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Forex General FAQ |
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1. |
What is FOREX? |
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Foreign Exchange (Forex or FX) trading is
simply the exchanging of one currency for another - each
Forex trade can theoretically be viewed as a 'spread'
trade where to buy one currency you must sell another. |
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2. |
What is the Forex Market
about? |
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The foreign exchange market is not a "market"
in the traditional sense. There is no centralized location
for trading as there is in futures or stocks. Trading
occurs over the phone and on computer terminals at thousands
of locations worldwide. Foreign Exchange is also one of
the world's largest market. Daily market turnover has
skyrocketed from approximately 5 billion USD in 1977 to
a staggering 1.5 trillion US dollars today; even more
on an active day. |
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3. |
Cash FOREX vs. Currency
Futures |
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In currency futures, the contract size is predetermined.
With Cash FOREX (SPOT FX), you may trade any desired
amount typically above $100,000 USD. |
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Futures Market closes at the end of the business
day (similar to the stock market), while the SPOT
FX market (see spot market) runs continuously on
a 24-hour basis from 7:00 am New Zealand time Monday
morning to 5:00 pm New York Time Friday evening. |
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Furthermore, currency futures only trade in non-USD
denominated currency amounts, whereas in SPOT FX,
an investor can trade either in currency denominations,
or in the more conventionally quoted USD amounts. |
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The currency futures pit, even during Regular
IMM (International Money Market) hours suffers from
sporadic lulls in liquidity and constant price gaps.
The spot FX market offers constant liquidity and
market depth much more consistently than Futures.
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With IMM futures, one is limited in the currency
pairs he can trade - Most currency futures are traded
only versus the USD - With SPOT FX, one may trade
foreign currencies vs. USD or vs. each other on
a 'cross' basis as well - ex: EUR/JPY, GBP/JPY,
CHF/JPY, EUR/GBP and EUR/CHF. See our cross currencies
for more details. |
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4. |
How do I invest in Foreign
Currency trading? |
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Trading Example
On Day 1, customer sells YEN 10,000,000 against USD at
the going spot rate of 123.20 . His position is left open
until Day 3.
On Day 3, customer buys YEN 10,000,000 against USD
to close out his position at the going spot rate of
124.10 .
Profit/ Loss and Interest Differential calculations:
Profit on exchange rate :
(¥10,000,000 ÷ 123.20) - (¥10,000,000 ÷
124.10) = USD588.65
Suppose USD interest is at a premium to YEN by 1% ,
position interests amount to :
¥10,000,000 ÷ 123.20 x 1% ÷
360 days x 2 days = USD4.51
Total profit from the transaction :
USD588.65 + USD4.51 = USD593.16
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5. |
Why trade Foreign Currencies? |
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LIQUIDITY: FOREX investors do not have to worry
about being "stuck" in a position due
to a lack of market interest. In this US$1.5 trillion
dollar per day market, major international banks
are always willing to provide both a bid (buying)
and ask (selling) price. Liquidity is a powerful
attraction to any investor as it suggests the freedom
to open or close a position at will. |
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LEVERAGE: FOREX investors are permitted to trade
foreign currencies on a highly leveraged basis -
up to 20 times their investment with some brokers.
An investment of US $10,000 would permit one to
trade up to US $200,000 worth of any particular
currency. |
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24 HOURS: A substantial attraction for participants
in the FOREX market is that it is open 24 hours
per day. |
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SIZE FLEXIBILITY: FOREX investors have greater
flexibility with respect to their desired trade
quantity. With most FOREX Brokers you can trade
ANY DESIRED AMOUNT over $25,000 USD, specifically
tailored to your needs or risk tolerance. |
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FREE AND FAIR FLOW OF INFORMATION: Foreign Currency
trading is a market where there is little or no
'inside information' and all pertinent, market-moving
news is released publicly to everybody in the world
at the same time. |
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6. |
What influences the market? |
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The primary factors that influence exchange
rates are the balance of international payments for goods
and services, the state of the economy, political developments
as well as various other psychological factors. In addition,
fundamental economic forces such as inflation and interest
rates will constantly influence currency prices. |
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7. |
What is a "Spot"? |
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Spot means an immediate delivery. |
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8. |
What is a Spot Market? |
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A market in which financial instruments
are traded and delivered immediately. |
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9. |
What is a Spot Transaction? |
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A spot transaction is the purchase or sale
of foreign currency at a fixed price, with delivery and
payment to take place on the second business day after
the day of the transaction. |
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10.What is Hedging/Speculating/Arbitrage? |
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Hedging is the simultaneous buying and selling
of forex positions to square off the exposed position,
and to offset the risks of changing prices in the
cash exchanges. |
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Speculators in forex exchanges fulfil the economic
function of lending liquidity to the forex markets.
Speculators do not create risk; they assume it in
the hope of making a quick buck. They actively expose
themselves to currency risk by buying or selling
currencies forward (forward contract), in order
to profit from exchange rate fluctuations. |
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Arbitrage is the simultaneous purchase and sale
on different markets of the same or equivalent financial
instruments to profit from price or currency differentials. |
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11.What is Bid/Ask/Spread? |
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Bid is the highest price that is available
at market to the seller for the particular currency at
the moment.
Ask is the lowest price achievable at market to the
buyer.
Together, the two prices constitute a quotation; the
difference between the two is the spread, that is, the
difference between the price offered by a dealer willing
to sell something and the price he is willing to pay
to buy it back.
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12.What do the phrases "going
short" and "going long" mean? |
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When you go long on a currency, it means
you bought it and is holding it in the expectation that
it will appreciate in value. By contrast, going short
means you're selling currency in the expectation that
what you're selling will depreciate in value. |
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13.What are Buying and Selling
Transactions? |
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From the viewpoint of the bank, buying
means purchasing a certain amount of foreign currency
(traded currency) at the bid or buying price against the
delivery/crediting of a second currency (counter-currency).
When a bank quotes a price, it will pay the bid price
to buy foreign exchange and it will sell at the offered
price. Viewed from the bank's standpoint, selling means
selling a certain amount of foreign currency at the offered
or selling price against the receipt/debiting of another
currency. |
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14.What is a cross-rate/cross-currency? |
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The term cross rate is used to describe
the relationship between 2 currencies other than your
home currency. For example, someone living in France would
consider the Mark/Yen a cross rate, but the Mark/Franc
would not be considered a cross rate if you lived in France
or Germany. A US citizen would, however, call the Mark/Franc
a cross rate. An easy way to think of cross rates may
be as non-dollar denominated exchange rates. |
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15.What is the currency
rate? |
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The currency rate is the rate at which
an authorised dealer buys and sells the currency notes
to its customers. |
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FX / Commodities
