Forex

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Euromoney  3 hrs ago  Comment 
The SNB's removal of its currency floor with the euro and a rising greenback call into question the strength and wisdom of currency pegs elsewhere, especially in the Gulf and Hong Kong
Forex News  4 hrs ago  Comment 
Euro is getting some help in forex trading today, heading higher against its major counterparts in something of a correction. However, it’s uncertain how long the current good news will last. (...)Read the rest of Euro Regains Upper Hand in...
The Hindu Business Line  5 hrs ago  Comment 
Technical forex report for Jan 29, 2015 by Veracity Financial Services
The Economic Times  9 hrs ago  Comment 
Rupee resumed lower at 61.44 as against yesterday's closing level of 61.41 at the Interbank Foreign Exchange (Forex) and moved down further to 61.54
Forex News  Jan 28  Comment 
The New Zealand dollar crashed today after the Reserve Bank of New Zealand announced its monetary policy decision. While the central bank did not change interest rates, the statement sounded rather dovish.(...)Read the rest of Dovish RBNZ...
Forbes  Jan 28  Comment 
If you are not watching FX's The Americans, you are missing the drama that is perhaps the best on TV right now. Here are five reasons why.
Forbes  Jan 28  Comment 
The greenback reclaimed some of yesterday's sharp losses against a basket of currencies on Wednesday, as investor sentiment appears to believe the Federal Reserve will not make any major changes to its current policy. The Fed's monthly two-day...
Mondo Visione  Jan 28  Comment 
BATS Global Markets (BATS) today announced a definitive agreement with KCG Holdings to acquire Hotspot FX, a leading institutional spot foreign exchange market, in a cash transaction valued at $365 million.  Closing is expected in the first...
Reuters  Jan 28  Comment 
Indian generic drugmaker Ranbaxy Laboratories Ltd reported a wider loss in the December quarter, hurt by foreign exchange losses and higher finance costs.




 
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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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