European Currency Quotation
An indirect quotation in the foreign exchange markets whereby the value of a foreign currency is stated as a per-unit measure of the U.S. dollar. This type of quotation shows how much foreign currency it takes to purchase one U.S. dollar.
European Monetary System - EMS
A 1979 arrangement between several European countries to link their currencies in an attempt to stabilize the exchange rate. This system was succeeded by the European Monetary Union (EMU), an institution of the European Union (EU), which established a common currency called the euro. The European Monetary System originated in an attempt to stabilize inflation and stop large exchange-rate fluctuations between European countries. Then in June 1998, the European Central Bank was established and, in Jan 1999, a unified currency, the euro, was born and came to be used by most EU member countries. As of 2005, Britain, Denmark and Sweden were the only original EU members that had not adopted the euro.
European Central Bank - ECB
The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union. The European Central Bank has been responsible for the monetary policy of the European Union since January 1, 1999, when the euro currency was adopted by the EU members. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things.
Euro LIBOR
London Interbank Offer Rate denominated in euros. This is the interest rate that banks offer each other for large short-term loans in euros. The rate is fixed once a day by a small group of large London banks but fluctuates throughout the day. This market makes it easier for banks to maintain liquidity requirements because they are able to quickly borrow from other banks that have surpluses The Euro LIBOR is based on the average lending rates of 16 banks. These bank rates are available to the public through the British Bankers' Association. Euro LIBOR exists mainly for continuity purposes in swap contracts dating back to pre-euro times and is not very commonly used.
Forex Broker
Firms that provide currency traders with access to a trading platform that allows them to buy and sell foreign currencies. A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market. Currency traders use these brokers to access the 24-hour currency market. It is valuable to do some research to find out whether a broker has a good reputation and has the functionality that you are looking for. Most major forex brokers will allow prospective clients to use a practice account so that they can get a good understanding of what the system is like. It is a wise idea to test out as many platforms as possible before deciding on which broker to use.
Thursday, April 30, 2009
Miscellaneous Terms
Trade Finance
The science that describes the management of money, banking, credit, investments and assets for international trade transactions.
Companies involved with trade finance include importers and exporters, financiers, insurers and other service providers.
Forex Scalping
A trading strategy used by forex traders to buy a currency pair and then to hold it for a short period of time in an attempt to make a profit. A forex scalper looks to make a large number of trades and earn a small profit each time. Forex scalping generally involves large amounts of leverage so that a small change in a currency equals a respectable profit. Forex scalping system strategies can be manual or automated. A manual system involves a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. In an automated trading system, the trader "teaches" the software what signals to look for and how to interpret them. It is thought that automated trading takes human psychology out of trading, which is important in forex scalping because the fast-paced environment can be hard for traders to stomach.
Trading Desk
A desk where transactions for buying and selling securities occur. Trading desks can be found in most organizations (banks, finance companies, etc.) involved in trading investment instruments such as equities, fixed-income securities, futures, commodities and foreign exchange. A trading desk provides traders with access to instantaneous trade executions. Also known as "dealing desk".
White Candlestick
A point on a candle stick chart representing a day in which the underlying price has moved up. Candlesticks will have a body and usually two wicks on each end. The bottom of the white body represents the opening price and the top of the body represents the closing price. The top and bottom tips of each wick are the day's highest and lowest price respectively. Also known as an “open candlestick.”
Candlestick charts are primarily used by technical traders because of how quick a day's price movement is conveyed. There are many formations which can be used as a buy, sell or hold indicator. Red/black candlesticks represent a downward movement for the day, which are opposite of white candle sticks. Most charting software will allow you to change the colors of these candles. Even though white is the common color for this type of candlestick, any color can and is used by traders.
Universal Banking
Banking that includes investment services in addition to services related to savings and loans. This is more common in European countries because there are generally more restrictions in North America as to what services financial institutions can offer.
