Forex

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MarketWatch  1 hr ago  Comment 
The Securities and Exchange Commission said on Tuesday that Morgan Stanley Smith Barney and Citigroup Global Markets will pay more than $2.96 million each to settle charges that they made false and misleading statements to investors about a...
The Hindu Business Line  3 hrs ago  Comment 
If the rupee depreciates 10 per cent in FY18, the rating agency expects the credit profile of 75 of the top 100 non-financial forex borrowers covered in the study to be negatively impacted
Mondo Visione  4 hrs ago  Comment 
The Wall Street Blockchain Alliance (WSBA), a 501 (c)(6) non-profit trade association, has announced that OTC Exchange Network (OTCXN) has joined the organization as a corporate member. OTCXN is utilizing blockchain technologies and smart...
Reuters  8 hrs ago  Comment 
Most Indian companies with overseas debt have not hedged enough of their foreign currency risk, making them vulnerable to any sharp movements in the rupee, according to a study by credit ratings agency India Ratings.
The Economic Times  8 hrs ago  Comment 
Ind-Ra analysed 100 top foreign exchange borrowers with a total forex exposure of Rs 19.5 lakh crore and found that only 36% of this is hedged for currency shocks.
Reuters  Jan 24  Comment 
Repatriation of normal profits by foreign invested firms will not be restricted, the head of China's foreign exchange regulator said on Tuesday.
Mondo Visione  Jan 23  Comment 
FlexTrade Systems (@FlexTrade), a global leader in multi-asset execution and order management systems, today announced that South Africa-based Sanlam Investments has chosen the FlexTRADER EMS to facilitate global cross asset trading...
The Hindu Business Line  Jan 23  Comment 
The rupee was trading a tad up at 68.14 in the evening deals on increased selling of the American currency by exporters. According to forex dealers, the dollar’s weakness against some currencies o...




 
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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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