Forex

RECENT NEWS
The Economic Times  4 hrs ago  Comment 
The rupee is forecast to weaken to 68.50 a dollar in one month versus 67.73 at Thursday's close, the poll of nearly 30 foreign exchange strategists carried out this week showed.
Forbes  Jan 7  Comment 
Amazon will make waves in the film categories, diversity may win big and FX could beat HBO.
Japan Today  Jan 7  Comment 
China's foreign exchange reserves fell by $320 billion last year, Beijing announced Saturday, as authorities sought to support the yuan against a soaring dollar which is encouraging capital outflows. The country's vast foreign exchange...
The Hindu Business Line  Jan 6  Comment 
The Madras High Court has confirmed a penalty of ₹25 crore imposed on TTV Dhinakaran by the Enforcement Directorate in a two-decade-old Foreign Exchange Regulation Act violation case against him.Dhin...
Yahoo  Jan 6  Comment 
Mexico's central bank confirmed on Friday it had sold dollars during the Asian trading session on Friday, its second intervention the day after it did the same during Mexican and U.S. trading hours to fight a slump in the peso. At 7:45 a.m. Mexico...
The Economic Times  Jan 6  Comment 
In the previous week, the reserves had declined by $ 935.2 million to $ 359.671 billion.
Reuters  Jan 6  Comment 
China will intensify efforts in 2017 to crack down on foreign exchange irregularities, such as underground banking, the foreign exchange regulator said on Friday.
The Economic Times  Jan 6  Comment 
Presently , ED is probing the matter under FEMA (foreign exchange management act) and has already sought documents from the company.
Financial Times  Jan 5  Comment 
Mexico’s currency retraces gains from central bank move as Trump fears weigh




 
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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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