The Foreign Exchange Scene

There are many instances when we hear or read numerous words and phrases, but are rather uncertain of their exact meaning. The foreign exchange is only one part of the financial world of many sections, each of which seems to have its own expressions and jargon, as if it was all designed only for those with professional or specialised knowledge of the subject.

Of course, other trades have their own language, like the legal boys for instance.
It is not too difficult to get to know what it all means, and if one can learn some of the important words and expressions, it makes life that much easier.

Here are a few expressions you will run into, the answers to which you may find useful:

1. World Bank: The bank consists of IMF members, and helps by making loans to member countries, particularly when money from the private sector is not offered.

2. Bank Rate: This refers to the rate at which a central bank will lend to its domestic banks.

3. Basis Point: One per cent of one per cent

4. Cable: The foreign exchange market reference for the USD/ GBP

5. Consumer Confidence: This is an indicator of economic conditions run by the Conference Board. All over the country, some 5000 consumers are surveyed monthly, the degree of confidence being associated with the volume of consumer spending.

6. Covered Call: The Foreign Exchange Market uses this name for the rate USD/GBP

7. Cross Rate: This is a rate between two currencies of which neither is the USD

8. CHIPS: Clearing House Interbank Payments System.

9. Disposable Income: Money earned after tax.

10. Eurodollars: USD on deposit in a bank outside of USA.

11. LIBOR: London Interbank Offered Rate.

12. Liquid Assets: These are various assets which can be quickly converted into cash.

13. Easing: A price decline.

14. Economic Indicator: Data indicating economic growth, taking into account for example, retail sales, employment, rates, etc.

15. Liquidity: The competence of a market to undertake sizable transactions.

16. Resistance Level: A summit of a price level at which point the supply is greater than the demand.

17. Bull Market: A period of time when prices are seen to be rising.

18. Bear Market: A period of time when prices are seen to be falling.

19.Market Rate: Is the up- to- date quote of a currency pair.

20. Pip: refers to the 4th decimal point i.e.0.0001 of any foreign currency.

21. Fill Price: This is the price at which the order for buy or sell was executed.

22. Households Survey: The number of people that are employed, the labour force in general, and the rate of unemployment.






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Forex (foreign Exchange)

A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to profit by trading in the foreign exchange market. One such example of someone who has come under such scrutiny is James Dicks. These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,improperly managed "managed accounts", false advertising, ponzi schemes and outright fraud . It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment. The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.[6]

An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities, can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.

Always remember that there is no such thing as a "free lunch." Be especially cautious if you have acquired a large sum of cash recently and are looking for a safe investment vehicle. In particular, retirees with access to their retirement funds may be attractive targets for fraudulent operators. Getting your money back once it is gone can be difficult or impossible.

The following are examples of statements that either are or most likely are fraudulent:

"Whether the market moves up or down, in the currency market you will make a profit." "We are out-performing 90% of domestic investments." "The main advantage of the forex markets is that there is no bear market." The currency futures and options markets are volatile and contain substantial risks for unsophisticated customers. The currency futures and options markets are not the place to put any funds that you cannot afford to lose. For example, retirement funds should not be used for currency trading. You can lose most or all of those funds very quickly trading foreign currency futures or options contracts. Therefore, beware of companies that make the following types of statements: "With a $10,000 deposit, the maximum you can lose is $200 to $250 per day." "We promise to recover any losses you have." "Your investment is secure." Margin trading can make you responsible for losses that greatly exceed the dollar amount you deposited. Many currency traders ask customers to give them money, which they sometimes refer to as "margin," often sums in the range of $1,000 to $5,000. However, those amounts, which are relatively small in the currency markets, actually control far larger dollar amounts of trading, a fact that often is poorly explained to customers. Don't trade on margin unless you fully understand what you are doing and are prepared to accept losses that exceed the margin amounts you paid.





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Foreign Exchange Made Easy

Foreign Exchange made easy is as basic as you would expect it to be. The foreign exchange market is a worldwide market and according to some figures are almost as large as 30 times the turnover of the US Equity markets. That is some figure to chew on. Forex is the commonly used term for foreign exchange. As a person who wants to invest in the Forex market, one should comprehend the basics of how this currency market operates. Forex can be made easier for beginners to understand it and here's how.

