ABOUT FOREX
Foreign Exchange ("FOREX")
1.Availability
24 hour-a-day trading allows investors,
hedgers and traders to gain access to their foreign
currency investments and permits them to minimize their
exposure in various markets across international time
zones.
2.Maximum
Liquidity
With over $1.6 trillion traded daily (compared with
$20 - $30 billion a day on the New York Stock Exchange),
this massive participation enhances liquidity. Unlike
the commodity futures or stock markets where a lack
of buyers or takers while sellers are liquidating their
open positions, results in a thin market and precipitous
price drops, FOREX traders are often able to liquidate
their positions with one-price execution (barring extreme
fundamental factors such as declaration of war, act
of terrorism, natural calamities, communications failure,
etc.).
3.Attractive
Pricing
One-price execution based on current inter-bank spot
rates for as much as 50 contracts at a time. When dealers
quote a price, a trader has the option to accept or
reject it at that very moment. When and if the trader
accepts the quote, a transaction is completed.
4.Execution
Market orders are executed and confirmed online or with
a single phone call.
5.No
Expiration Date
Open FOREX contracts can be rolled-over daily for an
indefinite time period.
6.Deliverable
Contracts
FOREX contracts can be delivered upon payment of the
full contract value and are repurchased or sold on a
spot basis not on a futures price.
7.Hedging
Tool
Importers and exporters, or investors involved in international
trade, can minimize their risk exposure by hedging in
FOREX.
8.Low
Commission Fees
Commissions can be as low as 0.00075
of the absolute market value for one complete round-turn
contract (less than one-tenth of one percent). Compare
that to stocks where commissions run as much as 3% (three
percent) of the total contract value, when initiating
and another 3% when liquidating a position.
Contract
Systems
| |
Currency |
Contact Size |
| |
Euro |
=EUR |
100,000 |
| |
Japanese Yen |
=JPY |
100,000 |
| |
British Pound |
=GBP |
100,000 |
| |
Swiss Franc |
=CHF |
100,000 |
Margin
Requirements (US Dollars)
| Day & Night Trade |
|
2% of Contract Value |
| Commission Charges |
|
$75 per contract settled |
Sample
Trade
- Bought 5 contracts of GBP at the
rate of 1.4500.
- Sold these 5 contracts at the rate of 1.4600 on the
same day.
- Net profit/loss calculation would be done as follows:
| {(Selling
Price - Buying Price) x Contract Size x No. of contracts}
- (No. of contracts x Commission per contract) |
| Selling Price |
= |
$1.4600 |
| Buying Price |
= |
$1.4500 |
| Contract Size of GBP |
= |
100,000 |
| No. of Contracts |
= |
5 |
| Commission Charges |
= |
$75/contract |
| By
putting the values in the formula |
| {(1.4600-1.4500) x 100,000
x 5} - (5 x $75) |
| = (0.01 x 100,000 x 5)
- (5 x $75) |
| = 5,000 - $375 |
| = $4,625 |
Therefore, $4,625 is the net. But if the buying price
is at $1.4600 and the selling price is at $1.4500, it
will result into a loss. To protect against losses or
to minimize a loss, one may apply the cut loss criterion
wherein a buying position is liquidated when and if
the trend goes against one's position e.g. Liquidating
when GBP touches $1.4570 or lower (a 30-point stop loss
order).
|
