MF Global

FX Handbook

What is Forex?

Foreign Exchange (FOREX) is the simultaneous buying of one currency, and selling of another currency. Daily volume in the currency market exceeds $1.4 trillion, making it the largest and most liquid market in the world. Unlike other financial markets, the forex market has no physical location or central exchange. It is an over-the-counter market (OTC) where buyers and sellers including banks, corporations, and private investors conduct business. Foreign exchange trading takes place in financial trading centres all over the world, including New York, London, and Tokyo creating one cohesive, international market. The huge number and diversity of players involved make it difficult for even governments to control the direction of the market. The unmatched liquidity and around-the-clock global activity make forex the ideal market for active traders.

Traditionally forex was only available to larger entities trading currencies for commercial and investment purposes through banks. Now with the product Margin FX, it enables private investors and smaller corporations access to similar level of liquidity and inter-bank pricing.

Buying/Selling

In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought (sold) has increased (decreased) its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to realise the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

Quoting Conventions

The first currency in the pair is referred to as the base currency, and the second currency is the terms currency. The U.S Dollar, as the world dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the EUR, GBP, and AUD. These currencies are quoted as dollars per foreign currency.

As with all financial products, FX quotes include a “bid” and “ask”. The bid is the price at which a market maker is willing to buy (and clients can sell) the base currency in exchange for the counter currency. The “ask” is the price at which a market maker will sell (and clients can buy) the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread.

In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip. In forex, like any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread define the trader cost, which can be recovered with a favourable currency move in the market.

Initial Margin

The margin deposit is not a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value.

In the event that funds in the account fall below margin requirements, MF Global will request for additional funds to be deposited into the account. This prevents clients’ accounts from falling required the available equity even in a highly volatile, fast moving market.

What Every Currency Trader Should Know

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. Without proper risk management, this high degree of leverage can lead to enormous swings between profit and loss. Knowing that even seasoned traders suffer losses. Speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one’s personal financial well being.


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