Forex & Gold
Foreign exchange are traded
round-the-clock involving financial institutions, commercial users
and individual investors around the world. The top foreign exchange
trading centres are London, New York, Tokyo, Singapore and Hong
Kong.
To find out how to be able to trade
in Forex, you may want to go to our Futures
site for more information on how to open a Futures acocunt.
In spot foreign exchange trading, you
can buy or sell a currency priced in terms of another currency in
the interbank spot foreign exchange market through Phillip Futures.
For example, when you buy US$/Yen, you are actually buying US$
priced in terms of Yen. Therefore, when you buy US$/Yen at a rate of
115, it means that you are buying US$1 priced at Yen 115. Later if
your market view is correct and you sell it at Yen 116, you would
make a profit of Yen 1. When you buy a foreign exchange contract,
the contract or position could be closed-out or liquidated later by
an opposite offsetting sell transaction.
In actual trading, however, investors buy or sell in minimum
multiples of US$100,000 for most currencies except British Pound,
Australian Dollar and New Zealand Dollar which would be 100,000 in
BP, A$ and NZ$ respectively. As a trading example, if an investor
who develops a view that on the basis of economic fundamentals
and/or technical analysis that the US dollar is going to appreciate
against the Yen, he can decide to buy US$100,000 at the prevailing
price of Yen 115.00 and then sell if price rises to Yen 120.00.
The result if his view was correct = 120.00 - 115.00 = 5.00 x
US$100,000 = profit of Yen 500,000.
To buy or sell US$100,000, however, you do not need to deposit the
full amount but only a margin of usually 2-5% of the amount traded.
However, investors should be prepared with more than just the
minimum margin deposit to weather price fluctuation.
For investors who use foreign exchange contracts for trading, there
is also no need to do physical delivery of the currencies. Instead,
the foreign currency contract or position would be automatically
rolled-over or carried forward indefinitely until the investor
decides to liquidate the position.
In addition to foreign exchange rate at which determines the profit
and loss of a trade, another factor to note is that there are also
interest rates applicable when buying or selling foreign exchange.
The buyer or holder of the currency which bears a comparatively
higher interest rate will receive interest rate differential between
the two currencies daily while the holder of the opposite currency
which bears a lower interest rate will be debited the daily interest
rate differential. This interest differential is referred to or
calculated as swap points which would be used to discount or add a
premium to the buying or selling prices to reflect the daily
interest earned or paid. For example, the buyer of US$ at a price
Yen 135.00 would have his price discounted to reflect the interest
differential earned (when US$ interest rate is higher then Yen
interest rate). So when his US$ position is rolled forward at the
"spot" delivery date which is two days later, the buying
price of Yen 135.00 would be adjusted to, say, Yen 134.99 if the
interest swap points was 1 point.
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