Forex

RECENT NEWS
Mondo Visione  53 min ago  Comment 
A British Columbia Securities Commission panel has found that Hong Liang Zhong committed fraud, engaged in unregistered trading, and offered clients false guarantees to reimburse them for any losses. Zhong recruited people to open Forex...
Forbes  3 hrs ago  Comment 
Growth in sales across geographies, including the U.S., Latin America, Asia and EMEA (Europe, Middle-East and Africa) lifted MetLife’s results. However, as MetLife's operations are spread across many international markets, it is susceptible to...
Daily FX  7 hrs ago  Comment 
We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the EURUSD may continue higher.
Mondo Visione  7 hrs ago  Comment 
EBS, ICAP's market-leading electronic FX business, announces today that it will beta launch FX Outrights and Swaps on EBS Direct in Q4 2015, subject to regulatory approvals.   Eight major liquidity providers (LPs) have agreed to support the...
Forbes  7 hrs ago  Comment 
Shares of the Priceline Group are down in early Thursday trading after the travel-booking giant posted better-than-expected first quarter profit but failed to match Wall Street's projections with its second quarter outlook. Citing weakness in the...
Mondo Visione  8 hrs ago  Comment 
CRYEX today announced the filing of an application with the Swedish Finansinspektionen (SFSA) to become a regulated clearing organization and create a member-only marketplace with clearing and settlement for FX and digital currencies. Cryex is...
Wall Street Journal  9 hrs ago  Comment 
Molson Coors Brewing said its profit fell by 50% in the first quarter of the year as foreign exchange impacts and lower beer volumes weighed on its performance.
Daily FX  10 hrs ago  Comment 
The April US jobs report, the unwind of the ECB's QE trade, and the UK general election are all influencing price action this week.
Forex News  10 hrs ago  Comment 
After moving above the US80¢ earlier, the Australian dollar is struggling. Thanks to disappointing employment data and a rate cut earlier this week, the Aussie is feeling a little weak against some of its counterparts. (...)Read the rest...




 
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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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