Source: http://www.forextheory.com/
Any company or person that conducts some portion of its business in a different currency is suspect to some currency forex risk (or exchange rate risk or foreign exchange risk, ). This potential risk is only possible if the company's cost currency is not the same as the company's sale currency. Alternately if a company has revenues and expenses in the same currency, there no foreign exchange risk exists.
Two types of currency risk exist: transaction risk and translation risk. Transaction risk is the risk involved with the actual switching of cash flows from different currencies, and how much the exchange rate changes will impact a company's cash flow. Translation risk has more to do with accounting. It involves the impact of exchange rates on earnings and balance sheet items when merging financial statements from foreign subsidiaries. Transaction risk is the more relevant than translation risk from a business viewpoint.
Five general types of risk exist that threaten all businesses: 1) market risk (unanticipated fluctuations in interest rates, stock prices, exchange rates, or commodity prices). 2) Credit risk also known as default risk. 3) Operational risk (this includes both equipment failure and fraud). 4) liquidity risk (an inability to buy or sell goods at quoted prices). 5) Political risk (such as new regulations and expropriation). Any business that operates in industries such as petroleum, natural gas, and electricity are especially prone to market risk-or more specifically, price risk- due to the extreme fickleness of energy commodity prices. Electricity prices are significantly the most of all commodity prices.
What is known as country risk can be further divided into two parts, economic and political risk. Economic risk is put simply the stability of a country's economy. It depends individual industries or markets, the country's ability to maintain a substantial level of activity and its ability to grow, as well as its supply of natural resources and other important inputs.
Political risk is more tied to the stability of the government that operates the economy. It is related to the ability to move capital into and out of the country, the probability of power transferring easily following elections, and the government's overall feelings toward foreign firms. Clearly, these two parts of country risk display significant overlap. A variety of services exist which can provide in-depth assessments of country risk for virtually every country; Multinational firms frequently use these services to better make decisions with regard to international projects.
Ways to pro-actively protect against transaction exposure include:
- clauses of price adjustment
- forward contracts
- borrowing and lending money in a foreign currency
- currency options
- invoice in ones home currency
One problem that frequently comes up in managing currency risk is that it only occurs to companies that they are exposed to risk once the exposure has been spawned. Currency risk management however should commence well before exposure risks have been spawned. If this has not occurred then fundamental decisions have been taken on the basis of incomplete information. The way a company may approach exposure seem to vary significantly, perhaps by the culture of the company or by the character of the business or the competition. On the one hand a company could be willing to accept a large amount of risk and expect corresponding returns or on the other hand it could not like risk and may be prepared to pay a rather high price for certainty and peace of mind. Another option is that it may have no solid stance on currency and may use a take things as they come/roll with the punches approach.
Source: http://www.forextheory.com/
Forex participants
The major participants of a Forex market are:
Commercial banks
Exchange markets
Central banks
Firms that conduct foreign trade transactions
Investment funds
Broker companies
Private persons
The majority of exchange transactions are conducted through Commercial banks. Even seemingly autonomous participants in the exchange market utilize accounts that belong to them at the banks where they go on to carry out pending transactions of conversion. Banks, through their transactions with clients, are able to answer the needs of forex via their taking and distributing of money, bringing the money into new banks.
Another major participant are exchange markets. Exchange markets are not confined to a particular place of work or any specific business hours unlike the stock exchange which operates from large buildings during 9-5 business hours. Thanks for modern technology in the realm of communications, all the best financial institutions in the world can utilize services of exchange markets immediately from any location, 24 hours a day.
Central banks play an important role in several ways. They are responsible for controlling currency reserves, adjusting the interest investment rate in the national currency in addition to being aware of factors that may influence an exchange rate. Beyond the Central banks are the national central banks which play an even larger role in the foreign exchange markets. National central banks attempt to mediate the money supply in addition to inflation as well as interest rates often with specific targeted (sometimes official sometimes unofficial) rates for their currency. Available foreign exchange reserve currencies are often used by national banks to bring stability to the market.
There are also firms that are involved in transactions of foreign trade. Any company that is involved with international trade tends to require both foreign supply (exporters) and foreign currency (importers) .
