Forex (FX)
Forex (FX)
Forex (FX)
FX-Definition
The foreign-exchange market ("forex" or
"FX") can be defined as the cash market
where currencies are traded.
Political factors
Stable the political factor, higher will be the demand for the particular currency
Economic data
Economic data such as labor reports (payrolls, unemployment rate and
average hourly earnings), consumer price indices (CPI), producer price
indices (PPI), gross domestic product (GDP), international trade,
productivity, industrial production, consumer confidence etc., also affect
fluctuations in currency exchange rates.
Factors Affecting Exchange Rates
Demand - Supply Factor
If Demand>Supply, value of currency rises.
If Demand <Supply, value of currency falls.
Inflation
Higher the inflation, lower the value of currency.
Trade Balance
The more the price of the exports than what the
country is paying for the imports, the higher will be the
demand of the currency of that country.
Type of FX Contracts
Spot FX contract – short term FX contract used
to cover the cost of a foreign currency trade or
other short term foreign currency requirements.
These are usually marked to spot FX rates. Also
used for speculation.
Currency Derivatives
Futures
A contract for the purchase of a country's currency at a price agreed now for
delivery at a later date.
Currency futures are exchange traded derivatives.
Options
An option which gives the owner the right to buy or sell the indicated amount
of foreign currency at a specified price before a specific date.
Eg: an importer who needs to SELL Australian Dollars will purchase a PUT
option AUD.
Similarly, an exporter, who needs to BUY Australian Dollars will purchase a
CALL option in AUD.
FX Trading Characterstics
Over the counter market.
Commercial companies.
Central banks.
Hedge funds
Exchange rate Mechanism
Since currencies are traded in pairs and exchanged one against the
other when traded, the rate at which they are exchanged is called
the exchange rate.
The exchange rate tells a buyer how much of the counter or quote
currency must be paid to obtain one unit of the base currency.