foreign exchange

Foreign Exchange is the trade of one national currency and takes place "over the counter" and centrally on an inter-bank system. According to the Bank of International Settlement's Triennial Survey, the average daily turnover in foreign exchange markets totaled $1.9 trillion.

The Foreign Exchange market, originally only accessible to large corporate banks and international corporations, is now available to speculators traders large and small. When trading Forex, investors are betting that one currency will appreciate against another one, and they will collect the change when they return to the original currency in which the position was established.

The Foreign Exchange market enjoys a few benefits over traditional equities, futures and derivatives markets. Like futures, Forex is traded using leverage that is based on a "good faith deposit" and not a loan. Also, since the securities being traded are international currencies, the markets are open 24 hours a day and seven days a week (though liquidity can differ over certain period). Another important facet of currency trading are interest rate spreads. Though it is usually not considered, money has a yield in modern finance with a return paid through savings and lending. When the interest rate attached to one nation's currency is higher than another's, someone who has bought the money with a higher yield and sold the lower one will collect the difference. This spread (called "The Carry") is collected every day.