OTC foreign exchange turnover for five forex instruments in the UK 2001-2019
Forex marketsSimply put, foreign exchange markets are markets where one currency can be traded for another. The most basic type of transaction on forex markets is termed a spot transaction, which is where one currency is traded for another within two days, without a signed contract. The two most common currencies exchanged on forex markets in this way are the euro and the U.S. dollar, which account for over a quarter of all forex transactions globally. In turn, the British pound has the fourth highest average daily turnover of currencies traded on global forex markets, behind the U.S. dollar, euro and yen.
Foreign Exchange DerivativesIn addition to the exchange of currencies, various ‘derivatives’ based on the exchange of foreign currencies can be bought and sold on forex markets. Some of the most common financial derivatives are:
- forwards, which are an agreement for the purchase and sale of currency at a fixed price at a point in the future (generally after 90 days);
- swaps, which are the simultaneous lending and borrowing of two different currencies between two investors (i.e. one investor borrows an amount in one currency, then repays in a different currency); and
- options, which are an agreement to exchange one currency for another at an agreed rate at some time on the future, but with no obligation to carry out the transaction (as is the case with forwards).