Forex Glossaries
Since the advent of the
internet, the forex market has
blossomed into one of the largest financial sectors in the world. Many
have reaped millions of dollars as this market shifted from an exclusive
club to an open-for-all club allowing practically any person to
participate in forex currency trading.
Membership to the forex market has
become easier with the new easy-to-use websites available over the
internet but as with many other industries or
trades, there are no guarantees of success.
In order to succeed, the first step is to learn the ropes. More
fundamental than basic principles is the language used in the
forex market. Without understanding the
jargon, you will find yourself lost in a sea of opportunities, without
any idea what to do.
Forex Glossary
The
exchange rate, which is
the heart and soul of every transaction, specifies the worth of a
currency in relation to the other. The basis of each transaction is the
exchange rate. There are two kinds of exchange rates used in each
transaction—the spot exchange rate and the forward exchange rate.
The current exchange rate
is called the spot exchange rate. On the other hand, the exchange rate
quoted by a trader to be delivered and paid on a specified date is
called the forward exchange rate.
A quotation in foreign exchange is different from how most people
understand it. In currency trading, a
quotation is given for an
exchange rate so that a price is given for every unit of a currency. A
direct quotation uses the
trader’s own currency for the price quotation while an
indirect quotation uses
the traders own currency for the unit quotation. For example, if a
trader from the US quotes $1 for every Euro,
that is an indirect quotation.
There is fluctuation
whenever the exchange rate of a currency changes. Changes are caused by
the demand for a currency. If the demand is high, the currency becomes
more valuable. If the demand is low, the currency becomes less valuable.
The demand for a currency
is determined by the volume of transactions which uses that currency.
For example, the US dollar has become highly valuable because many
transactions use it for trade.
As a currency trader, there are several kinds of financial instruments
that you can use. Financial
instruments can be defined simply as the different kinds of
transactions used by currency traders.
The most common type of transaction for currency traders is the
forward transaction. In a
forward transaction, a buyer and seller agree on a currency trade on a
specified time, regardless of the exchange rate at that time.
A futures is a forward
transaction that is conducted within an average length of three months.
In this type of forward transaction, the size of transaction and the
maturity date are agreed upon as well as the interest amounts.
In contrast, a spot transaction
is conducted within a shorter period of time. A spot transaction is
delivered within two days and involves cash exchange instead of
contracts.
Another type of transaction is a
swap where in one currency is traded for another for a specified
length of time. At another date however, the transaction is reversed. |
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