Investment funds are also regular participants in the foreign exchange markets. Companies that fall under this umbrella of participants include different kinds of international pension, investment, mutual funds, trusts, and insurance companies, all of whom understand and comply to logic that it is beneficial to have a diversified portfolio of assets. Thus the aforementioned companies will typically invest portions of their profits in securities of the governments as well as in corporations who operate in different countries.
Broker companies are also players in the foreign exchange markets through their role of bringing together a sellers and buyers of foreign currency and helping to facilitate a conversion agreement between them. A broker company's function involves meeting both the seller and buyer of some specified foreign currency and acting as a mediator between the two of them for either credit-depositary operation or conversion. An astute broker firm operates by raising the broker commission through some percentile that results from the sum of the overall transaction. Even though a general Forex rule states that there is no fee as a percentile from the resulting sum of the equation or as a sum agreed upon in advance, broker companies will still take some kind of fee. They accomplish this by laying out their currency with a spread that will include a free within, similar to when the tax is already included in a quoted price.
Private people, also known as speculators are the last important key players in the foreign exchange market. Lay-persons are usually well aware of all kinds of non commercial transactions and occurrences in the realms of transfers of salaries, pensions, royalties, foreign tourism, and buying and selling foreign currency. In reality, almost all transactions that occur today are speculative in nature. Speculative psychology is what is used, internationally in the current functioning exchange system where people are making transactions involving money. This speculative psychology is absolutely necessary in a financial world in which a currency can lose a large percent of its value in only a few months and in which exchange rates move up and down on a weekly basis. Thus it would be foolish for a manager of a fund, who must compensate for inevitable declines, not to use speculation when making financial decisions.
Source: http://www.forextheory.com/
Commercial banks
Exchange markets
Central banks
Firms that conduct foreign trade transactions
Investment funds
Broker companies
Private persons
The majority of exchange transactions are conducted through Commercial banks. Even seemingly autonomous participants in the exchange market utilize accounts that belong to them at the banks where they go on to carry out pending transactions of conversion. Banks, through their transactions with clients, are able to answer the needs of forex via their taking and distributing of money, bringing the money into new banks.
Another major participant are exchange markets. Exchange markets are not confined to a particular place of work or any specific business hours unlike the stock exchange which operates from large buildings during 9-5 business hours. Thanks for modern technology in the realm of communications, all the best financial institutions in the world can utilize services of exchange markets immediately from any location, 24 hours a day.
Central banks play an important role in several ways. They are responsible for controlling currency reserves, adjusting the interest investment rate in the national currency in addition to being aware of factors that may influence an exchange rate. Beyond the Central banks are the national central banks which play an even larger role in the foreign exchange markets. National central banks attempt to mediate the money supply in addition to inflation as well as interest rates often with specific targeted (sometimes official sometimes unofficial) rates for their currency. Available foreign exchange reserve currencies are often used by national banks to bring stability to the market.
There are also firms that are involved in transactions of foreign trade. Any company that is involved with international trade tends to require both foreign supply (exporters) and foreign currency (importers) .
Investment funds are also regular participants in the foreign exchange markets. Companies that fall under this umbrella of participants include different kinds of international pension, investment, mutual funds, trusts, and insurance companies, all of whom understand and comply to logic that it is beneficial to have a diversified portfolio of assets. Thus the aforementioned companies will typically invest portions of their profits in securities of the governments as well as in corporations who operate in different countries.
Broker companies are also players in the foreign exchange markets through their role of bringing together a sellers and buyers of foreign currency and helping to facilitate a conversion agreement between them. A broker company's function involves meeting both the seller and buyer of some specified foreign currency and acting as a mediator between the two of them for either credit-depositary operation or conversion. An astute broker firm operates by raising the broker commission through some percentile that results from the sum of the overall transaction. Even though a general Forex rule states that there is no fee as a percentile from the resulting sum of the equation or as a sum agreed upon in advance, broker companies will still take some kind of fee. They accomplish this by laying out their currency with a spread that will include a free within, similar to when the tax is already included in a quoted price.
Private people, also known as speculators are the last important key players in the foreign exchange market. Lay-persons are usually well aware of all kinds of non commercial transactions and occurrences in the realms of transfers of salaries, pensions, royalties, foreign tourism, and buying and selling foreign currency. In reality, almost all transactions that occur today are speculative in nature. Speculative psychology is what is used, internationally in the current functioning exchange system where people are making transactions involving money. This speculative psychology is absolutely necessary in a financial world in which a currency can lose a large percent of its value in only a few months and in which exchange rates move up and down on a weekly basis. Thus it would be foolish for a manager of a fund, who must compensate for inevitable declines, not to use speculation when making financial decisions.