Forex is the buying and the selling of foreign exchange in pairs of currencies. For example you buy US dollars and sell UK Sterling pounds or you sell German Marks and buy Japanese Yen. Why are currencies bought or sold? The answer is simple; Governments and Companies need foreign exchange for their purchase and payments for various commodities and services. This trade constitutes about 5% of all currency transactions, though the other 95% currency transactions are done for speculation and trade.

In fact many companies will buy foreign currency when it is being traded at a lower rate to protect their financial investments. Another thing about foreign exchange market is that the rates are ever-changing regularly and on daily basis. Therefore investors and financial managers track the Forex rates and the Forex market it on a daily basis.

Those who are involved in the Forex trade know that almost 85% of the trading is done in only US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. This is because they are the most liquid of foreign currencies. Which means the US Dollar can be easily bought and sold. In fact the US Dollar is most recognizable foreign currency even in countries like Afghanistan, Iraq, and Vietnam.

Being a truly 24 hour market, the currency trading markets opens in the financial centers of Sydney, Tokyo, London and New York in that series. Investors and speculators alike respond to the shifting transactions and can buy and sell simultaneously the currencies. In fact many operate in two or more currency market using arbitrage to gain profits.

While dealing in Forex, one should have a margin account. Quite simply put if you have $1,000 and have a Forex margin account which leverages 100:1 then you can buy $100,000 since you only need 1% of the $100,000 or $1,000. Therefore it means that with margin account you have $100,000 worth of real purchasing power in your hand.

Since the foreign currency market is fluctuating on a continual basis, one should be able to comprehend the factors that affect this currency market. This is done through Technical Analysis and Fundamental Analysis. These two tools of trade are used in a variety of other markets such as equity markets, stock markets, mutual funds markets etc. Technical Analysis refers to reading, summarizing and analyzing data based on the data that is generated by the market. While Fundamental Analysis refers to the factors, which influence the market economy, and in turn how it would affect the currency trading.

Of course there are other economic and non economic factors which can suddenly affect the trading of the Forex markets such as the 9/11 tragedy etc. One needs to have a intuitive acumen and a few number crunching abilities to strike gold in the Forex market.





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What is Meant by Forex or Foreign Exchange

Most countries have their own national currency such as the US dollar, the UK pound, the Japanese yen and the Thailand baht and these are of course necessary for making payments for goods and services within each country's borders. However, in a world where we are traveling more and more and where countries are increasingly trading with one another, foreign currency is required to pay for cross-border sales of goods and services. This means that there must be some mechanism in place to provide access to foreign currencies, so that payments can be made in a form that is acceptable to the seller, and thus the need for a foreign exchange market (or forex market which is simply short for FOReign EXchange).

In its simplest form foreign exchange refers to money which is denominated in a currency other than your own. For example, if an individual exchanges his own currency for the currency of another nation then he acquires foreign exchange. Of course we often think of foreign exchange in terms of tourism and most of us will have traveled abroad either on holiday or for business and exchanged currency on arrival at our destination to pay hotel and restaurant bills and for taxis, sightseeing and shopping. However, foreign exchange is not simply limited to the relatively small sums of money handled by tourists, but applies equally to larger transactions such as the exchange of hundreds of millions of US dollars when a US company buys another company which is based overseas.

Broadly speaking, in the US any money which is denominated in the currency of another nation would be termed as foreign exchange and it is important to remember that we are not necessarily talking here about cash. Foreign exchange can also consist of money which is available through a line of credit (such as a credit card) or that is held in the form of traveler's checks. In other words, we still talk about foreign exchange for any negotiable instrument which is denominated in a currency other than the US dollar.

When we talk however about the foreign exchange market we are not really concerned with the exchange of small sums of currency by tourists, but are looking at foreign currency which is exchanged between an international network of foreign exchange dealers and is normally exchanged in what most of us would see as being very large sums of money. For example, one of main players in foreign currency trading is the major banks and here a US bank might need Japanese yen and thus deposit several million US dollars with a Japanese bank in exchange for Japanese yen.

Today an increasing number of small investors are able to participate in the foreign exchange markets and benefit from the profits to be made as the prices of national currencies rise and fall against one another. In general however the private forex trader does not himself trade in large sums of money but is able to trade by working through brokers who are themselves major players in the market.




