This forex-definition market has two tiers. The first is the interbank market. It’s where the biggest banks exchange currencies with each other.
Even though it only has a few members, the trades are enormous. The second tier is the over-the-counter market. That’s where companies and individuals trade. The OTC has become very popular since there are now many companies that offer online trading platforms. Foreign exchange trading is a contract between two parties. There are three types of trades.
The spot market is for the currency price at the time of the trade. The forward market is an agreement to exchange currencies at an agreed-upon price on a future date. Dealers buy a currency at today’s price on the spot market and sell the same amount in the forward market. This way, they have just limited their risk in the future. No matter how much the currency falls, they will not lose more than the forward price. Meanwhile, they can invest the currency they bought on the spot market. The interbank market is a network of banks that trade currencies with each other.
Each has a currency trading desk called a dealing desk. They are in contact with each other continuously. That process makes sure exchange rates are uniform around the world. The minimum trade is one million of the currency being traded. Most trades are much larger, between 10 million and 100 million in value.