Source: http://www.forextheory.com/
Forex history / Part 2 /
The idea of Forex trading can be traced back to ancient times to when people first began trading currency from differing countries and groups. Yet despite this, the newest existing financial market is the foreign exchange industry.
Since the turn of the century, some serious shifts have taken place within the foreign market exchange. From 1944 until the early 1970s, the postwar foreign exchange system was the dominant system used in foreign exchange. This conference that would change the face of foreign exchange took place in Bretton Woods, New Hampshire.
At said conference, a future exchange system was discussed by 45 different nations. The end result of the conference was the formation of the International Monetary Fund (IMF). It was also the site that generated an agreement which stated that all fixed currencies in the exchange rate system would allow currencies to fluctuate one percent to gold values or the Us dollar which was previously accepted as the gold standard. This system of linking a currencies worth to gold or the us dollar became what is known as pegging.
This agreement held until December 1971 with the occurrence of the Smithsonian agreement. This agreement was in principle the same as the previous Bretton Woods one however it permitted greater fluctuations than one percent for the currencies. One year later in 1972, European countries attempted to move away from their link to the US dollar. West Germany together with France, Italy, the Netherlands, Belgium and Luxemburg founded the European Joint Float. This agreement was also like the Bretton Woods agreement, but like the Smithsonian agreement, it permitted for a larger band of fluctuations in the currency rates.
Mistakes were made in both the Smithsonian and European Joint Float causing them both to collapse by 1973. The collapse of both recent agreements in 1973 officially ushered in the ear of the free-floating system. The free floating system was somewhat of a default system since there were no new agreements to take place of the old ones. This meant that Governments had the autonomy to free to peg their currencies, semi-peg their currencies or simply allow them to float. The free-floating system became officially mandated in 1978.
Europe would try yet again to break free from its ties to the US dollar when they revealed the European Monetary System in July of 1978. This agreement similar to all previous ones failed and was abandoned in 1993.
Significant milestones in Forex history
The Gold Standard
Before money, there was bartering. Money eventually became a more efficient means of trade due to the fact that goods could not be easily divided, and could quickly lose their value, when a value could be determined and agreed upon (Morris 4). Alternately, money could have symbolic value and thus function as a medium for exchange or unit of accounting. Money in its original form consisted of something that was valuable itself such as valuable metals. The metal usually consisted of gold or silver (Eichengreen, 9), and was considered valuable because of both its sparsity and its obvious usefulness.
Both coins and paper money were being used by the nineteenth century. Currencies were not valued directly against each other but rather under a "Gold Standard". Under the gold standard each currency had a specific rate at which the same currency could be considered for a specific unit of gold. This however gave birth to a use full exchange rate between any two currencies.
To illustrate, in 1900 the mint parity for the U.S. dollar was $20.67, while the British equivalent was was 3 pounds, 17 shillings, 10 pence. If one wanted to exchange U.S. dollars for British pounds under the gold standard, one would divide $20.67 by 3.17.10, which yields a rate of $4.86 per pound after taking into account that U.S gold coins contain slightly more gold content than Brittish coins (Aliber, 34).
Following this logic, paper money could be used instead of some precious metal. A citizen could keep with them paper money while the central bank would, in which greater amounts of money exited the country than entered, that would lead o less U.S. dollars in circulation.
Since central banks have heavy influence when it comes to the interest rates (interest rate is a name for the rate at which the bank borrows and lends money), they soon discovered that it was no longer necessary to sit and wait for gold flows to be replenished. In the scenario of a gold deficit where gold is rapidly leaving the country, a central bank would be able to make investing with them more attractive by raising interest rates.
Floating Exchanges Systems
A floating exchange system values currencies in terms of other currencies not in terms of a gold standard.
Before this exchange system was in place, there were three aspects of previous systems that were in conflict: autonomous domestic economic policies, constant exchange rates, and increasing international capital mobility. The Bretton Woods agreement did not hinder or preclude countries from ignoring long term effects on the exchange rate by using domestic economic policy (manipulating interest rates, for example, as under the gold standard) for domestic reasons. The effect of domestic economic policies only happen sooner then expected due to capital mobility.
