Foreign Exchange is where one country’s currency can be traded against another’s. Foreign Exchange operates 24 hours a days, five days a semaine. Traders can use leverage and margin to protect against market risk. It is a global marketplace and Central banks trade there on a daily basis.
Foreign exchange is traded by central banks
The central banks play an important role in the global economy and are heavily involved with the forex market. Speculation about the amount of money that a Central Bank might sell is often closely monitored as changes in the FX Rate are often closely followed. For this reason, traders carefully monitor the announcements made by the Central Bank at each meeting.
Two markets are used to trade foreign currency: the interbank and the retail. Large multinational corporations that need to hedge risks and pay employees in other countries often use the latter. More than 50% of transactions are conducted in the top-tier interbank market. Other participants in the market include large hedge funds and some retail market makers specialized on Corporate FX Hedging.
Forex market is available 24 hours a days, five days a semaine
Forex market is open seven days a week, 24 hours a year. The trading hours for each session vary depending on where you are located. In the United States, the New York session runs from 8:00 a.m. to 4:00 p.m. Eastern Standard Time (EST). The Tokyo session runs from 7:00 am to 10:00 pm (local time) in Japan. The London session is held between three and five p.m. GMT in Europe.
The forex market operates in different times zones. Most trading occurs in the afternoon and early hours of the evening. These sessions are the busiest times for forex trading in New York and London. This is when the currency markets have their highest liquidity.
Traders use leverage
To increase their profits or losses, traders use leverage in foreign currency. The trader also has to comply with the obligations that come with leverage. For example, a trader might be subject to a margin call if a currency drops. This forces him to sell the borrowed securities at loss. Another drawback of leverage is the increase in transaction costs.
Forex market leverage can be as high at 100:1, which means that traders can trade up 100 times their initial capital. Some traders argue that this is not a good thing as high leverage can increase risk. However, forex market makers believe that this risk is manageable for a trader who manages his account correctly.
Margin can be used to hedge against market risks
Margin is money that you deposit with a clearing organization or member before opening a position. Margin is not part of a purchase, but a separate entity which provides protection against market risk. There are two types: initial margin is required to open a futures position and maintenance margin is a fixed amount that must always be deposited. The broker can issue a margin request to restore equity if the amount is ever exhausted.
To determine the appropriate amount of margin, a company must have a thorough understanding of its foreign exchange exposure and a strong financial forecasting process. Overhedging due too optimistic financial forecasts could prove costly. Another risky mistake is to hedge based on your personal opinions or personal views about currency movements. This can blur the line between speculation and risk management.
Corporations are involved in trading
Trading foreign exchange is possible for corporations, central banks, investment banking, and other institutions. Individuals and retail brokers can also participate in the foreign exchange market. Corporations use the foreign exchange market to facilitate business transactions and hedge their risks. They also use it for their long-term investment needs. These companies are often located all over the globe.