Forex

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Clusterstock  4 hrs ago  Comment 
NEW YORK (Reuters) - Swiss bank UBS said on Wednesday it appointed new roles in its foreign exchange, interest rates and credit (FRC) business with Dylan Roy to head of the group's Americas division. Roy will succeed Kevin Arnold, who will move...
Mondo Visione  5 hrs ago  Comment 
Portware, the first and only global provider of multi-asset trade automation solutions powered by artificial intelligence, today announced the company has appointed FX industry veteran Christopher Matsko as Head of Foreign Exchange Trading...
The Hindu Business Line  11 hrs ago  Comment 
Technical forex report for Aug 12, 2015 by Veracity Financial Services
The Economic Times  Aug 12  Comment 
Emerging Asian currencies fell to multi-year lows on Wednesday after China's central bank allowed the yuan to drop for second day.
Daily FX  Aug 12  Comment 
Driving the Yuan sharply lower carries far broader implications for the global markets than just bolstering China's economic prospects.
Daily FX  Aug 11  Comment 
The 24 hour FX Market is made up of multiple sessions every day. Learn the key characteristics and how it impacts the US Dollar.
The Economic Times  Aug 11  Comment 
Releasing a report on the Rs 80,000 crore Indian sugar industry, McKinsey said the sector is facing "worst-crisis in 30 years."
The Economic Times  Aug 11  Comment 
Data released yesterday said the Reserve Bank remained net purchaser of the US currency in June, buying $565 million from the spot market.
Euromoney  Aug 11  Comment 
Areas of the FX market where outsourced or cloud solutions have the potential to exert a greater impact include platforms that electronify the workflows associated with FX options trading, although bank conservatism is likely to prolong the...
Yahoo  Aug 11  Comment 
China's shock 2 percent devaluation of the yuan on Tuesday pushed the dollar higher and raised the prospect of a new round of currency wars, just as Greece reached a new deal to contain its debt crisis.




 
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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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