The foreign exchange market is a global, worldwide decentralized over-the-counter financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency.
The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions. When countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Breton Woods system. This historic decision opened one of the most gargantuan markets in the world, which is now open not only to professional brokers but also to private persons.
A foreign exchange option is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world. At the top is the inter-bank market, which is made up of the largest commercial banks and securities dealers. In 1971 this currency market was opened by the decision of the international banks to allow the unalterable currencies to float up and down with their real values on the international market. Within the inter-bank market, spreads, which are the difference between the bids and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens as you go down the levels of access.