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Foreign Exchange Trading

The acquisition or sale of one national currency in exchange for another nation's currency, usually conducted in a market setting is called as the Foreign Exchange Trading. The concept of Foreign Trading makes it possible for clients to do international transactions.

It can be mainly used during imports and exports and the movement of capital between countries. The value of one foreign currency in relation to another is defined by the exchange rate during the Foreign Exchange Trading.

Foreign Trading is also known as the FX Trading. Here the clients are able to hedge against, or speculate upon, changes aspect element within the exchange rate of two currencies. Foreign Exchange Trading services provide a chance for clients to trade FX.

Exchange Trading is done on the magnificent excellent foreign exchange market. In Foreign Exchange Trading the methods and instruments used to adjust the payment of debts between two nations that make use of different currency systems. A nation's balance of payments has an important effect resting on the magnificent exchange rate of its currency.

Bills of trade, drafts, checks, and telegraphic orders are the principal means of payment in international transactions of the Foreign Trading. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the comparative supply and demand of the currencies resource within the foreign exchange market.

Buying or promoting foreign currency in order to profit from rapid changes trait within the rate of exchange is known as an arbitrage in Foreign Exchange Trading.

Demand of Foreign Exchange Trading

The chief demand for Exchange Trading within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies buying goods and services abroad, and travelers.

Foreign Exchange Trading is one of the nascent market opportunities when it comes to the individual investor. Until recently only large traders and multi conglomerate companies were able to participate within the foreign exchange markets.

Now with the internet and many courses both online as well as on DVD, Videos and hard cover books there are a wonderful many resources available to the individual investor to help them become currency traders and earn incomes element within the six figure range.

There are numerous books available relating to Foreign Trading that will help the novice investor get started, explaining some of the basic strategies, even explaining all of the jargon that is new daily by currency traders all over the globe.

Other books to understand the Foreign Exchange Trading may assist the more intuitive and seasoned investor who is expecting to receive a more technical analysis of various currency trading strategies and markets.

There are a number of excellent courses available by the many supporting comments that these courses have received from many of their participants. They come from just about every repeated level of investor including the beginners as well as the more experienced investors.

Many of these courses for Foreign Trading include a variety of books; pamphlets and some will even include videos of various investment specialists providing you with their hands on training experience on Foreign Exchange Trading.

The e-books that are available to understand the Foreign Exchange more efficiently can typically be downloaded over the Internet, so you can most insolently begin almost as soon as you have paid your fees and downloaded the apropos files.

So no need of waiting for snail mail deliveries and you can begin immediately Foreign Exchange Trading soon. Some of the e-books and courses related to Foreign Trading will also include discounts and additional benefits when you sign up for an e-book or a course.

This combination can be of brilliant value when compared to some of the more long-established methods of learning the business of Foreign Exchange Trading.

Foreign Exchange rates refer to the amount of currency you obtain when you buy one currency with another currency. That is, it is most important to understand if you are traveling to England. In general, Foreign Exchange Trading if you or someone that understands and has expert knowledge live in approval of the United States, you then carry dollars.

You then ought to change these dollars for British Pounds and review the foreign currency rates to see how many US dollars it could take to buy one British Pound. Similarly, it would apply to every single country you might visit. Importers and exporters of goods are also concerned about the foreign currency rates.

The traders in Foreign Trading need foreign currency to make their business transactions. A buyer in England of United States goods watches the foreign currency rates to try and obtain a better price for the United States dollars they need to buy the United States goods.

During the Foreign Exchange Trading most foreign currency rates change all the time. The rates that do change on a daily or even hourly basis are called as the floating currencies. This means that market forces determine the price.

If more dollars are being bought and more British Pounds are being sold, the United States dollar then increases in value.

Thus, Foreign Exchange Trading should always be done keeping an alert eye on the Foreign Exchange Market.




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Forex Hedging

Basic Concept: The forex hedge’s change in value is opposite to the change in value of the foreign currency exposure (hedged item). These two amounts offset each other to obtain cost certainty or revenue certainty by fixing the foreign exchange rate for your transaction.

There is typically a cost associated with forex hedging and generally, forex hedging will require a certain amount of margin cash (retail online forex broker) or available credit from your financial institution, while the forex hedge is outstanding.

There are a couple different methods to complete the forex hedges. For the assumed example, the company uses the United Stated Dollar (USD) as its reporting currency and it has a future Euro payable amount. With all forex hedges, your company is buying one currency and selling another currency.

