Forex

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Mondo Visione  1 hr ago  Comment 
With more and more people looking to manage their money across multiple borders, peer-to-peer (P2P) alternatives for buying and selling currency are growing in popularity. Midpoint is a peer-to-peer foreign exchange platform that matches buyers...
DailyFinance  2 hrs ago  Comment 
FXCM Inc. (NYSE:FXCM), a leading online provider of foreign exchange trading and related services worldwide, today announced that its US subsidiary Forex Capital Markets LLC ("FXCM US") has introduced a new retail FX...
Forex News  4 hrs ago  Comment 
The Australian dollar dipped today together with other growth-related currencies due to concerns about potential slowdown of economic expansion in China. Fears of slowing growth hurt the Aussie both directly and indirectly, pushing prices...
The Economic Times  5 hrs ago  Comment 
Regional currencies pare gained on caution ahead of China's preliminary PMI survey due on Tuesday. Concerns about China's economy weighed on emerging currencies last week.
The Hindu Business Line  8 hrs ago  Comment 
Technical forex report for Sept 22, 2014 by Veracity Financial Services
Forex News  Sep 20  Comment 
The Great Britain pound demonstrated solid performance this week as traders were betting on Scotland staying in the United Kingdom after the referendum about independence. Another important event this week was the Federal Reserve policy...
The Economic Times  Sep 20  Comment 
In the last two weeks, reserves fell by about $3 billion as the rupee came under pressure due to the dollar’s global strength.
SeekingAlpha  Sep 19  Comment 
By Dean Popplewell: By Dean Popplewell Fed shifts interest rate projections Fed policy not to follow a "prescribed path" Japanese importers supports USD/JPY This week the Fed retained its guidance that short-term interest...
SeekingAlpha  Sep 19  Comment 
By Marc Chandler: I keep getting peppered with queries about the rising volatility. Some want to link it to the FOMC meeting this week or the modest participation in the ECB's new TLTRO facility. However, the implied volatility picture is more...
Forex News  Sep 19  Comment 
The Malaysian ringgit fell today, heading to the biggest weekly drop since August, after the nation’s central bank refrained from changing its monetary policy and kept the benchmark Overnight Policy Rate unchanged.(...)Read the rest of...




 
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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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