Forex is a compound word of foreign currency and exchange. Forex trading is the process of changing one currency into another. For reasons usually for trade, commerce or tourism.
For those who are new to “forex”, there are many risks involved in entering this market. So we recommend that you read the information provided carefully to avoid risks.
What is the Forex market?
The Forex market is where currencies are traded. Currency is important to almost everyone around the world, whether they realize it or not. Because currencies need to be exchanged in order to conduct foreign trade and business. More concrete example: If you live in the US and want to buy cheese from France, you or the company from which you buy the cheese must pay the French for that cheese in euros (EUR). This means that the US importer will have to convert the equivalent value of US dollars (USD) into euros.
Securities investment fund
Companies doing business abroad are always at risk from fluctuations in currency values when they buy or sell goods and services outside of the domestic market. The foreign exchange market provides a way of hedging currency risk by fixing the rate at which a transaction will complete.
To do this, traders can buy or sell currencies on the forward or swap market first, which locks in the exchange rate. For example, imagine that a company plans to sell US-made blenders in Europe when the exchange rate between the euro and the dollar (EUR/USD) is at par between €1 and $1.
The production cost of the blender is 100 USD and the American company is expected to sell it for 150 Euro – a price that is competitive with other blenders in Europe. If this plan is successful, the company will make 50 USD profit because the EUR/USD rate is equal. Unfortunately, the USD started to appreciate against the euro until EUR/USD was 0.80, meaning it now costs $0.80 to buy €1.00.
What is forex?
The problem the company faced was that while it still cost $100 to make the blender, the company could only sell the product at a competitive price of 150 euros, which converts to $120 in dollars. (150 Euro X 0.80 = 120 USD). A stronger dollar led to a much smaller profit than expected.
Blender company could have mitigated this risk by shorting Euros and buying USD when they are par. If the dollar increases in value, the profit from the trade will offset the reduced profit from selling the blender. If the USD depreciates, a more favorable exchange rate will increase the profit from the sale of the blender, helping to offset the losses in the trade.
Currency as an asset
There are two distinct characteristics to money as an asset class:
1.You can earn the interest difference between two currencies.
2.You can profit from changes in exchange rates.
An investor can profit from the difference between two interest rates in two different economies by buying a currency with a higher interest rate and short selling a currency with a lower interest rate. Before the 2008 financial crisis, selling the Japanese yen (JPY) and buying the British pound (GBP) was very popular because of the huge interest rate differentials. This strategy is “carry trading“.
Why can we trade currencies?
Currency trading was difficult for individual investors before the internet. Most currency traders are multinational corporations, hedge funds or high net worth individuals as it requires a lot of capital. With internet, the market for individual traders has emerged, making it easy for you to access the forex market. secondary. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.
Forex-investment
Risks of Forex trading
Currency trading can be risky and complicated. The interbank market has varying degrees of regulation and foreign exchange instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.
The interbank market is made up of banks dealing with each other around the world. Banks have established internal processes to keep themselves as safe as possible. Regulations like these are imposed by the industry to protect each participating bank.
Each participating bank offers offers and bids for a particular currency. The market pricing mechanism is based on supply and demand. Because there are large transaction flows, it is difficult for fraudulent traders to influence the price of a currency. This system helps to create transparency in the market for investors to have access to interbank transactions.
