Forex

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Forex News  8 hrs ago  Comment 
The Indonesian rupiah climbed today, touching the highest level in two months, as it was announced that Joko Widodo is the victor in the nation’s presidential elections. This gives hope that political uncertainty will not be driving...
Forex News  9 hrs ago  Comment 
Euro is struggling right now, trying to maintain the gains it eked out earlier in the session. However, that is proving a bit difficult, given the possibility of harsher sanctions against Russia over the whole issue of what’s happening...
Forex News  9 hrs ago  Comment 
UK pound is down pretty much across the board today, thanks in large part to the release of the minutes from the latest Bank of England meeting. It looks as though loose monetary policy is going to continue for a little while longer,...
The Hindu Business Line  Jul 23  Comment 
Veracity Technical Forex report for July 23, 2014, by Veracity Financial Serv...
Forex News  Jul 22  Comment 
The Indonesian rupiah dropped today as the result of this month’s presidential election was contested by one of the candidates, who said that the voting was undemocratic and unfair.(...)Read the rest of Indonesian Rupiah Drops due to...
Forex News  Jul 22  Comment 
The Thai baht advanced today on speculations that government spending will improve the nation’s economy, attracting investors to the country. The currency rose to the highest level since November.(...)Read the rest of Thai Baht Advances...
NPR  Jul 22  Comment 
This year's Television Critics Association press tour found networks pitching hard for the view beyond overnight ratings. But getting the right number isn't the end of the issue.
Forex News  Jul 22  Comment 
Forex traders are seeing that the ECB is really serious about stimulus, and the result is that euro weakness, after threatening for months, finally seems to be appearing on a more long-term basis. Euro is down against its major counterparts...
Forbes  Jul 22  Comment 
The greenback hit a one-month high against the Swiss franc and neared a five-month high versus the euro on Tuesday as market sentiment remains haunted by geopolitical risk. And yet, investors appear to be shrugging off the unsettled quandary...
Forex News  Jul 22  Comment 
Canadian dollar is hoping to hold on to some of yesterday’s gains, and with thin trading and concerns about the geopolitical situation, that’s a possibility. (...)Read the rest of Canadian Dollar Looks to Hold to Yesterday’s Gains...




 
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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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