The Vietnam War brought about great instability causing, central banks to exchange their dollars to gold. To put an end to the loss of gold, in 1971 Nixon "closed the gold window" by not providing gold to foreign dollar holders under any circumstance (Eichengreen, 133). This lead to the Bretton Woods System of adjustable pegs officially being abandoned in 1974. With no binding agreements in place the Jamaica Agreement was reimplemented which allowed a country to choose any exchange system it wants (Aliber, 52).
Exchange Systems Today
Today countries can choose from a variety of exchange systems. A free floating exchange system, as mentioned earlier, permits the market to establish the price of a currency. Many factors such as domestic investments versus foreign investments, trade surpluses and deficits and domestic taxation policies, could affect the exchange rate, and would all be able to occur regardless of their effects on the currency.
A pegged exchange rate as in the Bretton agreement, would function much like the traditional way of the gold standard with its currency being linked to the rate of another currency, in most instances the U.S. dollar. If a balance of payments deficit exists, the central bank would then probably buy a specific amount of the domestic currency in return for its foreign currency reserves, thus bringing back the price of the currency to its "peg" but also at the same time depleting the amount of its currency available in its reserves.
Some countries manipulate their currency rates in order to help domestic needs (while maintaining their free-floating status) by boosting (revaluing) their exchange rate prior to an oil shipment, for example (Luca, 17). Other countries, such as Brazil, before changing to a free floating system, peg their currencies to that of the U.S. dollar or a different currency while permitting the rate to fluctuate within a certain range not unlike the Bretton Woods system.
Sourse: http://www.forextheory.com/
Since the turn of the century, some serious shifts have taken place within the foreign market exchange. From 1944 until the early 1970s, the postwar foreign exchange system was the dominant system used in foreign exchange. This conference that would change the face of foreign exchange took place in Bretton Woods, New Hampshire.
At said conference, a future exchange system was discussed by 45 different nations. The end result of the conference was the formation of the International Monetary Fund (IMF). It was also the site that generated an agreement which stated that all fixed currencies in the exchange rate system would allow currencies to fluctuate one percent to gold values or the Us dollar which was previously accepted as the gold standard. This system of linking a currencies worth to gold or the us dollar became what is known as pegging.
This agreement held until December 1971 with the occurrence of the Smithsonian agreement. This agreement was in principle the same as the previous Bretton Woods one however it permitted greater fluctuations than one percent for the currencies. One year later in 1972, European countries attempted to move away from their link to the US dollar. West Germany together with France, Italy, the Netherlands, Belgium and Luxemburg founded the European Joint Float. This agreement was also like the Bretton Woods agreement, but like the Smithsonian agreement, it permitted for a larger band of fluctuations in the currency rates.
Mistakes were made in both the Smithsonian and European Joint Float causing them both to collapse by 1973. The collapse of both recent agreements in 1973 officially ushered in the ear of the free-floating system. The free floating system was somewhat of a default system since there were no new agreements to take place of the old ones. This meant that Governments had the autonomy to free to peg their currencies, semi-peg their currencies or simply allow them to float. The free-floating system became officially mandated in 1978.
Europe would try yet again to break free from its ties to the US dollar when they revealed the European Monetary System in July of 1978. This agreement similar to all previous ones failed and was abandoned in 1993.
Significant milestones in Forex history
The Gold Standard
Before money, there was bartering. Money eventually became a more efficient means of trade due to the fact that goods could not be easily divided, and could quickly lose their value, when a value could be determined and agreed upon (Morris 4). Alternately, money could have symbolic value and thus function as a medium for exchange or unit of accounting. Money in its original form consisted of something that was valuable itself such as valuable metals. The metal usually consisted of gold or silver (Eichengreen, 9), and was considered valuable because of both its sparsity and its obvious usefulness.
Both coins and paper money were being used by the nineteenth century. Currencies were not valued directly against each other but rather under a "Gold Standard". Under the gold standard each currency had a specific rate at which the same currency could be considered for a specific unit of gold. This however gave birth to a use full exchange rate between any two currencies.
To illustrate, in 1900 the mint parity for the U.S. dollar was $20.67, while the British equivalent was was 3 pounds, 17 shillings, 10 pence. If one wanted to exchange U.S. dollars for British pounds under the gold standard, one would divide $20.67 by 3.17.10, which yields a rate of $4.86 per pound after taking into account that U.S gold coins contain slightly more gold content than Brittish coins (Aliber, 34).
