How the FX market works
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
15 min read · updated November 3, 2026
Foreign exchange, or FX, is the market where one currency is swapped for another. It is the largest market in the world, close to ten trillion dollars a day in the 2025 survey that central banks run every three years, and it never really closes during the week. An FX desk at a bank quotes prices to companies paying foreign suppliers, to fund managers buying foreign stocks, to hedge funds with a view, and to other banks. Most of that flow is not a bet on currencies at all. It is the plumbing of global trade and investment.
In an interview, FX questions test whether you can read a quote without flipping it, do a pip and cross rate calculation in your head, and explain why a currency moved. If you can also say what a stronger dollar does to a US company's earnings and why a treasurer hedges, you sound like someone who could sit next to a client on day one.
Every FX price is the price of one currency in units of another, so always say the base currency out loud first. And the main thing that moves currencies over months is the gap in interest rates between two countries, and more precisely the change in where markets expect that gap to go. Carry trades, central bank surprises and most corporate hedging all come back to that gap.
The three products
The FX market trades three main things.
- Spot: an exchange of two currencies at today's rate, settled in two business days (one business day for a few pairs, like USD/CAD). "Spot" is the price you see quoted on a screen.
- Outright forward: the same exchange on a later date, at a rate fixed today. A company that will receive euros in six months uses one to lock in its dollar amount.
- FX swap: a spot trade and an opposite forward done together, in the same amount. Buy euros today, sell them back in three months. Because the two legs offset, it is really a short-term secured loan in two currencies. Banks and funds use it to borrow a currency they lack.
FX swaps are the biggest product by volume, larger than spot. Most forwards and swaps are short: the bulk mature within a week, and nearly all within a year. Options on currencies trade too, and the FX forwards and options lesson covers how forwards and options are priced.
Keep reading
The rest of this lesson is free with an account
There's about 11 more minutes of How the FX market works below this, plus every other lesson in Sales & Trading. Free account, no card.
Any partner school .edu
Frequently asked
- How do you read an FX quote like EUR/USD 1.1000?
- The first currency is the base and the second is the quote currency, so EUR/USD 1.1000 means one euro costs 1.10 dollars. A two-way quote such as 1.1000/1.1002 gives the bid, where the dealer buys the base currency, and the offer, where it sells. If the number goes up, the base currency has strengthened.
- What is a pip in forex?
- A pip is the fourth decimal place for most currency pairs, 0.0001, and the second decimal, 0.01, for pairs quoted in yen. On 1 million euros of EUR/USD, one pip is worth 100 dollars. Spreads and daily moves are quoted in pips.
- What is the carry trade?
- Borrowing in a currency with low interest rates and investing in one with high rates, to earn the gap. It pays steadily while exchange rates stay calm, but if the funding currency jumps, as it often does in a sell-off, the losses can wipe out years of interest in weeks.
- How does a strong dollar affect US companies?
- For a company with large foreign sales it is usually a headwind. Foreign revenue converts into fewer dollars, so reported sales and earnings fall even if nothing changed locally, and US-made goods get more expensive for foreign buyers. Importers and companies with costs abroad gain.
LearnAI