1. Forward contract. Your company would purchase a forward contract from a banking institution which would give you the right to purchase a contracted amount of euros at a future date at a fixed price. Your future exchange rate would be based upon the current exchange rate, likely profit paid to the bank, and forward points. Forward points are calculated based on interest differential (interest carry costs) on the two currencies traded. You pay interest on the currency sold (USD) and you receive interest on the currency bought (euros). If you change the amount to be paid or the date of the expiry date of the contract, your financial institution will likely charge your company a fee.

· Your company will need adequate credit (borrowing capacity) with the financial institution, which supplies the forward contract.

2. Carry Spot Trade. With a retail online forex broker, you will enter into the carry spot trade whereby your company will buy the Euros and sell your local currency. Over the expected time frame between when you purchase the carry spot trade and complete the euro transaction in the future, your account will be charged the interest differential (interest carry costs). Once again, your company pays interest on the currency sold (USD) and you receive interest on the currency bought (euros). The carry spot trade may be partially or fully terminated at any time, which provides flexibility for when your euro transaction is completed.

· Your company will need adequate margin with the online retail forex broker, which enables the carry spot trade to be transacted.


3. Forex Options. A currency option gives the holder the right, but not the obligation, to sell or buy a face amount of currency at a set price, on or before a given date. A currency option has a strike price—the amount for which the currency can be bought or sold—and an expiration date. U.S. options can be exercised at any time up to and including the expiration date, whereas European options can only be exercised on the expiration date. Options are one-sided contracts that are priced based on a number of variables: exchange rates, interest differentials, duration of contract, historical exchange rate volatility, and a built-in commission for the provider. They offer a method of speculating on future currency movements, but you pay a price for that right to speculate.


4. Forex Exotics tend to be combinations of a variety of products (typically options and forward contracts) with many different names and flavors (including features such as floors, ceilings, collars, participating forwards). They are often sold with the promise of limited downside risk and the potential of unlimited or limited upside benefit. They’re similar to standard options, but should be left to very experienced forex traders because their complex structures often hide extra profits for their providers.


Remember, hedging is not about making money on the hedge transaction. Hedging is obtaining cost certainty or revenue certainty. You are locking in the future exchange rate for a certain future forex transactions.


As an example, let us assume you are a USD currency company. You plan to purchase $40,000 in European product in eight months. If you entered into a carry spot trade to buy 40,000 EUR/USD trade on an online retail forex platform , then you will receive cost certainty in an assumed eight months. With this example, the current EUR/USD price is 1.5600. The first currency listed is known as the quote currency and always equals 1. In this case, therefore, you would buy 1 EUR with selling 1.5600 USD. Your current USD expense is 62,400. (40,000 multiplied by 1.5600)

In the future, your euro payable is a (40,000), so your forex hedge will be to purchase the 40,000 euros on the carry spot trade by selling the USD.

If in the future, the EUR/USD price is 1.61, then you will have made $2,000 on your forex hedge trade [ 1.61 minus 1.56 = 0.05 multipled by 40,000 = $2,000], however, when you make the payment to the supplier, the 40,000 EUR would cost you 64,400 USD. Your net cost for the product would be $62,400 USD. (Actual cash payment to your supplier less the amount made on the forex hedge).

OR

If in the future, the EUR/USD price is 1.51, then you will have lost $(2,000) on your forex hedge trade[ 1.51 minus 1.56 = (0.05) multipled by 40,000 = $(2,000)], however, when you make the payment to the supplier, the 40,000 EUR would cost you $60,400 USD. Your net cost for the product would be $62,400. (Actual cash payment supplier plus the amount lost on the forex hedge.)

This is the hedge. The forex carry spot trade’s win or loss will be offset by the actual amount of money paid to the foreign supplier. In the end, you have obtained cost certainty for your company.


For all forex hedging, your company will pay (or receive) interest carry costs. When you open a carry spot trade as a forex hedge, you are simultaneously buying one currency and selling another. Until the trade is closed (settled), your account will be charged (or earn) the interest differential on the open position. You will be charged interest on the currency sold and you will earn interest on the currency purchased. In your example, you would be buying EUR and selling USD. At today’s interest rates (July 2008), the interest earned will exceed the interest paid, so while the forex hedge is outstanding, you will earn net interest. This will depend upon the two currencies traded.


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