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The foreign exchange market (also called the "Forex" or "FX" market) is the world's largest in terms of cash value changing hands daily.

FX trading involves converting one currency into another and predicting changes in exchange rates based on global events. The point is simple: to profit from currency price fluctuations. FX is an extremely liquid market with numerous participants.

Anyone who has lost money by buying a foreign currency before going on vacation, only to find its worth fell before they arrived to spend it, will appreciate the need to keep an eye on the value of currencies. Banks and their clients face a similar problem, but to a much greater degree. For example, a U.S.-based company that owns hundreds of millions, or even billions, of euros stands to lose huge amounts if the currency drops even minutely against the dollar. On the other hand, business is increasingly global: In an era when the dollar is weak, U.S. companies with significant sales in European and Asian markets can reap significant bottom-line benefits when they convert their euro or yen-denominated sales back into dollars.

Working in foreign exchange means predicting whether one currency will fall (depreciate) or rise (appreciate) against another. If depreciation is forecast, salespeople and traders advise clients to sell the currency and buy one that's appreciating. It's a simple variant of the "buy low, sell high" maxim of financial markets.

The trading of currencies themselves is known as the spot market, and is transacted by the world's banks. However, many of the products bought and sold in foreign exchange markets are not actual currencies, but deferred-payment currency contracts known as futures, and one-way bets on the direction of foreign exchange price movements, known as options. Both futures and options are types of derivatives: contracts whose value is based on the performance of an underlying financial asset, index, or other investment. Large investors - like pension or hedge funds, or multinational corporations with significant overseas sales - use these derivative products as a "hedge" against the rise or fall of the actual currencies. It's a form of insurance meant to protect against fluctuations in a portfolio or on a balance sheet.

While geographically diverse, the top 10 FX trading institutions account for nearly three-quarters of the estimated $2.7 trillion in daily volume. According to the magazine Euromoney, in 2006 they were Deutsche Bank, UBS, Citigroup, Barclays Capital, Royal Bank of Scotland, Goldman Sachs, HSBC, Bank of America, JPMorganChase and Merrill Lynch.

Over the last few years, the big story in FX markets has been the weakness of the U.S. dollar, which has lost ground consistently against both the euro and the British pound. In April 2007, the pound hit $2, a level of weakness not seen since 1992. The dollar also reached record lows against the euro. Those drops were tied to the large budget deficit in the U.S. - the FX market abhors government deficits - as well as expectations about economic growth and inflation in the U.S., and what the Federal Reserve intended to do about it.

U.S. economic growth in the first quarter of 2007 slowed, according to government measures. Over a sustained period of time, weak economic growth would encourage the Federal Reserve to cut interest rates in order to stimulate the economy. But inflation measures, while not excessive by historical standards, remained strong enough in the first part of the year to concern the Fed's policy makers, which argues against a rate cut.

If and when the Fed concludes that it needs to cut rates, investors can be expected to move their money from dollar-denominated bonds to markets with stronger currencies and governments who pay higher interest rates on their borrowings. Because economic policies can impact the FX market, FX traders pay attention to what is happening in the government bond markets, particularly trading of U.S. Treasury securities.

Roles and Career Paths

Roles in the world of foreign exchange are much the same as in the sales and trading arena, except that you'd be trading currencies and derivatives instead of corporate or government bonds and equity products.

FX trading jobs are usually split between vanilla trading, where products are simple and trades are easy to execute, and more complex derivatives trading. As with other trading desks, some traders execute transactions on behalf of clients, while proprietary traders seek to earn profits for the bank that employs them.

Sales jobs in foreign exchange (as in other product areas) are usually divided between different client types, with some salespeople specializing in hedge funds and others selling only to companies.

As is the case with equity and bond trading, researchers that specialize in studying the currency markets produce written reports that are used by the salespeople to keep clients informed of market developments. If you work with FX derivatives, you could also become a structurer, assembling complex exotic derivative products for clients.

Skills and Qualities

- Understanding of geopolitical events and macroeconomics

- Quick thinking with a good awareness of how markets work

- For FX derivatives: reasonably strong math aptitude

- For structurers: patience and communications skills