Banking Department(FX)
A state-specific regulatory body that oversees the operations of financial institutions within its jurisdiction. The primary responsibility of the banking department is to ensure that the financial system is accessible, stable and safe for all consumers.
The state banking department is where many consumers go to file a complaint against a financial institution that is within the banking department's jurisdiction. (Not all banks operating in a state fall within that state's jurisdiction.)
Types of financial institutions that fall under the supervision of the banking department include commercial banks, credit unions, money transmitters and nonbank mortgage lenders.
The state banking department is where many consumers go to file a complaint against a financial institution that is within the banking department's jurisdiction. (Not all banks operating in a state fall within that state's jurisdiction.)
Types of financial institutions that fall under the supervision of the banking department include commercial banks, credit unions, money transmitters and nonbank mortgage lenders.
Forex Analysis
An examination of the changes in the forex market that are used by a trader to determine whether to buy or sell a currency pair at any one time. Forex analysis could be technical in nature, using charting tools, or fundamental, using economic indicators and/or news-based events.
Forex analysis can be either manual or automated. A manual system involves a trader sitting at the computer screen, analyzing signals and interpreting whether to buy or sell. In automated trading analysis, the trader teaches the software what signals to look for and how to interpret them. It is thought that automated analysis takes the element of human psychology out of trading.
Forex analysis can be either manual or automated. A manual system involves a trader sitting at the computer screen, analyzing signals and interpreting whether to buy or sell. In automated trading analysis, the trader teaches the software what signals to look for and how to interpret them. It is thought that automated analysis takes the element of human psychology out of trading.
Forex Forecasting Software
An analytical tool used to help currency traders with forex trading analysis through charts and indicators. Forex forecasting software provides charts of currency pairs that display price changes over time as well as indicator overlays including moving averages, which aid analysts and traders in determining appropriate and profitable entry and exit points for their forex trades. As with charting software used for trading other securities, forex charting software is used primarily by technical analysts to forecast future price movements.
There is a wide range of forex charting software used for currency forecasting, which varies in appearance and functionality. Users should look for several things in forex charting software, including:
- Is it free, or if there is a nominal charge? What additional features are made available?
- What technical indicators are available?
- Is the software Windows, Macintosh (Mac) or internet (Java or HTML) based?
- Can you trade from the charts?
- Is historical data made available through the software?
- Is the graphical user interface (GUI) pleasing to look at?
- Is the GUI conducive to monitoring a lot of information at once?
Most forex brokers allow you to open a demo account prior to funding a full account or mini account. This allows users to try out each broker's software during a trial period and determine which software best suits their needs.
Wednesday, April 29, 2009
Forex Option & Currency Trading Options
A security that allows currency traders to realize gains without having to purchase the underlying currency pair. By incorporating leverage, forex options magnify returns and provide a set downside risk. Alternatively, currency trading options can be held alongside the underlying forex pair to lock in profits or minimize risk. In this case, limiting the upside potential is usually necessary for capping the downside as well.Because options contracts implement leverage, traders are able to profit from much smaller moves when using an options contract than a traditional retail forex trade would allow. When combining traditional positions with a forex option, hedging strategies such as straddles, strangles and spreads can be used to minimize the risk of loss in a currency trade.Because of the risk of loss involved in writing options, most retail forex brokers do not allow traders to sell options contracts without high levels of capital for protection.
Not all retail forex brokers provide the opportunity for option trading. Retail forex traders should research prospective brokers because for traders who intend to trade forex options online, having a broker that allows you to trade options alongside traditional positions is valuable; however, traders can also open a separate account and buy options through a different broker.There are two types of options available to retail forex traders for currency option trading: put/call options and STOP options. The call option gives the buyer the right to purchase a currency pair at a given exchange rate at some time in the future. The put option gives the buyer the right to sell a currency pair at a given exchange rate at some time in the future. Both the put and call options are a right to buy or sell, and not an obligation. If the current exchange rate puts the options out of the money, then the options will expire worthless.Single payment options trading (SPOT) options have a higher premium cost compared to traditional options, but they are easier to set and execute. A currency trader buys a SPOT option by inputing a desired scenario (e.g. "I think EUR/USD will have an exchange rate above 1.5205 15 days from now"), and is quoted a premium. If the buyer purchases this option, the SPOT will automatically pay out if the scenario occurs. Essentially, the option is automatically converted to cash.
