Forex

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Mondo Visione  12 hrs ago  Comment 
The eight foreign exchange committees in the major financial centres are releasing today a revised “Global Preamble: Codes of best market practice and shared global principles” document, which was approved and endorsed by the eight ...
The Economic Times  Mar 30  Comment 
The rupee hit day's low of 62.69 versus the US dollar in trade today at the Interbank Foreign Exchange.
The Times of India  Mar 28  Comment 
India's foreign exchange reserves increased by $4.26 billion to $339.99 billion for the week ended March 20, Reserve Bank of India (RBI) data showed.
Forex News  Mar 27  Comment 
The US dollar fell today following disappointing macroeconomic reports from the United States. The losses were very limited but the greenback was still set to be one of the weakest currencies on the Forex market over the past...
The Hindu Business Line  Mar 27  Comment 
India’s foreign exchange (forex) reserves hit an all-time high of $340 billion, jumping by a record $4.26 billion in the week ended March 20, 2015 on the back of spike in foreign currency assets....
The Hindu Business Line  Mar 27  Comment 
Technical forex report for March 27, 2015 by Veracity Financial Services...
Benzinga  Mar 26  Comment 
Citi commented on the semiconductor industry Thursday and the impact of currency movements. Analysts led by Christopher Danely believed that the strengthening of the U.S. dollar could result in two possible negative scenarios for the...
Forex News  Mar 26  Comment 
The US dollar is attempting to stage a recovery during the Thursday’s trading session. For a change, news from the United States was positive, allowing the currency to regain some of its strength.(...)Read the rest of Dollar Attempts...
The Hindu Business Line  Mar 26  Comment 
The rupee was trading weak by 42 paise at 62.75 against the dollar on month-end dollar demand from banks and importers at the Interbank Foreign Exchange market today. After opening weak...




 
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Overview

Forex (FX) is short for foreign exchange and refers to the trading of one currency for another. Unlike stocks or futures, currency trading is an over-the-counter market with no central exchange.

Currencies typically trade in pairs such as the EUR/USD or USD/JPY. Currencies common to Forex tend to be the most liquid currencies such as the U.S. Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Swiss Franc (CHF), Canadian Dollar (CAD), and Australian Dollar (AUD).

FOREX[1] is the world's most traded market with an average daily turnover of USD $3.2 trillion[2].

Trades occur 24 hours a day, starting Monday morning in the Asia-Pacific region and ending Friday evening in North America.

Common FX Practices

Corporate FX Programs

Many corporations who receive a significant portion of their revenue from overseas (overseas refers to any sites outside of the chartering country - "headquarters") may wish to participate in FX Hedging. This is primarily because currency volatility can majorly effect a company's stated income. A long-winded example is below.

Say Google receives more than 50% of its revenue from outside the United States. This creates a situation in which the relative strength of the U.S. Dollar (USD) can impact its financials. If the Euro (EUR) strengthens against the dollar, it has a net positive impact on Google's income statement. If EUR/USD decreases, meaning more USD can be bought with 1 EUR, then when the company calculates the value of its EUR-denominated revenue, it will see a higher than average USD amount. Forex

Retail FX

In the last several years, the Retail FX market has opened up substantially with the spread of the internet and online trading. This segment is said to occupy about 4% of all forex transactions and is growing rapidly. One of the main reasons for this phenomenon is the simplified trading platforms like TradeStation that were recently developed by innovative internet brokers, aiming to educate the lay person and help get into this lucrative market.

Example with Fake Numbers and no Transaction Costs

Let's say, for ease of demonstration, that 1 EUR = 2 USD, or that 1 Euro can purchase 2 U.S. Dollars (this is not the case, but it's easy math). Furthermore, we can claim that Google makes 1 million Euros in December 2008 in France. If Google recognizes that revenue in USD, we'd say that Google made 2 million dollars that month (from France). Suppose, however, that the Dollar strengthens against the Euro, and instead we get 1 EUR = 1.5 USD (USD appreciates, which means that 1 Euro now buys less than before). This would instead result in 1.5 million dollars for December, instead of the previous 2 million.

On your own, try seeing what would happen if the USD weakens against the Euro (1 EUR = 3 USD). This volatility is something that most companies desperately seek to avoid. One can probably see already, the more money at risk, the greater the trading activity. Vis-à-vis, the more currencies that impact revenue, the greater the trading activity. As a result, these companies engage in all sorts of Hedging practices, including using currency swaps and Derivatives (Options, Futures, and forwards), to limit their exposure to currency movement, especially for the primary currencies as listed above.

Example Currency Pairs

U.S. Dollars to Euros





Euros to U.S. Dollars



U.S. Dollars to Canadian Dollars



Canadian Dollars to U.S. Dollars



U.S. Dollars to Japanese Yen



References

  1. FOREX
  2. Forex 101
  3.   WHAT IS FOREX
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