KEY CONCEPTS. Understanding Currencies

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1 KEY CONCEPTS Understanding Currencies

2 TABLE OF CONTENTS WHAT IS FOREX?...3 HOW FOREX IS TRADED...5 WHERE CAN I TRADE FOREX?...6 WHY TRADE FOREX?...6 TERMINOLOGY...7 AN EXAMPLE OF A CFD FOREX TRADE...9

3 UNDERSTANDING CURRENCIES WHAT IS FOREX? The foreign exchange market, otherwise known as forex, is the official international market for buying and selling currencies. It is a $4 trillion industry, making it the vastest and most liquid financial market worldwide. Also known as Foreign Exchange, FX or the Currency Market, forex is a form of trading as it involves the simultaneous buying and selling of one currency for another. All currencies are traded in pairs, such as the Euro/British Pound (EUR/GBP), or Canadian dollar/australian dollar (CAD/ AUD). Although this form of trading was solely utilized by large banks and institutional traders, the market has now opened up to traders of all types and experience levels. Forex is currently traded by individuals, businesses, financial institutions, central banks and governments. The forex market is run by a global network of banks, dealers and brokers with currencies traded around the clock Monday - Friday. Copyright Icon Markets Limited

The FX market is open 24/5, making it simple to trade around the clock throughout the week.

to pay for goods and services in another.

4 The FX market is open 24/5, making it simple to trade around the clock throughout the week. The market officially opens on Monday morning at 5am in Sydney, Australia, and closes on Friday afternoon at 5pm Eastern Standard Time in New York. Its accessibility, as such, facilitates international trade and investment by enabling companies that trade in one currency to pay for goods and services in another. Currencies are divided into various categories, depending on their type and significance. The most common currencies with the largest trade volumes are known as the majors. These are the largest currencies of the G10 countries and include the EUR/USD, GBP/ USD, USD/JPY and USD/CHF.. THE MAJORS EUR / USD USD / JPY GBP / USD USD / CHF 4

UNDERSTANDING CURRENCIES HOW FOREX IS TRADED Businesses and individuals can trade forex through the spot market, the forwards market and the futures market.

5 UNDERSTANDING CURRENCIES HOW FOREX IS TRADED Businesses and individuals can trade forex through the spot market, the forwards market and the futures market. The spot market is the largest and is where currencies are bought and sold according to the current price. The forwards and futures markets are more common with companies that need to hedge their foreign exchange risks to a specific date in the future. They do not trade actual currencies, but instead deal in contracts that serve as a guarantee to a certain currency type, price per unit or future settlement date. Forex prices are always quoted in currency pairs, as you are always buying or selling one currency for another. Each currency in the pairing is known by a three-letter code, such as EUR/USD (the euro against the US dollar). The first currency listed in the pair is known as the base currency, or primary currency. The second listed currency in a forex pair is known as the quote currency, or counter currency. A forex price relates to how much one unit of the base currency will buy the counter currency. As an example, if EUR/ USD = , this means 1 euro is worth dollars. In order to buy 1 euro, you would need to sell dollars. If you sold 1 euro, you would receive dollars. A CURRENCY PAIR EUR USD Base currency Variable currency 1 unit = X units BUYING base currency / SELLING variable currency SIMULTANEOUSLY Copyright Icon Markets Limited

WHERE CAN I TRADE FOREX? Currencies traded in the FX market are done Over The Counter (OTC) as transactions are conducted between two parties over the phone, or through an electronic network.

Forex trading has many advantages, some of which include: ü Vast market The FX market has a $4 trillion daily turnover in forex trades worldwide, making it the most popular financial market with an

6 WHERE CAN I TRADE FOREX? Currencies traded in the FX market are done Over The Counter (OTC) as transactions are conducted between two parties over the phone, or through an electronic network. Most exchanges can be done by dealers at major banks or through forex brokerage firms. Unlike stocks and futures markets, they are not centralized on an exchange. WHY TRADE FOREX? Forex trading has many advantages, some of which include: ü Vast market The FX market has a $4 trillion daily turnover in forex trades worldwide, making it the most popular financial market with an immense volume of trades taking place in a 24-hour loop. ü High liquidity Because of the large number of traders and the amount of currency traded on a daily basis, the forex market has very high liquidity. This makes the market quite simple for anyone around the world to access. ü Low margin You do not need a large margin to trade currencies, and transaction costs are typically low. The forex markets are also usually free from common commission systems that can make other markets less accessible. EUR / USD MARKET ORDER Current Price BUY OR SELL AT MARKET 6

7 UNDERSTANDING CURRENCIES TERMINOLOGY BID The bid is the first price in a quote and is the price at which the client sells at, or the market maker buys the currency pair in question. OFFER The offer is the second price in a quote and is the price at which the client buys the quoted pair, or the market maker sells the currency pair in question. LONG Going long involves entering a buy position and refers to the direction of the first currency in the pair. If you are long on the EUR/USD, then you have bought euros and sold US dollars. SHORT Going short involves entering a sell position. If you are short on the EUR/USD, then you have sold euros and bought US dollars BUY PRICE SPREAD SELL PRICE Copyright Icon Markets Limited

8 TERMINOLOGY CONTINUED QUOTE A quote is a price for an underlying asset, such as FX. A quote typically includes two prices: a bid and an offer. PIP A pip is the standard increment that is used when defining a price movement of a currency pair. A profit or loss is usually determined by a certain amount of pips in the quote currency. MARKET TAKER a market maker is placing a bid, selling, or buying. MARKET MAKER A market maker creates markets by quoting two-way prices for clients to trade. MARGIN When trading the FX market on speculation, trades are done on margin. This enables you to leverage your investment by entering positions that are larger than the amount of capital you have in your account. The client that is trading on a quote provided by a market maker. In other words, BID OFFER A market taker particpates in the market by placing a bid (selling), or lifting an offer (buying). A market maker actively creates the markets by taking a risk of quoting two-way prices for clients to trade. 8

9 UNDERSTANDING CURRENCIES AN EXAMPLE OF A CFD FOREX TRADE SELECT AN UNDERLYING ASSET You re interested in trading a EUR/USD CFD. Our price is currently set at / priced in pips. BUY OR SELL If you believe that the market will rise, you can buy 1 contract at the offer price of If you believe that the market will fall, you can alternatively sell 1 contract at the bid price of MARGIN CALCULATIONS The value per pip on a EUR/USD trade is $10. So every pip the market moves will be worth $10, whether in your favor or against it. In this example, your total exposure is x $10 = $156,505. However, with a 0.25% margin requirement for 1 EUR/USD contract, you will only need to have $156,505 x 0.25% = $ available. CLOSING YOUR TRADE At 3pm, the EUR is trading higher, and our new EUR/USD price is / You elect to close your trade by placing a sell trade at the bid price of YOUR PROFIT / LOSS You can calculate your profit or loss by taking the difference between the opening and closing prices in pips. In this example, = pips. Because you bought one contract and the market moved to your advantage, your gross profit would be: x $10 = $1155. If the market had fallen by pips, you would have sustained a $1155 gross loss. Copyright Icon Markets Limited

Copyright Alpha Markets Ltd. Page 1

Copyright Alpha Markets Ltd. Page 1 Financial Industry - Module 1 Welcome to this unit on the Financial Industry. In this module we will be explaining the various aspects of the Financial Industry as well