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Forex - Everything you need to Know

Published on Monday, December 29, 2014
Forex stands for ‘Foreign Exchange’. ‘Foreign Exchange’, ‘Forex’ or simply ‘Fx’ refers to the whole nine yards in respect of ‘foreign currency’.

When you say forex, you could mean forex trading or the forex reserves or the forex rates. All the above deal with foreign currencies but has different meaning and implications.

Let start with the trading aspect of ‘forex’.

Forex Trading

  • Forex Trading takes place in ‘Forex Market’. 
  • Forex market operates for 24 hours a day and 5 days a week! Why 24 hours? Simply because of the time differences in different parts of the world! 
  • Forex market is also known as currency market, as currencies from all over the world are traded; it is the largest market in the world only because of the sheer volume of transactions! 
  • Forex market is not a physical market – it is a term used to denote the worldwide ‘market’ where currencies from all over the world are traded – it is not limited by geographical constraints. 
  • Any person from any country can trade in the forex market; participants can be international banks, companies and individuals engaging in hedging or speculative transactions. 
  • Forex markets operate on ‘Over the Counter’ (OTC) form – just like a medical store – over the counter – ask for the currency which you want and pay according to the existing rate of the currency. 
  • Then when you want to sell them – take ‘em back and sell ‘em over the counter! 
  • The currency rates or forex rates differ every day and sometimes also during a day and exchange rates for different currencies are different and depend on various factors. 
  • Investors, traders, hedgers, speculators trading the forex market actually want to take advantage of the fluctuations of the exchange rates or simply put the currency’s rate. 
  • Exchange rates depend on various factors such as level of economic activity of a country, its GDP, its share market activities, political stability or instability etc., speculators look at all of these factors and make their own predictions and put their money on particular currency.
Simple example – current dollar rates (forex rate of dollar!) is 1$ = Rs. 63.79; say you have Rs. 1000 with you and you want to try your luck in the currency market – you go and buy dollars using Rs. 1000.

How many dollars will you get (remember its all OTC!)? – 1000/63.79 = $ 15.67.

So, with Rs. 1000 you are able to buy 15.67 dollars! Dollars is no use to you – its your commodity – you trade a commodity.

But when will you trade or in this case sell your dollar – you’ll sell only when you see you can earn a profit obviously! So you wait for the rate to improve …and then when the rate become 1$ = Rs. 65.85 (it’s increased from Rs. 63.79) you sell your 15.67 dollars and get your rupees back!

15.67 x 65.85 = Rs. 1032! Okay yeah … profit of only Rs. 32 … but we took an example with easy figure – in real world the figures are huge!
  • So this is basically how trading objectives are – and when the prices fall, the traders are dealt with huge losses. 
  • Forex market is highly exciting, highly risky and to be dabbled in when you’ve become an expert in the free online trading games!

 Okay here’s a scenario for consideration – if you are an importer, i.e, you buy goods from foreign country to be sold in India – you’ve got to pay to the foreign country seller in say, dollars – today the dollar rate is 1$ = Rs.63.79, so for every dollar you need 63.79 rupees. Ok.

Suppose when at the time of payment the rate is Rs. 68.85 for every dollar – you’ve got a loss! Now you will end up paying Rs. 5.06 more for every dollar!

On the flip side – if you are an exporter – you are selling goods to a trader in a foreign country and you will receive payments in dollars – when the rate becomes Rs. 68.85 from Rs. 63.79 – you end up earning a profit due to exchange rate fluctuation of Rs. 5.06! As when you are paid by in dollars you will get Rs. 68.85 for every dollar!

So you can see what a dynamic world forex is! Ever changing and somewhat unpredictable!

This brings us to:

Forex Reserves

  • The term ‘forex reserves’ is used to denote the foreign currency reserve of a central banks or governments of countries. 
  • So what goes into forex reserves? – Well, you could have foreign currency notes, deposits from foreign countries, foreign treasury bills other government securities etc. 
  • So basically forex reserves in a countries ‘reserve’ of money held in foreign currency or currency equivalent. 
  • Where does all the foreign currency come from? – from Exports, Foreign Loans, Grants, foreign investments in India – when tourists come to India! 
  • And the reserves are used to pay for imports, repay international loans and dues, or give international grants – when you go abroad! 
  • A country and its central bank has many international monetary obligations – forex reserves are used for that – when this reserve runs low the IMF or World Bank comes to rescue. 
  • Also a country’s strong forex position can impact its exchange rate and international trade relations! 
  • For India – most of the forex is used to pay for oil imports as you all probably know – so having a strong forex reserve is extremely important. 
  • Forex reserves are managed by the RBI in India.

Latest though, India is 9th on the list of countries with good forex position; list headed by China.

And even latest news on the forex reserves front is that, India’s forex reserves rose by $3.16 billion last week, so the current figure resides at $319.99 billion!
Which is like -$ 3,199,900,000! And the pundits are of the opinion that is it a comfortable position to be in. Well, who are we to argue!

All we can hope is that with the economic development envisioned for India in the coming years our forex reserves keep filling up!

With that … good day!
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ramandeep singh

Ramandeep Singh, your guide to banking and insurance exams. With 14 years of experience and 5000+ selections, Ramandeep understands the path to success, having transitioned himself from Dena Bank and SBI. He's passionate about helping you achieve your banking and insurance dreams.

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