FOREIGN EXCHANGE (FOREX)

The Foreign Exchange Market (Forex) is a worldwide market for buying and selling currencies. It is the single largest market around the world with a volume several times that of the New York stock exchange for example. The major market players on Forex include: central banks, commercial banks, investment firms, and retail brokers.

The currency prices are affected by an assortment of economic and political conditions. The most important are interest rates, global trade, inflation and political stability. Governments may participate in the market by either flooding the market with their domestic currency in an effort to decrease its price or, conversely, buying their currency in order to elevate the price. This is known as central bank intervention. Any of these factors, as well as large market orders, can initiate high volatility in currency prices. However, the size and volume of the Forex market make it virtually impossible for any one entity to "force" the market for any length of time.

Trading on Forex involves selling one currency and buying another ("trading in pairs"). Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the international three-letter code of the currency into which the price of one unit of XXX is expressed. For example, the EUR/USD pais is the price of the euro expressed in US dollars, as in 1 euro = 1,2045 dollars. 

Forex is traded on margin. The Liqvinet margin requirement varies between 2 - 4 %. For a complete list of margin requirements click here.

Characteristics of the Forex market:

• huge trading volume
• extreme liquidity of the market
• large number and variety of market participants
• geographical dispersion
• long trading hours - 24 hours a day, 5 days a week (except on weekends)
• variety of factors affecting the exchange rates
• OTC market i.e. no central exchange
• low margin requirements (normally between 2 - 4 %)

Trading examples:

Forex is traded in lots of 10 000 base currency. To keep the examples simple, the examples below are calculated excluding possible earned or paid roll-over interest (see "Rollovers" below for more info).

1. You assume that the Euro will rise against the US Dollar and buy 50 lots (500 000) EUR/USD at 1,4067. 
The margin requirement is 2 % (10 000 EUR), the commission fee is 500 000 x 0,015% = 75 EUR.

 a) You are right and the price of EUR/USD rises.
      You close the position (sell 50 lots) at 1,4167. Commission fee = 75 EUR.
      Gross profit = (sell price 1,4167 - buy price 1,4067) x (500 000 / sell price 1,4167) = 3529,33 EUR.
      Net profit  = gross profit 3529,33 EUR - commission fee 150 EUR (75 EUR x 2) = 3379,33 EUR.

 b) You are wrong and the price of EUR/USD decreases.
      You close the position (sell 50 lots) at 1,3967. Commission fee = 75 EUR.
      Gross loss = (sell price 1,3967 - buy price 1,4067) x (500 000 / sell price 1,3967) = -3579,87 EUR.
      Net loss = gross loss 3579,87 EUR + commission fee 150 EUR (75 EUR x 2)  = -3729,87 EUR.

2. You belive that the Euro will fall against the US Dollar and sell short 50 lots (500 000) EUR/USD at 1,4089.
The margin requirement is 2 % (10 000 EUR), the commission fee is 500 000 x 0,015% = 75 EUR.

a) You are right and the price goes down.
     You close the position (buy 50 lots) at 1,4033. Commission fee = 75 EUR.
     Gross profit  = (sell price 1,4089 - buy price 1,4033) x (500 000 / buy price 1,4033) = 1995,30 EUR.
     Net profit = gross profit 1995,30 EUR - commission fee 150 EUR (75 EUR  x 2) = 1845,30 EUR.

b) You are wrong and price goes higher.
     You close the position (buy 50 lots) at 1,4127. Commission fee = 75 EUR.
     Gross loss = (sell price 1.4089 - buy price 1.4127) x (500 000 / buy price 1,4127) = -1344,94 EUR.
     Net loss = gross loss 1344,94 EUR + commission fee 150 EUR (75 EUR x 2) = -1494,94 EUR.

Rollovers

The positions open on Forex are automatically rolled over at 5 PM EST (New York time). For positions left open overnight, you may pay or receive the rollover fee. It is calculated by the difference in the interest rates that apply to the two currencies in the currency pair that you are trading.