foreign exchange

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n. (Abbr. FX)
  1. Transaction of international monetary business, as between governments or businesses of different countries.
  2. Negotiable bills drawn in one country to be paid in another country.

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Purchase or sale of one national currency in exchange for another nation's currency, usually conducted in a market setting. Foreign exchange makes possible international transactions such as imports and exports and the movement of capital between countries. The value of one foreign currency in relation to another is defined by the exchange rate.

For more information on foreign exchange, visit Britannica.com.

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Currency-literally foreign money-used in settlement of international trade between countries. Trading in foreign exchange is the means by which values are established for commodities and manufactured goods imported or exported between countries. Creditors and borrowers settle the resulting international trade obligations, such as bank drafts, bills of exchange, bankers' acceptances, and letters of credit, by exchanging different currencies at agreed upon rates.

The result of all this international trade is that financial institutions accumulate surpluses of different currencies from loan repayments by foreign borrowers, and also from import-export trade financing on behalf of bank customers.

The interbank foreign exchange market is an over-the-counter market, a network of commercial banks, central banks, brokers, and customers who communicate with each other by telex and telephone throughout the world's major financial centers. Foreign exchange traders also make markets or speculate in different currencies, usually anticipating future appreciation of stronger currencies against weaker ones, through the foreign exchange Forward Market and the Currency Futures market.

See also Forward Exchange Contract; Forward Forward.

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The foreign capital earned by a country's exports. Since the currency of many less developed countries is not accepted by international markets, it often becomes necessary to earn foreign exchange in order to buy imports.

Columbia Encyclopedia:

foreign exchange

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foreign exchange, methods and instruments used to adjust the payment of debts between two nations that employ different currency systems. A nation's balance of payments has an important effect on the exchange rate of its currency. Bills of exchange, drafts, checks, and telegraphic orders are the principal means of payment in international transactions. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the relative supply and demand of the currencies in the foreign exchange market. Buying or selling foreign currency in order to profit from sudden changes in the rate of exchange is known as arbitrage. The chief demand for foreign exchange within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies purchasing goods and services abroad, and travelers.

Bibliography

See P. Einzig, History of Foreign Exchange (2d ed. 1970); I. Wexler, Fundamentals of International Economics (2d ed. 1972); N. Abuaf and S. Schoess, Foreign-Exchange Exposure Management (1988).


The ways in which debts between two nations that use different currencies are paid. Foreign exchange rates can have an important effect on a nation's economy, because the value of its currency in other countries affects the cost of both imported and exported goods and services. (See balance of payments.)

The market in which currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world.

Investopedia Says:
There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.

The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market.

Related Links:
In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market. Forex Tutorial: The Forex Market
Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers. A Primer On The Forex Market
Before entering this market, you should define what you need from your broker and from your strategy. Getting Started In Forex
We go over the ground rules and available resources needed for this undertaking. Forex: Wading Into The Currency Market


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Foreign exchange

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FX (abbreviation)
Convertible Currency (business term)
Exchange Controls (finance term)
Cross Rates (finance term)