Not all retail forex brokers provide the opportunity for option trading. Retail forex traders should research prospective brokers because for traders who intend to trade forex options online, having a broker that allows you to trade options alongside traditional positions is valuable; however, traders can also open a separate account and buy options through a different broker.There are two types of options available to retail forex traders for currency option trading: put/call options and STOP options. The call option gives the buyer the right to purchase a currency pair at a given exchange rate at some time in the future. The put option gives the buyer the right to sell a currency pair at a given exchange rate at some time in the future. Both the put and call options are a right to buy or sell, and not an obligation. If the current exchange rate puts the options out of the money, then the options will expire worthless.Single payment options trading (SPOT) options have a higher premium cost compared to traditional options, but they are easier to set and execute. A currency trader buys a SPOT option by inputing a desired scenario (e.g. "I think EUR/USD will have an exchange rate above 1.5205 15 days from now"), and is quoted a premium. If the buyer purchases this option, the SPOT will automatically pay out if the scenario occurs. Essentially, the option is automatically converted to cash.
Primer On The Forex Market
With the increasingly widespread availability of electronic trading networks, trading on the currency exchanges is now more accessible than ever. The foreign exchange market, or forex, is notoriously the domain of government central banks and commercial and investment banks, not to mention hedge funds and massive international corporations. At first glance, the presence of such heavyweight entities may appear rather daunting to the individual investor. But the presence of such powerful groups and such a massive international market can also work to the benefit of the individual trader. The forex offers trading 24-hours a day, five days a week, and the daily dollar volume of currencies traded in the currency market exceeded $3 trillion in 2007 (according to the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity), making it the largest and most liquid market in the world.
Trading Opportunities:
The sheer number of currencies traded serves to ensure a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, forex offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. Forex also allows highly leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, forex charges zero dealing commissions! Many of the instruments utilized in forex - such as forwards and futures, options, spread betting, contracts for difference and the spot market - will appear similar to those used in the equity markets. Since the instruments on the forex often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.
Buying and Selling Currencies:
Regarding the specifics of buying and selling on forex, it is important to note that currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. This necessitates a slightly different mode of thinking than what you might be used to. While trading on the forex, you would execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
Base and Counter Currencies and Quotes:
Currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip. For example, if USD/JPY was quoted with a bid of 134.85 and an ask of 134.90, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his or her profits, necessitating a favorable move in the position in order simply to break even.
Margin:
Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the forex is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.
Rollover:
In the spot forex market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. But currency trading systems may allow for a "rollover", with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business days). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market.In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the forex trading system. Rollovers, however, will not affect traders who never hold a position overnight since the rollover is exclusively a day-to-day phenomenon.
Trading Opportunities:
The sheer number of currencies traded serves to ensure a rather extreme level of volatility on a day-to-day basis. There will always be currencies that are moving rapidly up or down, offering opportunities for profit (and commensurate risk) to astute traders. Yet, like the equity markets, forex offers plenty of instruments to mitigate risk and allows the individual to profit in both rising and falling markets. Forex also allows highly leveraged trading with low margin requirements relative to its equity counterparts. Perhaps best of all, forex charges zero dealing commissions! Many of the instruments utilized in forex - such as forwards and futures, options, spread betting, contracts for difference and the spot market - will appear similar to those used in the equity markets. Since the instruments on the forex often maintain minimum trade sizes in terms of the base currencies (the spot market, for example, requires a minimum trade size of 100,000 units of the base currency), the use of margin is absolutely essential for the person trading these instruments.
