A foreign exchange transaction is a trade of one national money for another. The exchange rate is the price at which the moneys are traded. The spot exchange rate is the price for immediate exchange of the two currencies. The forward exchange rate is the price agreed now for a currency exchange that will occur sometime in the future. Banks and their traders are at the center of the foreign exchange market. They use computers and telephones to conduct foreign exchange trades with customers (the retail part of the market) and with each other (the interbank part of the market).

Spot foreign exchange serves a clearing function, permitting payments to be made between entities who want to hold or use different currencies. The exchange rate is determined by supply and demand, within any constraints imposed by the governmental choice of an exchange rate system or regime. Under a freely flexible or floating exchange rate system, market supply and demand set the equilibrium price (exchange rate) that clears the market. A floating exchange rate changes over time as supply and demand shift over time. Under a fixed exchange rate system (also called a pegged exchange rate system), monetary officials buy and sell a currency so as to keep its exchange rate within an officially stipulated band. When the currency's value lies at the bottom of its official band, officials must buy it by selling other currencies. When the currency's value presses against the top of its official price range, officials must sell it in exchange for other currencies.