$50
3 pips
$50
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What is forex? Well, forex is just shortened market terminology for foreign exchange. As international commerce continues to grow, the forex market has become the largest financial market in the world today, encompassing a total transaction volume averaging trillions of dollars each business day.
Exchange Rates and Currency Pairs
When used among market participants, forex trading generally refers to a financial transaction involving the exchange of the currency of one country for the currency of another at a particular rate of exchange or exchange rate. These exchange rates fluctuate along with important factors pertinent to each of the countries involved that might include such things as:
- Economic prospects.
- Interest rates.
- Credit status.
- Fiscal policies.
- Governmental Stability.
- Supply and Demand.
- Currency Reserves.
Every forex transaction involves the simultaneous purchase of one currency and the sale of another that together form the involved in the transaction. The first currency in the forex transaction is commonly referred to as the primary or base currency, while the second currency will often be termed the counter-currency.
Forex Quotations and Conventions
In the foreign exchange market, forex quotations will generally be expressed as a ratio of the valuations of each currency. In this ratio, units of the base currency will be expressed in terms of units of the counter-currency. When discussing forex rate movements, such units are commonly known as “pips” and usually refer to a single unit move in the fourth significant figure seen in the foreign exchange quotation. Larger forex rate moves involving 100 pips would be called a “big figure” move, while 200 pips would be two big figures, etc.
Traditionally, the U.S. Dollar becomes the base currency when dealing it against the:
- Japanese Yen.
- Canadian Dollar and.
- Exotic currencies - those of often smaller or developing countries.
Nevertheless, when dealing the U.S. Dollar against the currencies of well-established nations like the:
- European Euro (a consolidated currency).
- United Kingdom’s Pound Sterling.
- Australian Dollar.
- New Zealand Dollars.
the U.S. Dollar becomes the secondary counter-currency in the forex transaction.
These forex market conventions result in a common shorthand notation for each currency pair in which three letters that denote the base currency are separated by a slash from three letters denoting the counter currency. Accordingly, if you want to refer to the exchange rate of the U.S. Dollar against the Japanese Yen, you would write USD/JPY in this shorthand. On the other hand, if you wanted to refer to the U.S. Dollar’s exchange rate against the European Euro, you would write EUR/USD since the Euro is the base currency in that pair, not the Dollar.
Forex Contract Delivery
The date on which both parties to a forex contract must deliver the respective currencies to each other’s bank accounts is commonly referred to as the “delivery date” of the forex trade. The delivery date on most forex contracts transacted will be for value “spot” or two business days later, although spot delivery is typically only one business day for USD/CAD.
Forex transactions can also be delivered in one business day (referred to as value tomorrow or “tom” for short) or they can be delivered at some other specific future date. The forex rate for delivery on such dates, commonly known as the forward rate, will differ from the spot rate according to a calculation involving the prevailing spot rate plus the swap points which are computed from the interest rate differential observed in the market between the two currencies for the desired delivery date.
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