The market at a glance
Foreign exchange is the deepest market humanity has built: roughly $7.5 trillion of turnover every day (BIS survey), running 24 hours from Wellington's open to New York's close, with no central exchange — just a global dealer network stitched together by arbitrage. The dollar stands on one side of ~88% of all trades; EUR/USD alone is the most traded instrument on the planet.
Every cross-border activity ends here: trade invoicing, investment hedging, tourism, central-bank reserves, and speculation layered on top. The professional core is concentrated — a handful of bank dealers and non-bank market makers intermediate most flow, increasingly by internalising it (netting clients against each other) before touching public venues.
The one law of FX pricing
Covered interest parity: a forward exchange rate is not a forecast — it is spot adjusted for the two currencies' interest gap, enforced by arbitrage. High-rate currencies trade at forward discounts; low-rate at premiums. This single relation prices forwards, FX swaps and the funding structure of global finance:
$$ F = S \cdot \frac{1 + r_{\text{quote}}\,\tau}{1 + r_{\text{base}}\,\tau} $$
How the products fit together
Spot is the raw exchange. Forwards lock future rates for hedgers; NDFs do the same for restricted currencies, cash-settled offshore. FX swaps — over half of all FX volume — are really collateralised currency loans, the global dollar-funding machine. Cross-currency swaps extend that to multi-year debt transformation, letting issuers borrow wherever it's cheap and swap home.
Concepts to master
- Every position is a pair — you're never just "long euro"; you're long euro against something, funding included.
- Carry and its crashes — high-yield currencies don't depreciate as parity theory predicts (the forward-premium puzzle), rewarding carry trades that periodically unwind violently. "Up the stairs, down the elevator" is this market's oldest scar.
- The dollar smile — the dollar strengthens both in US booms and global panics; only the boring middle weakens it. Half of macro trading is a position on this smile.
- The basis is a stress gauge — when covered parity breaks against the dollar, someone's funding is on fire; central-bank swap lines exist for exactly that moment.