FOREX or FX refers to foreign exchange market. It is a market where brokerage firms and banks interact jointly on a regular basis with the help of Electronic Communication Networks (ECN) to buy or to sell currencies worldwide with the objective to make profits by speculating on the variation of currency exchange rates. The three functions of the FOREX market are defined as follow: (Cherunilam 2007, p.275)
A foreign exchange market performs three important functions: (i) transfer of purchasing power from one country to another and from one currency to another; (ii) provision of credit; (iii) provision of hedging facilities.
According to the Bank of International Settlement report of September 2013, the average volume in the FOREX market was
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The main importance is to take part in the speculative activity in order to generate future earnings. For this purpose, individual operators use tools for investment analysis or investment company’s services are bought in order to manage the capital in the names of investors.
A successful trader is one who has the capacity to analyze the volatility of foreign exchange markets for forecasting models taking into account the historical data and its tendencies or trends.
The forecast can never be fully accurate since it includes uncertainty. This uncertainty always carries some sort of intrinsic risk. However, various tools are regularly developed in order to forecast the future shape of some specific behaviors on the FOREX market.
Volatility relates to the transaction risk which is often intrinsic to the foreign exchange market. This volatility makes forecasting a tedious task for financial specialists and investors in analyzing future trends. FOREX market is constantly influenced by numerous variables. Similarly, news release from mainstream media about the good performance of the economy or conflicts in remote regions can have a strong impact on the behavior of the FOREX market. Therefore, individual traders and institutional investors are extremely careful when investing in the FOREX
The coins made in gold, silver and bronze were traded during Roman Empire and the shortage of coins created a barrier for money circulation. However with the establishment of paper money, a sophisticated banking, global clearing system and electronic money, the global financial system evolved with a worldwide framework of legal agreements. In the Global Financial market, foreign currencies issued by the world, countries are traded by the buyers and sellers using currency exchange rates. Now a day, it is very common practices of companies in one country to raise capital in a foreign country by listing their stocks on major foreign exchanges given the growth of equity markets are becoming more globalized (SNHU, 2015).
The action of forecasting the direction of USD/EUR is still a risky action since the
Foreign exchange refers to two different things. The first is currency claims expressed in the equivalent value in foreign money. The second is actual transactions involving the conversion of money of one country into that of another.
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
...f you know that currency that you are dealing with fluctuates by about 3 percent per year to USD, then you could easily charge 3 percent more for the product or services you offer in that country, in the USA particular to my example. By charging 3 percent more, you will get a baseline price if the currency will decline by 3 percent, and if the currency declines less than 3 percent ,the company will get an extra income. No one knows the best practices on how to mitigate the exchange risk, but still every company has some strategies that they can implement to decrease the risk and increase the profit. Overall, the foreign currency exchange risk is just something that every business should be able to deal with in a global economy, as long as they are not afraid to accept strategies that sometimes will take a little longer to see the results or they can failed in fact.
I introduce the research result on the market volatility and efficiency in the Korean market. Two approaches have been used to analyze the effect of index futures trading on stock market volatility and market efficiency. One approach is to compare the change on stock price volatility and efficiency before and after futures trading is introduced. The other approach is to compare stock price volatility differences and efficient trading between KOSPI 200 stocks and non-KOSPI 200 stocks.
Nowadays, the world of business becomes increasingly global, a lot of companies establish themselves as the multinational corporations (MNCs). They start to introduce the brand new products or services into market for gain more profit and become the leaders in the foreign market. However, most of the companies facing the challenge of fluctuations in currency exchange rates.
U.S. Securities and Exchange Commission. (2012, August 14). International Investing. SEC.gov. Retrieved February 25, 2014 from https://www.sec.gov/investor/pubs/ininvest.htm
Salifu, Z., Osei, K. A., and Adjasi, C.K.D. (2007), “Foreign exchange risk exposure of listed companies in Ghana,” The Journal of Risk Finance, Vol. 8, No. 4, pp. 380
It is not a literal market in a centralized location, but a network operated via modern technology. In 2004, the daily global turnover at exchange markets reached $1.9 trillion (Frankel, J., 2008). The exchange rate is the price of foreign currency. This price fluctuates daily. This can create a potential problem depending on the market you’re dealing with. It would be wise for a company to compare costs of exchanging currency through a local bank versus a foreign bank to receive the best deal.
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
During the year 2012, Australian Dollar (AUD) is the 5th most traded currency in the world, accounting for 7.6% of the world’s daily share. The Australian dollar is popular with currency traders because of the comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia's economy and political system, and the prevailing view that the Austra...
Foreign exchange risk is the potential loss due to change in the value of the assets or liabilities of the bank resulting from the fluctuations in exchange rate. Banks transact for their customers or for the banks’ own accounts. Any adverse movement can degrade the value of the foreign currency and causes bank’s loss.
Foreign exchange translation exposure results when an MNC translates each subsidiary’s financial data to its home currency for consolidated financial reporting. Foreign exchange translation risk arises from investments in the following countries: United States, United Kingdom, Switzerland, Hungary, Turkey, Poland, Australia, New Zealand, India and Egypt. The functional currencies of the subsidiaries in these countries are different from the Euro
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...