Each country has its own currency. Whenever one currency is exchanged with another it is a foreign exchange or Forex transaction.
The foreign exchange market has experienced many changes since its inception. For many years the United States and its allies participated in a system under the Bretton woods Agreement.
The foreign exchange rates were tied to the amount of gold reserves belonging to the nation.
However in the summer of 1971, President Nixon took the United States off the gold standard. After this many countries followed and there was no relation between the gold reserves and the exchange rates. Floating exchange rates materialized.
Today supply and demand for a particular currency or its relative value is the driving factor in determining exchange rates. The fall of communism and the dramatic growth of the Asian and Latin American economies have decreased obstacles and increased opportunities for investors in foreign exchange. Increasing trade and foreign investment have made the economies of all nations more and more interrelated. Economic figures are regularly reported around the world.
Inflation, unemployment levels, unexpected news, such as natural disasters or political instability, alters the desirability of holding a particular currency. This influences the international supply and demand for that currency. The U.S. dollar, therefore, fluctuates constantly against currencies of the rest of the world.
Forex investments are investments in a currency other than that of your own country. If you have U.S. dollars your investment is in dollars. If you have British Pounds your investment is in Pounds.
You desire to visit a foreign country. You know the approximate amount of money you will spend. You have the option of either taking your own currency to that country or exchanging the same when you visit that country.
You also have the option of exchanging the currency in your own country and keeping the currency of the foreign country with you well before you visit that country. e.g. You are to visit Japan but you are at present in New York. You can change the U.S. dollars into Japanese Yen before you leave. This is a foreign exchange investment.
You would do it if you think the Yen is going to become stronger. i.e. In future you will get less yen for dollars.
Forex investments are trading in future by options.
An option gives you the right, but not an obligation, to buy or sell a specific amount or foreign exchange at a specified price within a specified period.
Options are either call or put, Calls give the holder the right to buy the foreign currency or Forex at a specified price. Puts give the right to sell Forex at a specified price.
Depending on the actual market price when you exercise the option you will gain / lose the difference between the specified price and the market price.
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