Forex

RECENT NEWS
Wall Street Journal  6 hrs ago  Comment 
The U.K.'s Serious Fraud Office is gathering information about possible rigging of the foreign-exchange market, the latest sign of the seriousness of the global probe into currencies trading.
Financial Times  Jul 20  Comment 
Anti-fraud agency is gearing up to launch a criminal investigation by the end of the month into alleged rigging of the $5.3tn-a-day forex market
Forex News  Jul 19  Comment 
The US dollar gained this week with help of geopolitical tensions in Eastern Europe and Middle East that were driving the Forex market by the end of the week. The greenback ended the week flat versus the Japanese yen, another currency...
The Times of India  Jul 19  Comment 
India's foreign exchange reserves rose by $643.2 million to $317.03 billion for the week ended July 11, Reserve Bank of India (RBI) data showed.
Forex News  Jul 18  Comment 
The euro breached the $1.35 level for the first time since February yet was able to recover and close flat versus the US dollar, though it still ended the week with losses. The currency gained on some other majors, including...
Mondo Visione  Jul 18  Comment 
The U.S. Commodity Futures Trading Commission (CFTC) today announced the filing of an amended Complaint against Defendant Daniel K. Steele of Rolla, Missouri, and his firm, Champion Management International, LLC (Champion Management), charging...
The Economic Times  Jul 18  Comment 
The consolidated income from operations was up 14.8 per cent to Rs 305.13 crore during the April-June quarter, the company said in a statement.
Forex News  Jul 18  Comment 
UK pound is pausing today, looking for consolidation at the end of this week after solid gains driven by encouraging economic data. More strength is expected for the sterling going forward, especially against the euro, thanks...
The Hindu Business Line  Jul 18  Comment 
India’s foreign exchange (forex) reserves increased by $643.2 million to $317.03 billion in the week ended July 11. Foreign currency assets, which form a bulk of the reserves, ros...
SeekingAlpha  Jul 18  Comment 
By Dr. Duru: Thursday, July 17 was a tough news day that pressured the market in several ways. The S&P 500 (NYSEARCA:SPY) dropped 1.2% and returned to where it traded at the end of June. The primary uptrend for the S&P 500 ends with a decisive...




 
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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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