Buying and Selling Currencies:
Regarding the specifics of buying and selling on forex, it is important to note that currencies are always priced in pairs. All trades result in the simultaneous purchase of one currency and the sale of another. This necessitates a slightly different mode of thinking than what you might be used to. While trading on the forex, you would execute a trade only at a time when you expect the currency you are buying to increase in value relative to the one you are selling. If the currency you are buying does increase in value, you must sell the other currency back in order to lock in a profit. An open trade (or open position), therefore, is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
Base and Counter Currencies and Quotes:
Currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread.The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip. For example, if USD/JPY was quoted with a bid of 134.85 and an ask of 134.90, the five-pip spread is the cost of trading this position. From the very start, therefore, the trader must recover the five-pip cost from his or her profits, necessitating a favorable move in the position in order simply to break even.
Margin:
Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the forex is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.
Rollover:
In the spot forex market, trades must be settled within two business days. For example, if a trader sells a certain number of currency units on Wednesday, he or she must deliver an equivalent number of units on Friday. But currency trading systems may allow for a "rollover", with which open positions can be swapped forward to the next settlement date (giving an extension of two additional business days). The interest rate for such a swap is predetermined, and, in fact, these swaps are actually financial instruments that can also be traded on the currency market.In any spot rollover transaction the difference between the interest rates of the base and counter currencies is reflected as an overnight loan. If the trader holds a long position in the currency with the higher interest rate, he or she would gain on the spot rollover. The amount of such a gain would fluctuate day-to-day according to the precise interest-rate differential between the base and the counter currency. Such rollover rates are quoted in dollars and are shown in the interest column of the forex trading system. Rollovers, however, will not affect traders who never hold a position overnight since the rollover is exclusively a day-to-day phenomenon.
Forex Hedge
A transaction implemented by a forex trader to protect an existing or anticipated position from an unwanted move in exchange rates. By using a forex hedge properly, a trader who is long a foreign currency pair can be protected from downside risk, while the trader who is short a foreign currency pair can protect against upside risk.
The primary methods of hedging currency trades for the retail forex trader is through spot contracts and foreign currency options. Spot contracts are the run-of-the-mill trades made by retail forex traders. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. In fact, regular spot contracts are usually the reason why a hedge is needed.Foreign currency options are one of the most popular methods of currency hedging. As with options on other types of securities, foreign currency options give the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles, and bull or bear spreads, to limit the loss potential of a given trade.Not all retail forex brokers allow for hedging within their platforms. Be sure to research the broker you use before beginning to trade.
The primary methods of hedging currency trades for the retail forex trader is through spot contracts and foreign currency options. Spot contracts are the run-of-the-mill trades made by retail forex traders. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. In fact, regular spot contracts are usually the reason why a hedge is needed.Foreign currency options are one of the most popular methods of currency hedging. As with options on other types of securities, foreign currency options give the purchaser the right, but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in the future. Regular options strategies can be employed, such as long straddles, long strangles, and bull or bear spreads, to limit the loss potential of a given trade.Not all retail forex brokers allow for hedging within their platforms. Be sure to research the broker you use before beginning to trade.
Forex Arbitrage
A trading strategy that is used by forex traders who attempt to make a profit on the inefficiency in the pricing of currency pairs. The strategy involves reacting quickly to opportunities, and is usually accomplished through the use of computers. As with other arbitrage strategies, the act of exploiting pricing inefficiencies will actually correct the problem in the market. For this reason, these opportunities are often only around for a very short time. Arbitrage currency trading requires the availability of real-time pricing quotes and the ability react quickly as opportunities present themselves.Forex arbitrage calculators are available to help find these opportunities more quickly, but as with all software, programs and platforms used in retail forex trading, it is important to try them out in a demo account if possible. Trying out multiple products before deciding on one is the only way to determine what is best for the forex trader.
