The significance of the foreign exchange market outstrips its impressive size. It is an important part of the return on foreign investments. Academic studies suggest the variability of currencies can account for almost a third of the return of a portfolio of international equities over time and almost two-thirds of the return on a portfolio of global bonds. For that matter, investors in U.S. blue-chip multinational companies also take on currency exposure, albeit indirectly.

It is ironic, but prices in the currency market may not be set the way we might assume they are, with profit-maximizing buyers and sellers duking it out over them. That’s because many, if not most, of the folks trading those trillions of dollars every day are not trying to maximize their profits in the foreign exchange market. They simply don’t see currencies as an asset class — as an opportunity for profit — but rather as a risk that needs to be hedged, a cost that needs to be made certain, or a transactional vehicle needed to purchase another asset, which is more likely what they are trying to maximize return on.