Foreign Exchange
Foreign Exchange is the action of changing one currency for another and/or reducing the risks associated with changes in currency exchange rates.
Foreign exchange is sometimes called "forex", "FX", "4X" or "currency exchange".
Why exchange currencies
Personal purposes
- When travelling
- When emigrating
Business and investment purposes
Trade, import/export
Trade
- goods for money
- goods for goods
Investment
Capital transfer.
Profit repatriation transfer.
Hedge
Trade
Short-term investment
Long-term investment
Speculators
Help create a liquid market
- Spot market
- Forward outrights
- Futures
- Options
Exchange rates
The exchange rate the is amount of one currency you get when you pay for it with another currency.
An exchange rate can be
- fixed by a national government
- fixed by agreement within a currency area
- "floating" depending upon market demand, e.g. U.S., EUR, GBP, AUD, NZD, JPY to name a few or
- something in between, e.g. India
RBA and Fed rates influence. Many other influences. See Exchange Rate
Central bank attempts to control usually fruitless.
Just because the exchange rate of one currency pair has moved up or down, does not mean either currency is "up"/"stronger" or "down"/"weaker". For instance, just because the AUDUSD rate is down does not mean "the AUD is weaker". The AUD might be up against other currencies. It might be that the USD is stronger against several currencies because of US economic news. Judgement about a currency should be made in regards to several currencies, not just one. For more information on this, research trade-weighted index.
Carry trade; what, why and effect on exchange rates.
Currency codes & abbreviations
base/settlement currencies http://www.bloomberg.com/markets/currencies/asiapac_currencies.html
Abbreviations of most commonly traded currencies.
For instance, when you expect AUD to go down against the USD, you do NOT say you want to "buy USDAUD", as it is not the way the Foreign Exchange market quotes the pair. You would say you want to "sell AUDUSD".
To benefit from an expected USD fall against the JPY, you would "sell USDJPY".
cross rates are http://www.bloomberg.com/markets/currencies/fxc.html
Ways to exchange currencies
Retail: over the counter in banks and currency exchanges, frequently found at airports and in large towns/cities.
Wholesale:
- banks
- brokers.
Wholesale rates better than retail rates.
Telegraphic/electronic transfers.
- banks
- western union, etc.
Notes cost more due to administration costs.
Related Articles
External Links
- Example exchange rate graphs at http://www.dailyfx.com/charts/ChartStation.html