The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in China and want to buy beef from the U.S., either you or the company that you buy the beef from has to pay the American for the beef in US dollars (USD). This means that the Chinese importer would have to exchange the equivalent value of Chinese Yuan (CNY) into US dollars. The same goes for traveling. An American tourist in Thailand can't pay in US dollars to see the Phuket because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Thai Baht, at the current exchange rate.
The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $5 trillion per day.
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.
Importers and exporters use one currency in importing goods and use another currency in exporting them, which means different currencies used in paying and receiving money. Therefore, it is necessary to convert some of the money received into another currency that can be used to buy goods. Similarly, a company that buys foreign assets must pay in local currency.
Exchange rate between two currencies changes as the supply and demand for these currencies change. Traders buy a currency at an exchange rate and sell it at a different rate in the hope of profiting. It is an act of buying and selling the foreign currency under the conditions of uncertainty with a view to earning huge gains.
Companies holding foreign assets might undertake some risks when converting those assets into local currencies due to fluctuations in two related exchange rates. If the value of foreign assets in foreign currency remains the same, then it might cause profit or loss when the assets are converted into local currency if exchange rate changes. But companies can hedge this potential risk by making foreign exchange transactions that would just offset gains and losses caused by ups and downs of foreign exchange rate.
Central banks and the Governments
Commercial banks and financial institutions
Exporting and importing companies
Transnational investment company
Hedgers, speculators and retail participants
What makes the forex market an excellent financial market? The characteristics that make the forex market a good one are 24-hour market, lower trading costs, excellent transparency, superior liquidity and very strong market trends.
A currency pair is the quotation and pricing structure of the currencies traded in the forex market; the value of a currency is a rate and is determined by its comparison to another currency. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency.
For example, if the USD/EUR currency pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you purchase (receive) $1 in U.S. currency. If you sold the currency pair, you would receive 1.5 euros for every $1 you sell. The inverse of the currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that 66.7 cents in U.S. currency would buy 1 euro.