Foreign exchange, also known as Forex Trading, is a critical part of every international business relationship, allowing businesses in every corner of the globe to send and receive payments for goods and services. In order to best take advantage of forex trading, it is important to understand how it works: Arguably the largest and most important market in the world is the global currency market. If, hypothetically, all trading in equities, fixed income, derivatives, and commodities were to suddenly cease, currency trading would still continue, as people, businesses, and governments would still have to pay for various goods and services between each other.
To do so, they would still require forex trading in order to transform and move currencies from one country to another. In , the majority of countries ceased linking their currencies to the value of gold.
As a result of the move away from gold as a pricing standard, the forex trading market and surrounding industry blossomed. With the exponential growth in forex trading volume came a corresponding increase in liquidity and volatility, as well as a dramatic increase in trading and pricing speed.
Making the forex trading market even more complex is the fact that, unlike other securities markets, it is a truly twenty-four hour market. Forex trading takes place in every country, giving rise to arbitration opportunities every moment of every weekday. Because of this, timely and accurate pricing quotes are paramount in executing profitable forex trades.
When there are discrepancies in pricing, the opportunity for triangular arbitrage arises, and for traders who can execute forex trades in milliseconds, there are profits to be made. There are some basic forex trading tools everyone should be familiar with when executing currency trades: Forex trading revolves around one central piece of data: Every second of every day, Monday through Friday, there is a live quote for every actively traded currency in the world.
Knowing this spot rate gives a business the ability to calculate, at every moment, the value of the currencies that business holds, as well as the value of accounts receivable in foreign currencies, and the obligations due in foreign currencies. To trade using the spot rate, a spot contract is used. The spot contract allows a business to buy or sell a currency at the very moment it places a currency transfer, similar to how someone generally buy gasoline to fill up their car: A forward contract allows a business to purchase or sell a specific amount of currency in the future, at a price they agree to at now.
This would be like agreeing to pay or receive a specific price for a gallon of gasoline at a future date. Using forward contracts to lock in forward rates is also a useful forex trading tool, allowing a business to accurately predict its cash inflows and outflows, by locking in exchange rates for a future point in time.
By knowing precisely how much foreign currency they will receive or have to pay out in the future, at what exchange rate, the business can focus on its business, instead of fretting over their cash management. Forward contracts are best locked in with foreign exchange providers, who can ensure swift and seamless transfers on the settlement date.
Future contracts are similar to forward contracts in forex trading, but they are pre-existing currency exchange contracts, which can be bought and sold on derivatives exchanges. This can all be distilled to two important criteria when selecting a currency exchange provider: Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Phillip holds a B.
Article s on this website that are identified as being prepared by third parties are made available to you for information purposes only.
These third party articles do not represent the opinions, views or analysis of American Express and American Express does not make any representations as to their accuracy or completeness. If you have questions about the matters discussed in those articles, please consult your own legal, tax and financial advisors. All users of our online services subject to Privacy Statement and agree to be bound by Terms of Service.
Skip to main content. Check your balance, review recent transactions and pay your bill on the go. Save when you book your next trip online with American Express Travel.
Select from over 35 designs. United States Change Country. Log In Log Out. Search US website Search Search. Log in Inquire Now Get Started. Industry Solutions Financial Institutions. What Is Forex Trading?
Back To More Articles. Inquire Now Get Started. Existing FX International Payments customers log in here. Industry Solutions - Financial Institutions.More...