Forex

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Good Day! . And a Happy Friday to one and all! It's a real TGIF, remember that saying?, for yours... For more information, read our latest forex news and reports.
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The two major crude oil contracts are little-changed this Friday afternoon. Brent fell back... For more information, read our latest forex news and reports.
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Decrease in the U.S. Dollar Index (USDIDX) continued on Thursday. Thus, the current week may be the... For more information, read our latest forex news and reports.
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Diverging rates are expected to benefit the dollar - a hawkish Fed will trump a dovish Draghi every... For more information, read our latest forex news and reports.
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Good morning, US futures treading water following Thursday’s significant losses; UoM consumer... For more information, read our latest forex news and reports.
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One of the biggest conundrums in the bullion markets at the moment is why PGM prices remain... For more information, read our latest forex news and reports.
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Gold prices are steady in Friday trading, as the spot price stands at $1317 early in the European... For more information, read our latest forex news and reports.
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Forex News and Events: The European equity markets follow the steep decline in US and Asian... For more information, read our latest forex news and reports.
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The U.S. is resuming its role as an engine of global growth, this time one that just putt-putts... For more information, read our latest forex news and reports.
FX Street  Apr 11  Comment 
   DAILY MARKET OUTLOOK EUR/USD - 1.3893 Update Time: 11 Apr 2014   01:32 GMT The... For more information, read our latest forex news and reports.




 
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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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