Forex – For+ex. It involves foreign currency trade and exchange. Foreign exchange involves changing one country’s currency into another currency for commercial and tourism purposes. You can trade in foreign currency through your forex trading account or the currency trading account.<\/p>\n
Just like the share market, the Forex market deals with foreign currencies of different countries. As an investor, you can buy and sell foreign currencies here for profit. Unlike share markets, the forex market’s open timings differ depending on the country. Also, the regulatory body here includes RBI apart from SEBI as it involves forex currencies.<\/p>\n
You can trade foreign currencies in three ways – Spot market, forwards, and futures market. Spot market involves direct trade in the market, while futures and forwards majorly involve companies that aim at hedging the forex risks out to a specific future date.
\nForwards and futures do not trade in actual currencies. It deals with contracts that represent a claim on a future date. The contract is made for a particular currency at a specific rate to be settled at a specific date. The primary aim of these contracts is to hedge the risk of price speculation in the future.<\/p>\n
Companies involved in foreign transactions or foreign businesses invest in Forex futures and forwards to hedge the risk in price fluctuations. Here is an example of how forex hedging works.<\/p>\n
Let us assume that a company ABC plans to sell its product in the US. The manufacturing cost involved is INR1000 and the selling price at the US market is fixed at USD30 for a future date. Now, in this case, if the company sells the product at $30 with an exchange rate of 1$=75INR, the company makes a profit of around 1250INR.<\/p>\n
In case, the USD\/INR rate on the expected date depreciates to 1$=70INR, the company makes a profit of only 1000INR. To hedge this risk, the company buys a future or swap contract at the fixed price of 1$=75INR on a future date. By executing this contract, the risk involved in the price fluctuation is hedged.<\/p>\n
Factors like interest rates, tourism, economic status, and natural pandemics affect the price of forex currencies. An investor can watch the market and hold the respective currency in his\/her currency account to profit from the change.<\/p>\n
For example, if the interest rates in the US increase, it indicates an increase in demand for the USD. In this case, if the investor holds USD in his\/her account for a longer time, the profit ratio increases.<\/p>\n
To open your forex currency trading account, you need to submit your income proof as well as the regulatory bodies include RBI. The other documents required for opening your currency trading account includes:<\/p>\n