Following this logic, paper money could be used instead of some precious metal. A citizen could keep with them paper money while the central bank would, in which greater amounts of money exited the country than entered, that would lead o less U.S. dollars in circulation.
Since central banks have heavy influence when it comes to the interest rates (interest rate is a name for the rate at which the bank borrows and lends money), they soon discovered that it was no longer necessary to sit and wait for gold flows to be replenished. In the scenario of a gold deficit where gold is rapidly leaving the country, a central bank would be able to make investing with them more attractive by raising interest rates.
Floating Exchanges Systems
A floating exchange system values currencies in terms of other currencies not in terms of a gold standard.
Before this exchange system was in place, there were three aspects of previous systems that were in conflict: autonomous domestic economic policies, constant exchange rates, and increasing international capital mobility. The Bretton Woods agreement did not hinder or preclude countries from ignoring long term effects on the exchange rate by using domestic economic policy (manipulating interest rates, for example, as under the gold standard) for domestic reasons. The effect of domestic economic policies only happen sooner then expected due to capital mobility.
The Vietnam War brought about great instability causing, central banks to exchange their dollars to gold. To put an end to the loss of gold, in 1971 Nixon "closed the gold window" by not providing gold to foreign dollar holders under any circumstance (Eichengreen, 133). This lead to the Bretton Woods System of adjustable pegs officially being abandoned in 1974. With no binding agreements in place the Jamaica Agreement was reimplemented which allowed a country to choose any exchange system it wants (Aliber, 52).
Exchange Systems Today
Today countries can choose from a variety of exchange systems. A free floating exchange system, as mentioned earlier, permits the market to establish the price of a currency. Many factors such as domestic investments versus foreign investments, trade surpluses and deficits and domestic taxation policies, could affect the exchange rate, and would all be able to occur regardless of their effects on the currency.
A pegged exchange rate as in the Bretton agreement, would function much like the traditional way of the gold standard with its currency being linked to the rate of another currency, in most instances the U.S. dollar. If a balance of payments deficit exists, the central bank would then probably buy a specific amount of the domestic currency in return for its foreign currency reserves, thus bringing back the price of the currency to its "peg" but also at the same time depleting the amount of its currency available in its reserves.
Some countries manipulate their currency rates in order to help domestic needs (while maintaining their free-floating status) by boosting (revaluing) their exchange rate prior to an oil shipment, for example (Luca, 17). Other countries, such as Brazil, before changing to a free floating system, peg their currencies to that of the U.S. dollar or a different currency while permitting the rate to fluctuate within a certain range not unlike the Bretton Woods system.
Sourse: http://www.forextheory.com/
Етикети:
About FOREX
Forex history / Part1 /
FOREX (Foreign Exchange Market) is a global currency market that exchanges currency from one country to the currency of another at a changing rate, subject to the date of exchange.
FOREX is a virtual network of currency dealers connected among themselves by means of telecommunications. FOREX currency dealers are connected to leading world financial centres, and round the clock workers. As a result, FOREX forms a united and very efficient system.
The foreign exchange market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates.
The history of stock exchanges can be traced to 12th century France, when the first brokers are believed to have developed, trading in debt and government securities. Unofficial stock markets existed across Europe through the 1600s, where brokers would meet outside or in coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602, became the first official stock exchange when it began trading shares of the Dutch East India Company. These were the first company shares ever issued.
Source: http://www.forextheory.com/
FOREX is a virtual network of currency dealers connected among themselves by means of telecommunications. FOREX currency dealers are connected to leading world financial centres, and round the clock workers. As a result, FOREX forms a united and very efficient system.
The foreign exchange market owes its existence to the 1971 abandonment of the Bretton Woods accord and the subsequent unwinding of the regime of universal fixed exchange rates.
The history of stock exchanges can be traced to 12th century France, when the first brokers are believed to have developed, trading in debt and government securities. Unofficial stock markets existed across Europe through the 1600s, where brokers would meet outside or in coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602, became the first official stock exchange when it began trading shares of the Dutch East India Company. These were the first company shares ever issued.
Source: http://www.forextheory.com/
Етикети:
About FOREX
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