Currency

What is currency trading?

In simple words, currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies.


The currency market

The currency trading (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover.
Markets are places to trade goods. The same goes with FOREX. The Forex goods (or merchandise) are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars.


Understanding the Forex Market

Word "Forex" comes from shorting up "foreign exchange" and it is used to describe currency spot market mostly but also currency futures and options market. This is the biggest and most fluent global market.

Forex is over the counter market. It means that there are no agreed centres or exchanges where you need to be connected in order to trade. It is a big worldwide network, letting you trade 24 hours per day usually from Monday till Friday.


Who can trade in Currency Futures markets in India?

Any resident Indian or company including banks and financial institutions can participate in the futures market. However, at present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.

Which currency pairs are listed?

Any currency can be traded on the international level. However, on the Multi Commodity Exchange (MCX- SX), only 4 major currencies are traded against the Indian Rupee.

  • 1. USDINR
  • 2. EURINR
  • 3. GBPINR
  • 4. JPYINR

Which are the Exchanges used?

The commonly used exchanges on the national level are - Multi Commodity Exchange (MCX- SX) National Stock Exchange (NSE) The most commonly used exchange on the international level - COMEX


Who are the Regulators of the Market
The currency market is regulated jointly by the Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI).


How is pricing determined for certain currencies?

The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.


Is there a central location for the Forex Market?

Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.


When is the FX market open for trading?

Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events


How does one profit in Forex?

Very simply put, buy cheap and sell for more! The profit is generated from the fluctuations (changes) in the currency exchange market.


What is Margin?

Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability,the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.


What are “short” and “long” positions?

Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.


What is a Spot Market?

A Spot Market is any market that deals in the current price of a financial instrument. Futures markets, such as the Chicago Mercantile Exchange (CME), National Stock Exchange (NSE), MCX SX, BSE offer currency futures contracts whose delivery dates may span several months into the future. Settlement of Forex spot transactions usually occurs within two business days.


What are the major fundamental factors that affect currency movements?

1. Trade Balance – This refers to imports and exports, and is probably the most important determinant of a currencys value. When imports are greater than exports, you have a trade deficit. When exports are greater than imports, you have a surplus. A shift in the trade balance between two countries tends to weaken the currency of the country with greater deficit

2. Wealth – Wealth is a countrys reserves, in the form of gold, cash, natural resources, and so on. Any factor that affects a countrys ability to repay loans, finance imports, and affect investments affects the markets perception of its currency and the currencys value.

3. Internal Budget Deficit or Surplus – A country running a current account deficit has, on balance, a weaker currency than one that runs a budget surplus. This is tricky, however, in that the direction of the surplus or deficit affects perceptions and currency valuations too.

4. Interest Rates – Funds travel globally in electronic format responding to changes in short-term interest rates. If three-month interest rates in Germany are running 1% less than three-month rates in the United States, then all other things being equal, ‘hot money’ flows out of Euro into the Dollar.

5. Inflation – Inflation in each country and inflationary expectations, affect currency values.

6. Political factors – Taxes, stability and other factors that affect the international trade of a country or the perception of ‘soundness’ of the currency affect its valuation.

 

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