Introduction to FOREX The foreign exchange market (currency, forex, or FX) market is where currency trading takes place. The Foreign Exchange market, is the largest financial market in the world, with a daily average turnover of US$3.2 trillion — (Figures represented are of the year 2008) "Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/ Indian Rupees (USD/INR).
About Forex Banks and other official institutions facilitate the buying and selling of foreign currencies. Transactions involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The purpose of FX market is to facilitate trade and investment.
Some Interesting facts… Average daily turnover in global foreign exchange markets is estimated at $3.21 trillion. The Break Up of this $3.21 is as follows:- $1.005 trillion in spot transactions $362 billion in outright forwards $1.714 trillion in foreign exchange swaps $129 billion estimated gaps in reporting 85% of all daily transactions involve trading a group of currencies known as the "Majors."
Unique FOREX Market Its trading volumes. The extreme liquidity of the market. The vast geographical dispersion. the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes) its long trading hours: 24 hours a day except on weekends
How to Read a Currency Quote currency pair base currency quote currency Bid price Ask Price SIMPLE !!
Major Players According to the BIS study, the most heavily traded products were 2. EUR/USD: 27% 3. USD/JPY: 13% 4. GBP/USD (also called sterling or cable): 12% The US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) Since its inception in January 1999, Euro is gaining a strong foothold and demand to make Euro as the reference currency has increased.
Two components to Forex Forex has two components 3. Over-the-counter (OTC) 4. Organized exchanges OTC is a network of dealers, brokers, and final customers. Low regulation Dealers are mostly commercial and investment banks that buy a currency at a bid price and sell it at an ask price Dealers take a position and thus face a risk of a price change between purchase and sale Biggest dealers are Deutsche Bank, UBS, Citigroup, HSBC, Barclays Bank, J.P. Morgan Chase, Goldman Sachs, ABN AMRO, and Morgan Stanley Brokers help in carrying out a deal, connecting a dealer with a final buyer or seller. They receive a fee and take no exchange rate risk
Types of transactions Spot Outright exchange of one currency for another at the current spot price with a two-day settlement. Currency covers both actual currency and bank deposits. Large transactions are in deposits. Outright forward Outright exchange of one currency for another at the current market price but with future delivery. Transaction used to be done typically in agriculture. An Italian exporter of Parmigiano cheese to the US, with an invoice due in 60 days, would sell forward the dollars against liras. Now forwards are used for a variety of reasons.
Types of transactions Forex swap (two legs) In the first leg there is a swap of one currency for another In the second leg, which occurs in the future, there is a re-exchange, that is the opposite swap The swap can occur with the first leg, say, in one month, and the second in three months Currency swap (three legs) First: a spot exchange of two currencies with underlying assets Second: an exchange of flows of fixed or floating interest rate payments Third: a re-exchange of the currencies at the initial spot rate It thus combines an interest rate swap with a forex swap
Example of a FOREX trade Suppose you feel that the INR is undervalued against the dollar. To execute this strategy, you would buy Rupees (simultaneously selling Dollars) and then wait for the exchange rate to rise. So you make the trade: purchasing 100,000 INR (1 lot) and selling 2000 Dollars. As you expected, INR/USD rises to 48.50/55. Since you bought Rupees and sold Dollars in your previous trade, you must now sell Rupees for Dollars to realize any profit. You can now sell 1 Rupee for 0.020619 Dollars. When you sell the 100,000 Rupees at the current INR/USD rate of 0.020619, you will receive $2,061.9 . Since you originally sold (paid) 2000 USD, your profit is US $61.9.
Tools for determining futuremovements in Money Market Fundamental Analysis Thorough analysis of economic and political data with the goal of determining future movements in a financial market. Technical Analysis An effort to forecast future market activity by analyzing market data such as charts, price trends, and volume.
Some reasons to trade in FOREX 24-hour forex trading Superior liquidity 100:1 Leverage in forex trading Lower transaction costs Equal profit potential in both rising and falling markets
Types of Forex risk Translation risk: Multinational co. (MNC) with branches or subsidiaries in different currency areas of the world must report its consolidated financial accounts in a single currency. The conversion creates gains or losses and may have tax consequences. The US has the most elaborate system of accounting to handle the conversion risk. Transaction risk: Arising from transactions in different currencies. Economic risk: Typical in a foreign direct investment (FDI). Investment is valued in terms of discounted cash flows in foreign currencies and then converted in local currency, with the local discount rate.
References http://en.wikipedia.org/wiki/Foreign_exchange Categories: Foreign exchange market Triennial Central Bank Survey (December 2008), Bank for International Settlements.