Forex

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newratings.com  3 hrs ago  Comment 
WASHINGTON (dpa-AFX) - Edwards Lifesciences Corp. (EW) said that sales for the fourth quarter 2016 are trending towards the lower end of the previously stated $750 million to $790 million guidance, hurt by lower Surgical Heart Valve Therapy or...
guardian.co.uk  7 hrs ago  Comment 
Fashion brand’s profits hit by increased investment and foreign exchange costs Mulberry has slipped into the red after investing more in products, but sales rose strongly as the British handbag maker’s new collection helped it win back...
Reuters  Dec 8  Comment 
China's foreign exchange reserves fell far more than expected in November to the lowest level in nearly six years, as authorities struggled to stem capital outflows and shore up the sliding yuan in the face of the relentlessly rising dollar.
Mondo Visione  Dec 7  Comment 
Bats Global Markets, Inc. (Bats: BATS) today reported November data and highlights, including $30.4 billion average daily notional value traded on the Hotspot FX platform, one of the strongest months of 2016 for the segment. Click here for full...
The Hindu Business Line  Dec 7  Comment 
Rupee’s decline will also lead to better forex realisations for exporters
Financial Times  Dec 7  Comment 
Central bank burns through more of its war chest in the fight to defend currency
The Economic Times  Dec 7  Comment 
The Chinese yuan eased as the People's Bank of China set its daily guidance weaker, reflecting the dollar's broad strength amid the euro's loss.
The Times of India  Dec 7  Comment 
Forex dealers said that besides sustained selling of the greenback by banks and exporters, the dollar's weakness against some currencies overseas backed up the rupee at the Inter-bank Foreign Exchange.
Benzinga  Dec 6  Comment 
Bernstein maintains its Outperform rating on Oracle Corporation (NYSE: ORCL) ahead of its second-quarter results, scheduled for December 15. Analyst's Take Analyst Mark Moerdler expects Oracle's cloud revenue to more than offset the decline...
The Economic Times  Dec 6  Comment 
They (government) have a new feedback every day from the ground and they are still trying to react to it, said Jiwarajka of the daily changes to the rules of currency exchange.




 
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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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