2. • The term foreign exchange implies two things:
• Foreign currency
• Exchange rate
• Foreign exchange generally refers to foreign
currency, eg for India it is dollar, euro, yen etc
• The other part of foreign exchange is exchange
rate which the price of one currency in terms of
the other currency.
• Forex is the international market for the free
trade of currencies.Traders place orders to buy
one currency with another currency
FOREIGN
EXCHANGE
3. What is
Forex
Trading?
The foreign exchange, or forex, market
is the world’s largest financial market.
It exists to allow the global trading of
international currencies. By
aggregating buyers and sellers, the
market establishes the relative value of
each currency against a range of other
currencies.
Forex trading is the act of buying or
selling currencies. Banks, central
banks, corporations, institutional
investors and individual traders
exchange foreign currency for a variety
of reasons, including balancing the
markets, facilitating international trade
and tourism, or making a profit.
4. How forex
trading
works?
It is essentially the process of buying and selling currencies in order to
make a profit. The price of one currency is linked to the price of
another currency in a trade, so the forex is always work with two
currencies at a time.
The base currency is the first currency appearing in a currency pair
followed the quote currency, The base currency – also called the
transaction currency. The base currency represents how much of the
quote currency is needed to get one unit of the base currency.
The second part of the quotation, called the quote currency or the
counter currency.
The difference in price between the currencies is where profit, or loss
sits.
5. Operation
of foreign
exchange
market
Foreign exchange market operates either as:-
Spot Market: (Current Market) Spot market for foreign
exchange is that market which handles only spot
transaction or current transactions. Principle
characteristics:-
• Spot Market is of daily nature. It does not trade in future deliveries.
• Spot rate of exchange is that rate which happens to prevail at the time
when transactions are incurred.
Forward Market: Forward Market for foreign exchange is
that market which handles such transaction of foreign
exchange as are meant for future delivery. Principles
Characteristics:-
• It only caters to forward transaction.
• It determines forward exchange rate at which forward transaction are
to be honoured.
6. Exchange Rate
Fixed Exchange Rate System
• Fixed rates provide greater
certainty for exporters and
importers.
Flexible Exchange Rate System
• Flexible exchange rate or
floating exchange rates
change freely and are
determined by trading in the
forex market.
8. Base currency/Quote currency
EUR/USD 1/1.0500
One Euro costs 1.05 US dollars.
MARGIN
Also called leverage, margin is money borrowed from your Forex broker. Leveraging
amplifies price changes and thus the profit or loss from a given trade. A 2% margin means
that you can command positions that are 50 times greater than the funds in your account.
9. Now imagine that in the
example above, the Euro did
not rise; indeed instead it fell to
1.0475 at the end of the day.
Therefore, when you close your
position by selling the EUR
100,000, you receive USD
104,750, loosing USD 250.
10.
11. Long Position
and Short
Position
A long position means a trader has bought
currency expecting the value to increase.
Once the trader sells that currency back to
the market (ideally for a higher price than
he paid), his long position is said to be
‘closed’ and the trade is complete.
A short position refers to a trader who
sells a currency expecting it to decrease,
and plans to buy it back at a lower value. A
short position is ‘closed’ once the trader
buys back the asset (ideally for less than he
sold it for).
