Forex

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Forex News  2 hrs ago  Comment 
It’s been a choppy morning of trading so far, thanks in large part to the surprise data that shows Japan is in recession. The move has certainly impacted the Australian dollar, leading to wild swings in earlier trading. Now, though,...
The Hindu Business Line  6 hrs ago  Comment 
Technical forex report for Nov 17, 2014 by Veracity Financial Services
Reuters  9 hrs ago  Comment 
Reuters Market Eye - The rupee is little changed at 61.69 vs its previous close of 61.72/73.
Clusterstock  Nov 17  Comment 
By Kylie MacLellan LONDON (Reuters) - An international settlement over allegations of manipulation in the foreign exchange market shows reform of Britain's banking system is still badly needed and must not be diluted, a group of British lawmakers...
guardian.co.uk  Nov 17  Comment 
Anger at payment after RBS was fined for forex market rigging as MPs warn new rules to rein in banks are vulnerable to lobbying Royal Bank of Scotland is at the centre of a fresh pay row after it emerged it had handed £1m in shares to Stephen...
Financial Times  Nov 16  Comment 
The chatroom banter of the forex traders shows little has changed in the banking culture
Yahoo  Nov 16  Comment 
Working out of a shared office near London's Euston station, Michael Kent is part of a revolution that may be driven on by this year's row over alleged currency market manipulation by major banks. Kent's ...
Forbes  Nov 15  Comment 
As I mull the £2.6 billion (c.US$4.3bn) of collective fines handed out by UK and US regulators to six of the world’s biggest banks, which includes Bank of America, Citibank, HSBC, Royal Bank of Scotland, JPMorgan Chase and UBS - over traders’...
The Times of India  Nov 15  Comment 
India's foreign exchange reserves fell by $778.4 million to $315.13 billion for the week ended Nov 7, Reserve Bank of India (RBI) data showed.




 
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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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