Lesson 1 of 8 · 13 min
The FX market: functions and participants
The FX market is the world's largest market because almost every cross-border trade or investment has to pass through it, and most of its volume comes from investors and traders rather than importers and exporters.
In short
- The foreign exchange (FX) market is where currencies trade against each other: global, electronic, open around the clock on business days, and by far the largest financial market.
- Its functions: settle international trade, move cross-border capital, and let participants hedge or speculate on currency risk.
- The sell side is the FX dealing banks; the buy side is their clients: corporates, real money and leveraged accounts, retail, governments, central banks and sovereign wealth funds.
- Real money accounts (pension funds, insurers, mutual funds) use little leverage; leveraged accounts (hedge funds, prop desks, algorithmic traders) actively take FX risk for profit.
- Besides spot, the market trades forwards, FX swaps and options; swaps make up the largest share of daily volume, and financial clients trade far more than non-financial ones.
- Most participants mix hedging and speculative motives (plus policy motives for public bodies), which makes FX hard to forecast.
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