Forex Account
The type of account a forex trader opens with a retail forex broker. Forex accounts come in many forms, but the first that is opened is often the forex demo account.
After the trader has tried out demo accounts with a few different dealers, a funded account would be the next step. Mini accounts, full accounts and managed accounts are the most common types of funded accounts. Mini accounts are similar to full accounts except that currency is traded in lots of 10,000 rather than 100,000. This allows for lower mandatory initial deposits and greater customization of risk management. Is is important for currency traders to consider what they want to get out of their accounts before deciding on the type to open. Demo accounts and mini accounts are great for the retail forex trader to learn a profitable system and get used to the broker's execution methods. For currency speculators who doesn't want to trade themselves, a managed account may be a better option.
There are three main types of trading accounts - standard, mini and managed - and each has its own pros and cons. Which type of account is right for you depends on your tolerance for risk, the size of your initial investment and the amount of time you have to trade the market on a daily basis.
Standard trading account is the most common account. Its name derives from the fact that you have access to standard lots of currency, each of which is worth $100,000.
Mini trading account is simply a trading account that allows traders to make transactions using mini lots. In most brokerage accounts, a mini lot is equal to $10,000, or one-tenth of a standard account. Most brokers that offer standard accounts will also offer mini accounts as a way to bring in new clients who are hesitant to trade full lots because of the investment required.
Managed trading accounts are forex accounts in which the capital is yours but the decisions to buy and sell are not. Account managers handle the account just as stockbrokers handle a managed stock account, where you set the objectives (profit goals, risk management and so on) and they work to meet them. There are two types of managed accounts:
Pooled Funds: Your money is put into a mutual fund with that of other investors and the profits are shared. These accounts are categorized according to risk tolerance. A trader looking for higher returns will put his or her money in a pooled account that has a higher risk/reward ratio, while a trader looking for steady income would do the opposite. Read the fund's prospectus before investing.
Individual Accounts : A broker will handle each account individually, making decisions for each investor instead of the combined pool.
After the trader has tried out demo accounts with a few different dealers, a funded account would be the next step. Mini accounts, full accounts and managed accounts are the most common types of funded accounts. Mini accounts are similar to full accounts except that currency is traded in lots of 10,000 rather than 100,000. This allows for lower mandatory initial deposits and greater customization of risk management. Is is important for currency traders to consider what they want to get out of their accounts before deciding on the type to open. Demo accounts and mini accounts are great for the retail forex trader to learn a profitable system and get used to the broker's execution methods. For currency speculators who doesn't want to trade themselves, a managed account may be a better option.
There are three main types of trading accounts - standard, mini and managed - and each has its own pros and cons. Which type of account is right for you depends on your tolerance for risk, the size of your initial investment and the amount of time you have to trade the market on a daily basis.
Standard trading account is the most common account. Its name derives from the fact that you have access to standard lots of currency, each of which is worth $100,000.
Mini trading account is simply a trading account that allows traders to make transactions using mini lots. In most brokerage accounts, a mini lot is equal to $10,000, or one-tenth of a standard account. Most brokers that offer standard accounts will also offer mini accounts as a way to bring in new clients who are hesitant to trade full lots because of the investment required.
Managed trading accounts are forex accounts in which the capital is yours but the decisions to buy and sell are not. Account managers handle the account just as stockbrokers handle a managed stock account, where you set the objectives (profit goals, risk management and so on) and they work to meet them. There are two types of managed accounts:
Pooled Funds: Your money is put into a mutual fund with that of other investors and the profits are shared. These accounts are categorized according to risk tolerance. A trader looking for higher returns will put his or her money in a pooled account that has a higher risk/reward ratio, while a trader looking for steady income would do the opposite. Read the fund's prospectus before investing.
Individual Accounts : A broker will handle each account individually, making decisions for each investor instead of the combined pool.
