Forex

RECENT NEWS
The Economic Times  2 hrs ago  Comment 
The rupee opened sharply higher 67.55 per dollar against yesterday's closing level of 67.68 per dollar at the Interbank Foreign Exchange (Forex) market.
Financial Times  4 hrs ago  Comment 
Record day on foreign exchange desks tested stamina and resilience
Euromoney  4 hrs ago  Comment 
Paris and other leading European cities will have their work cut out usurping London’s status as the continent’s leading FX centre, even if they succeed in undercutting London’s status as the centre for euro clearing.
Euromoney  6 hrs ago  Comment 
How and why trading was dominated by banks and ECNs, with retail investors cautious about getting steamrolled by volatility.
Reuters  6 hrs ago  Comment 
Foreign exchange volatility and economic uncertainty after Britain's vote to leave the European Union have imperiled a projected profit rebound in the United States, where companies have been stuck in an earnings recession since last year.
Mondo Visione  8 hrs ago  Comment 
Business as usual for OANDA customers as they trade through exceptionally uncertain times OANDA   a leading global provider of online foreign exchange (“Forex” , “FX”) and over-the-counter commodities, bonds and indices trading...
Mondo Visione  Jun 29  Comment 
BSO, the global Ethernet network, cloud and hosting provider, announces the company is adding Financial Cloud to its service portfolio to provide a unique and fully-integrated low latency network and cloud offering specifically engineered for the...
Japan Today  Jun 29  Comment 
China's Foreign Ministry on Wednesday said the yuan's exchange rate was not the reason for unbalanced trade ties with the United States, after Republican presidential candidate Donald Trump said he would label Beijing a currency...
The Hindu Business Line  Jun 29  Comment 
Says cost cuts, local parts to help offset forex impact
Mondo Visione  Jun 28  Comment 
The Foreign Exchange Professionals Association (FXPA) commends the industry for its preparations ahead of Britain’s referendum on whether to Leave or Remain in the European Union, which resulted in the relatively smooth functioning of currency...




 
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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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