Category: All Articles >> Other


Forex is an acronym for currency and exchange. Currency exchange  is the process of changing one currency to another for a variety of reasons, usually for commerce, commerce or tourism. According to a recent three-year report by the Bank for International Settlements (a global bank for national central banks), the average was more than $ 5.1 trillion in the daily volume of foreign exchange transactions.
 
To know
 
The foreign exchange market (also known as FX or forex) is a global market for exchanging national currencies with each other.
Due to the global scope of trade, commerce and finance, currency markets tend to be the largest and most liquid asset markets in the world.
Currencies are traded with each other as pairs of exchange rates. For example, EUR / USD.
Currency markets exist as spot (cash) markets, as well as derivative markets that offer forwards, futures, options and currency swaps.
Market participants use the foreign exchange market to protect against international currency risk and interest rates, speculate on geopolitical events and diversify portfolios, among other reasons.
 
What is the currency market?
The currency market is where currencies are traded. Coins are important to most people around the world, whether they realize it or not, because the coins must be exchanged for business and foreign trade. If you live in the USA UU. And you want to buy cheese from France, you or the company from which you buy the cheese have to pay the French cheese in euros (EUR). This means that the US importer. UU. You would have to change the equivalent value of US dollars (USD) in euros. The same goes for traveling. A French tourist in Egypt cannot pay in euros to see the pyramids because it is not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.
 
A unique aspect of this international market is that there is no central market for currencies. On the contrary, currency trading is done electronically, which means that all transactions are made through computer networks between merchants around the world, rather than in a centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney, in almost every time zone This means that when the trading day in the US ends. In the US, the foreign exchange market starts again in Tokyo and Hong Kong. As such, the forex market can be extremely active at any time of the day,
 
A brief history of Forex
Unlike the stock markets, which can trace their roots centuries ago, the forex market, as we understand it today, is a truly new market. Of course, in its most basic sense, that of people who convert one currency to another to gain a financial advantage, the forex has existed since nations began to coin coins. But modern currency markets are a modern invention. After the agreement at   Bretton Woods   in 1971, more important currencies were allowed to float freely against each other. The values ​​of individual currencies vary, which has resulted in the need for currency exchange and trade services.
 
The  banks  trade and   investment   do most of the trade in the currency markets on behalf of its clients, but there are also opportunities  speculative  to trade one currency against another for professional and individual investors.
 
Cash market and futures and futures markets 
In reality, there are three ways in which institutions, corporations and individuals trade with currencies: the  spot market  , the forwards market and the futures market. Currency trading in the spot market has always been the largest market because it is the “underlying” real asset on which futures and futures markets are based. In the past, the futures market was the most popular place for traders because it was available to individual investors for a longer period of time. However, with the advent of e-commerce and numerous  become a funded account trader, the spot market has witnessed a large increase in activity and now outperforms the futures market as the preferred commercial market for individual investors and speculators. When people refer to the currency market, they generally refer to the spot market. Forwards and futures markets tend to be more popular among companies that need to cover their currency risks on a specific date in the future.
 
More specifically, the spot market is where coins are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, the feeling of ongoing political situations (both locally and internationally), as well as the perception of future performance. of one currency against another. . When an agreement is finalized, this is known as a “cash agreement”. It is a bilateral transaction whereby one of the parties delivers an agreed amount of currency to the counterparty and receives a specified amount of another currency at the value of the agreed exchange rate. After closing a position, the settlement is in cash.
 
Unlike the spot market, futures and futures markets do not operate with real currencies. Instead, they negotiate contracts that represent claims to a certain type of currency, a specific unit price and a future settlement date.
 
In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between them.
 
In the futures market, futures contracts are bought and sold based on a standard size and a settlement date in public commodity markets, such as the Chicago Mercantile Exchange. In the United States, the National Futures Association regulates the futures market. Futures contracts have specific details, which include the number of units that are marketed, the dates of delivery and settlement, and the minimum price increases that cannot be customized. The exchange acts as the merchant's counterpart, providing authorization and settlement.
 
Both types of contracts are binding and are generally settled in cash at the exchange in question at maturity, although contracts can also be bought and sold before they expire. Forwards and futures markets can offer protection against risk when trading currencies. In general, large international corporations use these markets to protect against future fluctuations in the exchange rate, but speculators also participate in these markets.
 
Keep in mind that you will often see the terms: FX, forex, currency market and currency market. These terms are synonyms and all refer to the currency market.
 
Forex for coverage
Companies that do business in foreign countries are at risk due to fluctuations in currency values ​​when they buy or sell goods and services outside their domestic market. Currency markets   offer a way to   hedge  currency risk by setting a rate at which the transaction will be completed.
 
To achieve this, an operator can buy or sell currencies in the  forward   or  exchange markets in   advance, which blocks an exchange rate. For example, imagine that a company plans to sell American-made blenders in Europe when the exchange rate between the euro and the dollar (EUR / USD) is 1 to 1 dollar at par.
 
The blender costs $ 100 and the US company plans to sell it for € 150, which is competitive with other blenders that were manufactured in Europe. If this plan is successful, the company will get $ 50 in profits because the EUR / USD exchange rate is uniform. Unfortunately, the USD begins to increase in value against the euro until the EUR / USD exchange rate is 0.80, which means that it now costs $ 0.80 to buy € 1.00.
 
The problem facing the company is that, although it still costs $ 100 to make the blender, the company can only sell the product at the competitive price of € 150, which when translated back to dollars is only $ 120 (€ 150 X 0.80 = $ 120). A stronger dollar resulted in a much smaller gain than expected.
 
The blender could have reduced this risk by  shortening  the euro and buying the USD when they were in parity. That way, if the value of the dollar increases, the profits from the trade would offset the reduced profit from the sale of blenders. If the USD fell in value, the more favorable exchange rate will increase the profits from the sale of blenders, which compensates for trade losses.
 
The coverage of this type can be done in the   currency futures market . The advantage for the trader is that  futures contracts  are standardized and authorized by a central authority. However, currency futures may be less liquid than term markets, which are decentralized and exist within the interbank system worldwide.
 
Forex for speculation
Factors such as   interest rates  , trade flows, tourism, economic strength and   geopolitical risk  affect the supply and demand of currencies, which generates daily volatility in the currency markets. There is an opportunity to benefit from changes that can increase or reduce the value of one currency compared to another. A forecast that one currency will be weakened is essentially the same as assuming that the other currency of the pair will be strengthened because the currencies are traded as pairs.
 
Views: 89 views    Report this Article
Comments (0)