Financial Markets

FX

Currency trading (FX) is the most liquid and robust market in the world. In fact, no other market can compare to the sheer value of this massively traded market. Estimates peg the value of currency trading at around $5 trillion per day, a figure that far outstrips the value of all stock market trading in the world.

You may have noticed that the value of currencies goes up and down every day. What most people don’t realize is that there is a foreign exchange market – or ‘Forex’ for short – where you can potentially profit from the movement of these currencies. The best known example is George Soros who made a billion dollars in a day by trading currencies. Be aware, however, that currency trading involves significant risk and individuals can lose a substantial part of their investment. As technologies have improved, the Forex market has become more accessible resulting in an unprecedented growth in online trading. One of the great things about trading currencies now is that you no longer have to be a big money manager to trade this market; traders and investors like you and I can trade this market.

Different Ways to Trade Currencies

There are many different foreign exchange trading products. The most active and simplest is a spot FX contract. A spot FX transaction entails buying one currency and simultaneously another for settlement in a period of two days for most currencies. Spot FX is traded “over the counter” (OTC) meaning bilaterally between counterparties, one of which is often a bank. In addition to spot, forwards, non-deliverable forwards, swaps and options, comprising approximately 97 per cent of all FX volume, are traded OTC. Individual investors can trade spot FX through accounts with specialized FX brokers or banks subject to local regulation. Institutions can trade with banks or on electronic trading platforms directly or via so-called prime brokers.

FX futures and options are traded on exchanges. Exchanges provide market transparency and equal market access for all participants Futures are traded to fixed expiration dates and are equivalent to spot FX or forwards contracts in terms of gaining market exposure. Options on futures are also listed on futures exchanges. All futures market participants trade through accounts held at futures brokers.

Options products are available OTC as well as listed on exchanges. Like options in other asset classes, options confer the right but not the obligation to buy, in the case of a call, or sell, in the case of a put, a currency pair at a fixed strike price.