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What is Foreign Exchange
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FX Fundamentals

A foreign exchange (FX) transaction is a transaction which allows funds to flow between bank deposits denominated in different currencies.

Last available figures from the Bank for International Settlements (BIS) show that on an average day, over $1.9 trillion changed hands in the 24 hour global FX marketplace.

Surprisingly, only about 15% of FX is directly driven by cross-border trade in goods and services. Approximately 85% is driven by capital transactions conducted by banks for financial engineering and speculation.

Each sovereign state issues and manages its own currency through a national central bank. The exception is the eurozone. This new currency area is made up of 12 European Member States. A politically independent European Central Bank issues and manages the trans-national currency, the euro.

The euro should not be confused with eurocurrencies, which are currencies held in deposits outside their national banking system.

For example, dollars held in the account of a German bank are known as eurodollars, yen held in the account of a London bank - and as an asset of the London bank - are known as euroyen, and so on.

Terminology

In the markets, currency names are shortened to 3 letters to meet the needs of screen-based tables. These were developed by the International Organisation for Standardisation and are called ISO codes or SWIFT codes. We use these conventions throughout.

The currencies in purple are the 'legacy' national currency units (NCUs) which represented localised denominations of a single currency, the euro. They were tradeable as NCUs until 1.01.2002 when the euro became the sole denomination.

Interbank fund flows are predominantly in euro because pricing, trading and settlement in all EMU money, debt and equity markets are now denominated solely in euro.

This material has been prepared by FT Knowledge and is for information purposes only. It has not been independently verified by Standard Chartered Bank and makes no recommendation and accepts no responsibility or liability with respect to the accuracy or correctness of information contained in the material. It has not been prepared to be suitable for any particular person or class of persons and should not be relied on as a basis for investment decisions. The material in this document is not intended as an offer or solicitation of an offer to buy or sell any financial products. It does not constitute a prediction of likely future movements in rates or prices or any representation that such future movements will not exceed those shown in this document. Past performance is not necessarily indicative of future performance; the value, price or income from investments that may fall as well as rise. Before making any investment, you should seek your own professional advice.