foreign_exchange.htm

Foreign Exchange, often called Forex, facilitates international business of every kind. As a home-based entrepreneur, you may be losing opportunities and money if you are unaware of how this system works.

As with any business, currency trading involves risks. J.P. Morgan has been quoted as saying, “financial markets will continue to fluctuate.” This is truly an understatement. However, it's through risk that businesses profit—it's the reward entrepreneurs get for taking chances to bring consumers goods and services.

What is Foreign Exchange?

Foreign exchange is the act of converting the currency of one country into that of another. A familiar example occurs when a U.S. citizen goes to Germany on business. Whatever she buys in Germany will be paid for with Euros purchased with U.S. Dollars. The difference in price between these two currencies is either a bonus or an extra cost for the traveler, depending on whether the U.S. Dollar will buy more or less Euros per USD (US Dollar).

Importers, exporters, and global businesses of every sort are engaged in changing from one currency to the other regularly. All of this activity works to make foreign exchange the largest of the global financial markets. On many days, an estimated $1.5 trillion dollars changes hands. Those involved in this market include international banks, multi-national corporations, and large brokerage houses trading in huge currency volumes.

Except for some kinds of options to purchase or sell currency, there is no central trading floor for foreign exchange. It is all conducted through individual contracts with participating banks and brokerage houses. There is generally no regulation of this market in the United States nor in most other countries of the “free world.”

Forex options are mostly traded on the Philadelphia Stock Exchange (PHILX) or the Chicago Mercantile Exchange (IMM). These options have standardized expiration dates, sizes, and strike prices.

Why Understanding Foreign Exchange Is Useful or Important:

Investors can make money by speculating in currency transactions. Many currencies freely float against the others with no controls or regulations. This condition obviously gives rise to opportunities to profit from price fluctuations of one currency against another.

For instance, if you bought the Euro in June 2001 at its average low of about 1.17 Euro/USD ($0.85), and you sold it in September 2001 at its average of about 1.09 Euro/USD ($0.91), you would have made a profit of $0.06 USD/Euro.

Some people treat Forex as an investment medium in much the same manner as day trading. Risks are high in both of these practices.

Travelers to foreign countries want to know exactly how much the trip will cost. This can be determined precisely using Forex either as a spot purchase or a forward trade to cover a future trip.

Currency exchange facilitates any export-import business by defining actual transaction costs. If an entrepreneur doesn’t consider the exchange rate, they are likely to lose money on foreign business.

Many businesses buy and sell assets located in countries other than their own. Several international currencies may be involved in a transaction. Forex may be used to hedge against business losses in this kind of market.

Marketing companies need to know their real costs when a price is quoted to a foreign customer. A currency decline in the purchaser’s country will result in less revenue to the seller.

Likewise, a producer must know if they can afford to purchase raw materials from other countries. If the other currency rises, the producer’s cost will be more than anticipated because more producer currency will be required to buy the rising foreign money.

Farmers are often involved with foreign exchange because of international trading of farm products. Currency fluctuations influence the price paid for many things we use frequently and take for granted like wheat, sugar, and tin.

On the Internet, prices for electronically transmitted products like e-books are usually quoted in the seller’s currency, as in “$19.95 AUD.” The Australian seller is relieved of concern about the exchange rate, but it could greatly impact the buyer if they don’t live in Australia.

Credit card and online payment companies will charge in the buyer’s own currency. The actual purchase price may be more than $19.95 in the buyer’s money.

Onanda.com (www.oanda.com/channels/business/FXCommerce.shtml) offers a special service enabling businesses to quote instant prices in local currency to foreign buyers. This makes the buying decision easier. The service can be installed on your Website.

How do you know when to use Forex?

Any person, including a vacation traveler, might look at historical exchange rates or any other available information to decide when to lock in a rate for their own currency conversion.

Most Forex decisions, such as those of a farmer who buys a foreign currency to protect his profit on a foreign sale, or a manufacturer who needs raw materials right now, are not speculative in nature. These people act on the situation as it is when they need their money.

The two basic Forex contracts are called “spot” and “forward” contracts. The spot contract settles within two business days while a forward contract may have any future date to close.

Most Forex actions are of the forward variety because businesses usually need time to produce a product or service before delivery. The forward contract allows everyone to know exactly the cost regardless of the ultimate delivery date.

How can an entrepreneur participate in the foreign exchange market?

There are many Websites offering foreign exchange. Be careful when you visit them, and be sure they are operating from your own country. If you live in the United States, use a company located in the United States. Wherever you are, find a local Forex company. Many countries have no rules or restraints on currency exchange, but some do, so trade with someone you are sure is following all the appropriate regulations.

Online Forex Companies:

If you want to buy currency for a trip abroad, try www.x-rates.com. This company currently quotes about 15 currencies for sale. Their order form shows the present rate in U.S. Dollars for each currency. You can use your credit card and they will ship the currency to your door.

Global Forex at www.forexonline.com is another site allowing trades from 7 P.M. (EST) on Sunday to 3 P.M. (EST) on Friday. You can get real-time prices and news all day every day. The company has a Demo Account you can use to invest without risk. There is also extensive information on how to trade. They have a Mini account you can open with only $300.

Global Capital Investment, LLC (CGI) (www.globalcap.com) offers “Mini Contract Trading.” You can start with $500 to open your account. CGI requires a margin of $50 per lot, about $10,000 USD, under a “Mini Contract.”

Oz Forex (www.ozforex.com.au) is an excellent Australian company organized especially to serve smaller business. This site has excellent information on how foreign exchange works. If you know nothing about Forex, visit this site first.
Foreign Exchange is a useful tool. Learn all you can and use no-risk demo accounts to become familiar with this market. It can help your business be more successful.

If you have products and services in demand in other countries, you are losing money if you aren’t selling there. Forex can help you profitably reach these customers.

SOURCES

Onanda.com offers an instant local currency quote for your Website, www.oanda.com/channels/business/FXCommerce.shtml

This company will deliver currency to your door overnight: www.x-rates.com/

Global Forex offers no-risk trading online with a Demo Account, www.forexonline.com/

Global Capital Investment has a Mini Contract account for small trading, www.globalcap.com/

Oz Forex is an Australian online trader where you can learn everything about Forex, www.ozforex.com.au/default.htm

Article by Yank Elliott, a home-based entrepreneur and freelance business writer in Belhaven, North Carolina, USA. His Website is www.furriwhalesworld.com. He is currently a staff writer for IAHBE. Contact Yank at globalbiz@furriwhalesworld.com.