Real-Time Currency Rates
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With several different entry points, speculators and hedgers can both find what they are looking for. Whether they simply want to hedge their everyday currency risk, or pursue a more complex strategy, the FOREX markets provide the liquidity and instruments for trading in currencies. In the earliest of times, man traded furs and skins and eventually grains and oils, dried fish, sheep, horses, cattle, and oxen.
Because of their durability, oxen became a favorite medium of exchange. In time, with division of labor and urban living came a new era in which new uses were found for metals copper, bronze, gold and silver.
Because of their added usefulness, portability, and divisibility, their value forex chart option trading education currency exchange inc and they were eventually accepted as the medium of exchange. For convenience, standardized pieces of metal, known as coins, came into use. As stores of metal became too cumbersome to carry, paper receipts were issued for gold and silver deposited with goldsmiths for safekeeping.
In time, people grew accustomed to using paper money as a substitute for gold and silver. Of course, there is no limit to the amount of paper money and credit that can be issued, which is too much for most legislators to resist. One type of government intervention leads to another, until there is a world-wide competition among governments to stimulate their own economies relative to all others through monetary expansion.
Another consequence of legal tender laws was that each country, by requiring that its own currency be used within its borders, shut out all other currencies, thus necessitating the exchange of one currency for another by international businessmen and forex chart option trading education currency exchange inc. Thus was born the phenomenon of exchange rates and the need for determining the price of one currency relative to another. For example, when we talk in terms of buying an ounce of silver, we may state the price in terms of U.
Notice that different currencies have different prices relative to the one ounce of silver. It depends on which measuring stick or currency we use, what the stated price of one ounce of silver is. In time, either the price of the measuring stick, i.
For example, the price of one ounce of silver could become U. Notice that the price of one ounce of silver has increased by Thus, it is apparent that the measuring stick, i.
This phenomenon of the prices of currencies changing relative to one another can be easily seen by looking at a history of changes between the U. See here for the cost of one Euro in terms of U. Each country or group of countries that controls its own currency has the power to inflate or deflate its currency relative to others.
Debtor nations also benefit from inflating their currencies by paying off their debts with cheaper money. There are a number of markets in which currencies are traded. The exchange rates that are used in such transactions are determined by an informal network of banks and other financial institutions known as the inter-bank market with settlement occurring in two business days.
The inter-bank market consists of large investment banking firms linked together with a computer network where members negotiate among themselves for large quantities of a given currency 24 hours a day five days a week.
A forward contract is an agreement in which two parties negotiate the following terms: The forward contract market is for transactions with settlement beyond two days. Currency swaps are transactions in which two banks in the inter-bank market trade a quantity of currency with an agreement to reverse the transaction at a certain later time. The initial leg of the transaction can be either a spot transaction or a forward transaction with the closing leg being a forward transaction.
The futures markets have exchanges in which the terms of the contracts for the exchange of currencies are standardized by the exchanges, i. The only contract term remaining is the price, which is negotiated between the buyers and sellers. The most liquid futures markets trading currencies are: The cash options market trades calls and puts for the delivery of the cash currency. If you exercise a call, you receive the underlying currency for that call.
If you exercise a put, you must deliver the underlying currency for that forex chart option trading education currency exchange inc. Exchange-traded cash options are traded at the Philadelphia Stock Exchange ; however, their settlement occurs in Forex chart option trading education currency exchange inc. The futures options markets usually coincide with the futures markets because the underlying asset for a futures option is a futures contract.
In other words, if a futures option is exercised, the owner forex chart option trading education currency exchange inc either a long or short futures position. The futures exchanges with futures options on currencies are: By investing in the components of an index or in the commodity, the ETF makes available to small investors the opportunity to invest in the index or commodity.
Currency ETFs began trading in They are traded on the New York Stock Exchange. As international trade has grown, the sea of money forex chart option trading education currency exchange inc expanded.
Of course, the bigger the bath tub, the easier it is to have waves and the more difficult it becomes to stop those waves. Thus, currency fluctuations have grown beyond the control of central banks and have spawned the need to protect oneself against the risk of price exchange rate change.
