We all have a basic understanding of international trading. Whether it is importing goods from abroad or exporting homemade products and services, all fall under international trading.
Forex, or what is usually abbreviated as FX is a medium through which all foreign transactions take place. The very main gist of Forex is the conversion of one country’s currency to another which enables us to carry out trade, aids us to make commercial transactions as well as travel throughout the world.
Now a question may arise such that ‘Where do we go for Forex Trading?’ The answer is there is a Forex trading market; a market place where currencies are traded to carry out the functions that are mentioned above. Interestingly, there is no one specific place of trading these currencies, rather they are done in a decentralized manner in a system called over the counter (OTC) where the transactions of buying, selling and speculation takes place on an online platform where transactions occur 24/7 with exclusive financial centers at London, Tokyo, Zurich, New York, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.
There three main modes of transactions done by individuals, corporations, and institutes at a Forex market; spot market, options market, and futures market. If you search with the term how to trade on Forex, you should get the details about the transaction type. Trading is not as tough as you think. Many rookies in the Mena region have mastered trading within a short time and you can do the same.
Spot markets have two modes-forwards and futures that involve buying and selling of currency based upon the valuation of the currency.
Forward currency trading involves buying and selling of contracts over OTC whereas future contracts are bought and sold over the physical commodities market.
In the spot market, traders make speculations about the near-future valuation of currency, and based upon that, they buy or sell a currency that has to be done within a specific expiration date. In this case, if the value of the currency goes up according to the buyers’ speculations, they gain money, or if the currency depreciates they end up losing money.
Whether they gain or lose cash out of spot purchase or selling, they must fulfill the transactions. Options markets, on the other hand, involve greater flexibility than the spot market. The options market is of 2 types- call and put.
In the case of the call option, buyers of the option contract have the right to exercise the option when it is favorable to them, in other words when the currency appreciates the buyers of the contracts sell off the currency. Sellers of the call option buy off the currency when the currencies to be traded depreciate. Vice-versa occurs during put option where buyers sell off currency when it depreciates and sellers of the contract by them.
Buyers have full right out of the two parties in the case of options market trading. In this case, neither of the buyers or sellers is obliged to end the transaction at a specific date rather they can hold on to the currency till they face a favorable position and then make a move. Options transaction involves a fee that the buyers pay and sellers receive known as the premium.
Forex is mainly used in international trading for two sole purposes- Hedging and speculation.MNCs abroad often go for hedging because when they operate abroad, they convert the profits and earning into their currency, and during conversion, if foreign currency appreciates, the company loses money, so they hold the currency to avoid any loss of earning.
Speculation is done by traders who want to make gains out of change in conversion rates. The gains in terms of cash inflow are affected by factors such as economic strength, interest rates, and political conditions. If these are favorable, then the traders are at an advantage by choosing the speculating tools of operation.