Questions on international market transactions

1. What is FOREX?

FOREX market is an inter-bank market formed in 1971 when international trade shifted from fixed exchange rates to floating ones. And the exchange rate of one currency against another is determined in the most evident way i.e. exchange of one currency for another at the ratio both parties agreed on. This market exceeds all the other markets in volume. For instance, daily world securities market turnover accounts for approximately 300 billion while FOREX market volume is 1-3 trillion USD per day.

However FOREX market is not a "market" in traditional meaning of the word. It does not have any particular place for trading like stock and shares and currency futures have. On the FOREX market trading is done by the telephone and through computer' terminals simultaneously at hundred of banks worldwide. In addition the futures and stock markets have yet another significant difference and constraint at the same time i.e. trading is stopped at the close of the day and starts anew, or is resumed only in the morning of the following day. And if you trade on the Russian market and some significant things for the market occurs on US market the opening of the market may prove quite different from your expectations.

FOREX market works 24 hours a day, round the clock and exchange of currencies does not stop within the whole working week. Actually in each time zone (i.e. in London, New York, Tokyo, Hong-Kong, Sydney … etc.) there are dealers willing and prepared to quote currencies.

2. Trade objective

The objective of trading on each market is to buy a commodity low and to sell it high. The international foreign exchange market (FOREX) is no exception. But the commodity traded on this market is currencies and exchange rates of different countries. Like any other commodities currencies have their value.

To make settlements between partners located in different countries, to effect interstate settlements and speculative transactions and … etc the banks throughout the world perform currency transactions on the FOREX market. Due to changes in various trade, economic and other indicators discount rate, Central banks policies, time of the day, preferences and expectations of the stock market speculations participants and for a number of other reasons mutual quotations i.e. prices of currencies, or exchange rates are in constant movement. Your task is to try to identify the trend of price movements to buy the currency, which is appreciating, or to sell that currency which is depreciating and to make profit through subsequent reverse transaction. Our dealing centre offers you an opportunity to have in real time mode quotations of different currencies in different banks and the largest world Exchanges - participants of FOREX market. Simultaneously on your screens you see the chart of current prices of each currency being made and you have the latest economic news which directly or indirectly might have an impact on currency quotations.

3. Currency codes

Each currency is assigned a three-character code. For instance the code of USA dollar is USD (United States Dollar), the code of EURO is EUR (EURO), that of Swiss franc is CHF (Confederation Helvetica Franc), that of Japanese yen is JPY (JaPanese Yen), and the code of British pound is GBP (Great British Pound). The currency codes are made on the basis of ISO-4217 standard. As a rule they are made of two characters ISO-3166 country code and the first character, indicating currency. There are but few exceptions to this rule it is, notably, European currency EURO that is codes as EUR and ruble coded as RUB and not RUR as it might be expected.

Exchange rates show ratio of monetary units of different countries in relationship to each other. Currency codes are represented by 6 character words including two three-character currency codes. It is common that the first place is taken by more significant currency. Quotation is traditionally expressed in units of the first currency. For instance quotations of USD for CHF (USD-CHF) show number of Swiss francs for one dollar USA. And quotations of GBPUSD (GBP-USD) on the contrary shows how many US dollars one has to pay for one British pound.

4. How to read quotations?

Quotations normally are expressed by 5-digit number. For instance, USDJPY = 121.44 means that 1 US Dollar is worth 121.44 Japanese yen (i.e for 1 Dollar one is prepared to pay that much yen when buying or selling). At the same time GBPUSD = 1.6262 means that 1 British pound is worth USD 1.6262. In general if in qotation XXXYYY = Z it means that for one unit of X currency you will get Z units of YYY currency.

When quotation changes like USDJPY = 121.44 for USDJPY = 121.45 or GBPUSD = 1.6262 for 1.6263 then they say that the price changed by one point.

Sometimes quotations are given in pairs, for example, 121.44/49. Such form of presenting means the pair of BID and ASK prices. First comes the BID price and the last two figures in a quotation are the ASK price. Remembering that ASK is usually higher than BID and that the difference doesn't exceed 100 points it is always possible without fail to determine the second quotation. In our case ASK price equals 121.49. Studying the charts it is necessary to remember that only charts showing movements in Euro (EURUSD) and British pound (GBPUSD) reflect the actual movements of price (i.e. the higher the curve, the higher the price) and the growth (i.e. upward movement of the graph) of other currencies does not mean growth of prices, it actually means decline of quotations (prices).

5. BID and ASK prices

It is universally known that each deal is made at a particular price.

Each of the FOREX market participants in every particular transaction acts either as a Seller of certain currency or a Buyer thereof. And the Seller offers the currency at a higher price, like GBPUSD at 1.6325 and the Buyer asks to sell it at a lower price, say GBPUSD at 1.6322. So respectively the price of an offer by Seller is called ASK, or asked price, and that of a Buyer is called BID price. Therefore if you expect GBPUSD to go up, to appreciate (in your graph the curve GBPUSD goes up), then you make a decision to buy pound while it is cheaper to sell it later at a higher price. It is possible to buy (this deal is called BUY) only from a Seller who offers the currency (pound, in our case) at ASK price. When you sell the pounds (the operation is called SELL), the Buyer will offer you the BID price for the pounds (it applies to all currencies).

Therefore it means that if you opened position (the operation is called OPEN), i.e. you performed the operation BUY GBPUSD and then you want to close it right away (the operation is called CLOSE), i.e. you want to sell the pounds you have just bought. You can do it only with a loss like it might be at any foreign exchange bureau. Therefore to make a profit the price of currency should go along the direction longer than the difference between BID and ASK.

The third digit is called LAST on the FOREX market - it is an average of the last BID and ASK.

To sum up the above we say that for USDCHF and USDJPY opening of position for lowering the price (that is BUY) is done at BID price, and close at ASK price, respectively, opening of position for increase (i.e. SELL) occurs at ASK price and close at BID price. For GBPUSD and EURUSD OPEN BUY (upward) is performed at ASK price, and CLOSE - at BID price; OPEN SELL (downward) - at BID price, and CLOSE, respectively, - at ASK price.