Forex

RECENT NEWS
Financial Times  May 14  Comment 
Forex advisers report pick-up in activity as finance directors reassess budgets
Reuters  May 14  Comment 
Financial leaders of seven leading world economies pledged stronger cooperation against cyber crime on Saturday and not to use foreign exchange to gain competitive advantage, but stuck to their cautious wording on trade, their final communique...
The Hindu Business Line  May 13  Comment 
Financial leaders of seven leading world economies will pledge stronger cooperation against cyber crime on Saturday and not to use foreign exchange to gain competitive advantage, but stick to their c...
The Economic Times  May 12  Comment 
Entities that will have to report are banks, professionals, fund houses, forex dealers, post office, nidhis, non-banking finance cos, property registrars.
The Economic Times  May 12  Comment 
Backed by the strong inflow of foreign currency and strengthening of the Rupee the RBI is thought to have intervened in the market by mopping up foreign currency assets, said market sources.
Mondo Visione  May 11  Comment 
Aequitas NEO Exchange Inc. (“NEO Exchange” or “NEO”) is pleased to announce it has been designated a Qualified Foreign Exchange by OTC Markets Group Inc. (“OTC Markets”), effective March 29, 2017. With this designation,...
Euromoney  May 11  Comment 
Institutional FX and derivatives broker Sucden Financial claims its new OTC FX options service has broken fresh ground in addressing concerns raised by corporates around liquidity, costs and the availability of pricing data.
Mondo Visione  May 11  Comment 
  Cobalt, the FX post-trade processing network based on distributed ledger technology, today announced that Citadel Securities, a leading global market-maker across FX, fixed income, equities, ETFs and options, and XTX Markets, a leading ...
New York Times  May 10  Comment 
Joe Marchese fills a role that had been vacant since September and will oversee advertising for the Fox Television Group, Fox Sports and FX.
Forbes  May 10  Comment 
The fall in oil prices, an FX shortage and militant attacks on oil-sector infrastructure have pushed indigenous firms into deep distress.




 
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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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