FOREX Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of FOREX, written in plain English, along with examples of how it is used.
What is FOREX?
Acronym for Foreign Exchange Market which is a case market that brokers located in various parts of the world trade currencies for many nations. FOREX transactions are not traded in futures markets.
History and Meaning of FOREX
The Foreign Exchange Market, commonly referred to as Forex or FX, is the largest financial market in the world. It involves the buying and selling of currencies between banks, financial institutions, and individual traders from around the globe. The market operates 24 hours a day, five days a week, and is considered to be highly volatile due to the constant changes in currency values. The origins of the Forex market can be traced back to the early 1970s when countries moved from a fixed exchange rate to a floating exchange rate system.
Examples of FOREX
- When a company in the United States imports goods from China, the payment for those goods is typically made in Chinese Yuan. In order to make this payment, the US company would need to convert their US dollars into Chinese Yuan on the Forex market.
- An individual who plans to travel to Europe from Japan would need to exchange their JPY (Japanese Yen) for EUR (Euro) before they can buy anything in Europe. This exchange would take place on the Forex market.
- A financial institution hedges against the risk of currency fluctuations by buying and selling different currencies on the Forex market.
- A Forex trader buys a currency pair, such as EUR/USD, when they believe the value of the Euro will increase relative to the US dollar. They would then sell that currency pair in order to make a profit when the value of the Euro has indeed increased.
Legal Terms Similar to FOREX
- Futures Market: A futures market is a centralized exchange where futures contracts are traded. These contracts are agreements to buy or sell an asset at a set price on a future date. Unlike Forex, futures markets do not involve the trading of currencies but rather commodities, such as oil, corn or gold.
- Options Trading: Options trading allows an investor to purchase the right to buy or sell an asset at a set price on a future date. It can be considered similar to Forex trading in that it involves speculation and risk-taking in the hope of making a profit.
- Derivatives: A derivative is a financial security that is derived from an underlying asset. It can be thought of as a contract between two parties that is based on the future value of an underlying asset. Forex can be considered a type of derivative since the value of currency is derived from factors such as the economic health of a country and geopolitical events.