traders and they are able to participate in these markets only by way of brokers and banks.