What is a foreign exchange market?

The world of finance is a complex and dynamic one, with various markets serving different purposes. Among these, the foreign exchange market, commonly referred to as Forex or FX, plays a pivotal role. In this blog post, we will explore the basics of the foreign exchange market, its purpose, highlight some of the most well-known ones, and discuss what it takes to work in this sector such as studying a master in Financial Management or a master of Business Economics at Universidad Europea.

Definition of a foreign exchange market

At its core, a foreign exchange market is a global decentralised or over-the-counter (OTC) marketplace where participants trade currencies. In simpler terms, it's the place where one country's currency is exchanged for another's. This market operates 24 hours a day, five days a week, allowing for continuous trading across different time zones.

The primary purpose of the foreign exchange market is to facilitate international trade and investment. When businesses and individuals engage in international transactions, they often need to exchange one currency for another. This market enables them to do so, ensuring the smooth flow of goods, services, and capital across borders.

How are foreign exchange markets used?

There are four principle financial activities that take place on a financial exchange market. They are:

• Hedging: Companies and investors use the foreign exchange market to manage currency risk. For instance, a multinational corporation that operates in multiple countries may use this market to hedge against adverse currency movements that could affect their profits.
• Speculation: Traders and investors speculate on currency movements to profit from price changes. They buy and sell currencies in the hope of making a profit by accurately predicting how exchange rates will fluctuate.
• Arbitrage: Arbitrageurs take advantage of price discrepancies between different foreign exchange markets. They buy low in one market and sell high in another, profiting from the price difference.
• Facilitating International Transactions: Businesses and individuals need to convert their domestic currency into foreign currency when conducting international trade or travel. The foreign exchange market provides a platform for these conversions.

Well-known foreign exchange markets

There are different foreign exchange markets that exist, each one slightly different from the other and that has its own unique purpose. In this section, we’ll look at the most well-known markets that companies trade on.

• Forex (FX): The Forex market is the most well-known and largest foreign exchange market globally. It's the market where major and minor currency pairs are traded. The major currency pairs include EUR/USD (Euro/US Dollar), GBP/USD (British Pound/US Dollar), and USD/JPY (US Dollar/Japanese Yen), among others.
• Interbank Market: This market is exclusively for large financial institutions, such as banks and central banks, where they trade massive volumes of currencies. The interbank market sets the benchmark for exchange rates, which are then disseminated to the rest of the foreign exchange market.
• Retail Forex Market: Retail traders and small investors participate in this segment of the foreign exchange market through online trading platforms provided by brokers. They can speculate on currency movements with relatively small amounts of capital.

What to study to work with the foreign exchange markets?

Working in the foreign exchange market sector requires a deep understanding of financial markets, economics, and currency dynamics. Some of the knowledge you’ll need includes:

• Finance and Economics
• Technical and Fundamental Analysis
• Risk Management
• Trading Strategies
• Regulations and Compliance
• Technology and Data Analysis

At Universidad Europea, we have a wide portfolio of Business and Technology Degrees to choose from and learn some of the key skills needed to work in the financial sector across the global. With an international focus, designing to allow you to enjoy global careers, you will have the chance to study at one of our partner institutions and take part in work experience and internships at large organisations operating in the financial sector.  Our degree programmes include the Bachelor in Business Administration, International Business Degree, Double Degree in International Business + International Relations, and the Degree in Economics. If you are looking for a postgraduate programme, we also offer a wide portfolio of Business and Technology Master Degrees.