This risk can be transferred from those who want to avoid it to those who seek to profit from it in the FOREX markets. Consequently, two distinct groups of traders have arisen. There are the hedgerswho want to reduce their risk of currency price fluctuations, and there are the speculatorswho want to profit from the change in currency exchange rates. In the world of business, hedgers are entities individuals or businesses wanting to reduce their risk of loss from price changes.
In broad terms, there are two types of hedgers: It could be a banker who forex chart option trading education currency exchange inc to protect against a rise in interest rates and decline in bond pricesforex chart option trading education currency exchange inc it could be an exporter selling goods and being paid a fixed price in a currency with a declining price exchange rate. A long hedger might be a farmer who fattens cattle and wants forex chart option trading education currency exchange inc protect against an increase in feed prices.
It could be an insurance company looking to purchase bonds in its portfolio when the cash becomes available down the road and wanting to protect against a decline in interest rates and an increase in bond prices. Or it could be a company planning to purchase goods in a country with an appreciating currency. Because hedgers have one foot in the cash market, they tie future prices to present prices.
Thus, as we move into the future, future prices become present prices convergence. Between the time the invoice is issued and the time it is paid, the manufacturer withstands the risk of exchange rate loss. Specifically, if the price of the U. This makes it more difficult to pay his employees and vendors in Europe. To hedge this risk in the futures marketsthe German manufacturer buys Euro futures as a substitute purchase for the Euros he will be purchasing at a future time in the cash market.
Fortunately, GAM reduced its currency risk exposure by hedging its position with futures. Way to go GAM! I bet GAM will continue to hedge its currency exchange exposure in the futures. Because the various FOREX markets tend to move parallel to one another, it is possible to hedge currency risk.
While there are both long and short hedgers providing liquidity to one another, hedging is also facilitated by speculators who provide the bulk of liquidity that makes for ease of entry and exit for hedgers. Speculators assume risk in the pursuit of profits. Their risks are calculated to maximize profit potential.
They might speculate that prices will rise, decline, go sideways or that price differentials will widen or narrow. Still others may prefer the to 1 leverage found in the currency spot market. Of course, the more leverage used, the faster one can be taken out of the markets for lack of adequate margin. If he were to liquidate his position at this point, he would have a Forex chart option trading education currency exchange inc the price declines, our speculator must add additional money to his account forex chart option trading education currency exchange inc cover the daily losses and maintain his position.
Thus, his total return in the spot market is — Thus, his total return in the futures market is — This lower percentage loss is due to the higher margin requirement in the futures market. The symbols that are used to designate the various currencies are standardized world-wide. These symbols are used by banks and exchanges alike to indicate which currency is being purchased and which is being sold.
Thus, you generally see them listed in pairs. The currency to be purchased is listed first base currency and the currency to be sold is listed second quote currency.
The difference between the two prices can vary depending on the firm issuing the quote. Some firms will charge a commission and offer a narrower spread, while others charge no commission and offer a wider spread. Be sure to know how your firm charges. When closing a spot market or futures market position, one sells the same quantity of the same currency one purchased earlier.
Conversely, when one sells short, one buys back the same quantity of the same currency one sold earlier. With futures, it is important to do this on the same exchange and in the same contract month as the opening position. In the spot market, the same settlement date must be used. To have a strategy, or plan, we must understand what affects the market, how it affects the market, and how to profit or hedge in that market.
As we mentioned earlier, supply and demand are the key actors in this play—supply of money and demand for money relative to goods. Thus, we must consider not only the supply and demand for money, but also the supply and demand for the economic goods that currencies buy. So how do we gauge forex chart option trading education currency exchange inc health of the economy? When we consider all of these supply and demand factors, we are engaging in fundamental analysis.
Investors often make decisions, in part based on these government reports. They also look at the trends these reports divulge to develop an expectation about future inflation rates, thus biasing the markets. In other words, when enough investors believe that housing prices, for example, will continue to rise, forex chart option trading education currency exchange inc may be inclined to borrow money sometimes at higher rates than usual and purchase second and third homes as investments.
Forex chart option trading education currency exchange inc, in turn, can cause a speculative frenzy bubble? Of course, should interest rates rise at some point, borrowers who still have their jobs and are over-extended with adjustable rate mortgages may have problems making their payments, which, in turn, can create a problem for the banks who lent them the money in the first place.
To see the U.