Lincolnshire Direct

Lincolnshire Direct

Corporations, investors, and speculators access the foreign exchange market through dealers, who can be the direct counterparty or a middleman. For most travelers, the airport kiosk is their foreign exchange dealer. Corporations, mutual funds, and hedge fund managers, on the other hand, directly call in to the dealing or sales trading desks of Goldman Sachs or Citigroup to conduct their transactions. Individuals are usually not trading large enough amounts to matter to a big bank like Goldman Sachs and so, instead, they will usually access the market through a retail forex broker or an exchange.

Exchange

One of the unique aspects of the forex market is that there is no formalized exchange such as the NYSE (New York Stock Exchange) or the CME (Chicago Mercantile Exchange). Underlying currency transactions are done over the counter, which means they are handled directly by dealers. The lack of a formal exchange is probably the main reason some people are hesitant about dabbling in currencies, but the competition in the market has made pricing extremely competitive and forced many forex dealers to offer free educational resources and tools that would normally cost hundreds of dollars a month. The governments of many countries have also instituted tough rules and capitalization requirements for the dealers to protect investors and traders.

Fundamentals

Generally speaking, the movements in currencies reflect how investors and speculators feel about the economic outlook of one country relative to another. Looking at concrete economic data or hard numbers to compare the outlook of two countries is known as fundamental analysis. There are many different ways to analyze the markets on a fundamental basis; the topic is so important that an entire chapter is dedicated to it.

Going Long and Short. One of the interesting things about currencies is that in a forex transaction, you are going long one currency and short another simultaneously. This is important because it means that you are exposed to the fluctuations of two currencies. For example, the Australian dollar/New Zealand dollar exchange rate will rise if investors buy Australian dollars, sell New Zealand dollars (NZD), or both. Theoretically, if the AUD and NZD rise at the exact same time by the same amount, the exchange rate will not moveā€”just like with the tango, nothing happens except toes being stepped on when both dancers move forward.

Hedging. Most companies dabble in the forex market to hedge or offset the currency-related exposure of their import or export activities, but they are not the only ones that can benefit from hedging. When stock markets around the world collapsed during the global financial crisis, investors poured into the safety of the U.S. dollar and low-yielding currencies. As a result, investors who wanted to protect against additional losses in stocks could have hedged their positions by buying U.S. dollars, Swiss francs, and Japanese yen. Hedging accounts for a lot of the big transactions that flow through the forex market.


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