Forex

RECENT NEWS
Daily FX  2 hrs ago  Comment 
Retail FX continues to fade the near-term rally in USD/CAD as the crowd remains net-short the pair since June 18.
guardian.co.uk  3 hrs ago  Comment 
Martin Wheatley’s resignation is another victory for the increasingly bullish banks - George Osborne has capitulated again It’s job done as far as Britain’s banks are concerned. The departure of Martin Wheatley as the head of the City’s...
The Hindu Business Line  5 hrs ago  Comment 
India’s foreign exchange (forex) reserves fell for the third consecutive week ending July 10 by $0.157 billion at $354.360 billion, as per the RBI data. In the previous reporting week, th...
newratings.com  6 hrs ago  Comment 
WASHINGTON (dpa-AFX) - Kansas City Southern (KSU) reported that its second quarter net income available to common stockholders declined to $111.8 million or $1.01 per share, from $129.8 million, or $1.18 per share, in the comparable quarter last...
The Hindu Business Line  9 hrs ago  Comment 
Technical forex report for July 17, 2015 by Veracity Financial Services
Daily FX  Jul 16  Comment 
Continued Euro tumbles have been met with aggressive retail FX crowd buying, and our trader sample shows that traders are close to flipping to net-long the EUR/USD for the first time since March.
Daily FX  Jul 16  Comment 
Retail FX traders remain heavily long the Australian Dollar versus its US namesake, and a contrarian view of crowd sentiment leaves us firmly in favor of selling into weakness.
Daily FX  Jul 16  Comment 
Extraordinarily one-sided retail FX trader sentiment warns that the New Zealand Dollar will continue to tumble versus its US namesake.
Euromoney  Jul 16  Comment 
In addition to facilitating more efficient payments, corporate cards can also help treasurers reduce their FX costs.
Daily FX  Jul 16  Comment 
After better than expected data, the USDJPY has been rejected at daily resistance. Learn today's trading values with the Chart of the Day!




 
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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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