Role of Traders
Traders we essentially mean exporters and importers, international portfolio
investors, multinational enterprises and tourists. These players use the foreign
exchange market to facilitate execution of investment or commercial transactions. Their
usage of the foreign exchange market is necessary but not an incidental purpose of
investment. In other words if an individual wants to trade in foreign currency or foreign
exchange market, the usage of the foreign exchange is but mandatory.
Cable is the Exchange rate between British pound sterling and the U.S.
dollar.
investors, multinational enterprises and tourists. These players use the foreign
exchange market to facilitate execution of investment or commercial transactions. Their
usage of the foreign exchange market is necessary but not an incidental purpose of
investment. In other words if an individual wants to trade in foreign currency or foreign
exchange market, the usage of the foreign exchange is but mandatory.
Cable is the Exchange rate between British pound sterling and the U.S.
dollar.
History of Forex
BRETTON WOODS is the name of a conference held at Bretton Woods, New
Hampshire, in 1944, which designed the structure of the international monetary system
after the Second World War and set up the IMF (International Monetary Fund) and the
World Bank. It was agreed that the Exchange Rates of IMF members would be pegged
(fixed exchange rate) to the dollar, with a maximum variation of 1% either side of the
agreed rate. From 1944 till 1971 the U.S. had a fixed exchange rate under this system.
Hampshire, in 1944, which designed the structure of the international monetary system
after the Second World War and set up the IMF (International Monetary Fund) and the
World Bank. It was agreed that the Exchange Rates of IMF members would be pegged
(fixed exchange rate) to the dollar, with a maximum variation of 1% either side of the
agreed rate. From 1944 till 1971 the U.S. had a fixed exchange rate under this system.
Functions of Foreign Exchange Market
- The foreign exchange market is the mechanism by which participants (to trade)
transfer purchasing power between countries, obtain or provide credit for
international trade transactions, and minimize exposure to the exchange rate
changes. - Transfer of purchasing power becomes necessary as international trade involves
parties living in different countries, with their own currencies. Each party may want
to deal in its own currency but for the trade or capital transaction to be invoiced
one party must deal in a foreign currency. - With the movement of goods between countries taking time, goods-in-transit must
be financed. The foreign exchange market in such cases provides a source for credit. - The foreign exchange market also provides hedging (Hedging is an investment
strategy to minimize exposure to an unexpected business risk, while still allowing
the business to profit from an investment activity) facilities to minimize exposure to
the risks of exchange rate changes.
Foreign Exchange Rate
Exchange Rate is nothing but“the price of one currency expressed in terms of another”.
Real Exchange Rate is an exchange rate that has been adjusted to take account of any
difference in the rate of inflation in the two countries whose currency is being
exchanged.
What determines the exchange rate ?
The exchange rate depends primarily on three factors:
1. Trade Balance
2. Inflow and outflow of investment
3. Speculation
Real Exchange Rate is an exchange rate that has been adjusted to take account of any
difference in the rate of inflation in the two countries whose currency is being
exchanged.
What determines the exchange rate ?
The exchange rate depends primarily on three factors:
1. Trade Balance
2. Inflow and outflow of investment
3. Speculation
Foreign Exchange Market
Foreign exchange market (also known as currency market) is a market where a given
currency of one particular nation is traded against paper denomination of currency of
some other nation. Since it underlines the basic fundamentals of trade, foreign
exchange markets underpin all other markets in financial markets. They directly
influence each country’s foreign trade patterns, determine the flow of international
investment and affect domestic interest and inflation rates. They operate in every
corner of the world, in every single currency. The foreign exchange market is the largest
financial market in the world.
currency of one particular nation is traded against paper denomination of currency of
some other nation. Since it underlines the basic fundamentals of trade, foreign
exchange markets underpin all other markets in financial markets. They directly
influence each country’s foreign trade patterns, determine the flow of international
investment and affect domestic interest and inflation rates. They operate in every
corner of the world, in every single currency. The foreign exchange market is the largest
financial market in the world.
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