FOREX is short term for Foreign Exchange which is a type of financial market that facilitates trading between countries with exchange of specific currency equivalent in value of one currency in exchange for another foreign currency in order for each country across the world to effectively purchase an investment or any products from each other. It is also a distributed or decentralized financial market that aims to assist foreign trading products or other financial instruments used as credit or equity investments made available on another nation through exchange of currencies. In addition, another involvement of foreign exchange is through transactions from remittances across countries. It works by means of converting the currency of money into another foreign currency in order to transfer the money or other credit instruments internationally or in short, remit to another country.
The use of foreign exchange is very significant because of the different monetary units by different countries, and it is very impossible for one country to make use of its own currency for settlements transactions in another country. It is just essential to convert money into another currency of a certain nation first for the purposes of travelling, trading and other transactions between individuals and business enterprises of different countries. For instance, a British enterprise will purchase some raw materials from USA, having currency of Euros on hand; it will still require them first to convert the amount or value to be paid for the raw materials in pound into US dollars to complete the trading transaction.
Generally, the main function of a foreign exchange is to support transactions involving international trading and investing by means of converting one currency to another currency by individuals or any parties involved like large banks, central banks, corporations, private entities, governments and other types of financial institutions. Foreign exchange plays a vital role in the financial market because it is certainly the most liquid financial market. In the foreign transactions, exchange rate is always present. It is important in every country. Each country has foreign exchange reserves which reveal the financial capability of its economy. The exchange rate across different countries is determined through computing of the foreign exchange ratio because it indicates the direct relationship of the prices and commodities in the local and foreign market. The foreign exchange can be an evidence of financial condition of a certain country. The foreign exchange market determines the equivalence of the different currencies across nations.