Forex

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Forex News  41 min ago  Comment 
Most risky currencies fell yesterday after the surprise interest rate cut from the European Central Bank, and the Malaysian ringgit was among them. Today, the Forex market is still shaken, meaning that the yesterday’s trends remain...
Forex News  2 hrs ago  Comment 
Canadian dollar is trading mixed today, looking for solid direction as the dust from this week settles. The Bank of Canada kept things steady, but elsewhere, there is plenty of turmoil. (...)Read the rest of Loonie Trades Mixed as This...
Forex News  2 hrs ago  Comment 
Euro is eking out some small gains today, following yesterday’s huge drop against all major counterparts. Forex traders aren’t expecting much, though. The big shocker from the ECB is likely to result in general euro weakness for a while....
Forex News  Sep 4  Comment 
The US dollar demonstrated huge gains today, mostly with help from the European Central Bank policy decision, but also due to the string of positive domestic economic indicators that supported the outlook for monetary tightening from...
Forex News  Sep 4  Comment 
The Great Britain pound experienced weakness today but halted its decline and attempted to gain ground after the Bank of England decided to keep its monetary policy unchanged.(...)Read the rest of Sterling Attempts to Gain Ground After BoE...
Forex News  Sep 4  Comment 
The Japanese yen recovered a bit after earlier losses today after the Bank of Japan announced no changes to its monetary policy. While the currency remained soft versus the US dollar, it pared losses against some other majors.(...)Read the...
Forex News  Sep 4  Comment 
Euro is lower today, dropping as Forex traders look ahead to policy expectations from Mario Draghi and the European Central Bank. Many expect the ECB to embark on looser monetary policy, and that is weighing on the euro. (...)Read the...
The Hindu Business Line  Sep 4  Comment 
Technical forex report for Sept 4, 2014 by Veracity Financial Services
Forex News  Sep 4  Comment 
The Chilean peso rose with other currencies of emerging markets thanks to the positive risk sentiment among Forex market participants. It allowed the currency to ignore a downward revision to the projected economic growth...
Forex News  Sep 4  Comment 
The Japanese yen weakened today against other most-traded currencies at the early Asian session ahead of the Bank of Japan monetary policy announcement. For now, losses are not big and are not enough to erase yesterday’s gains.(...)Read...




 
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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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