Zona asked in Business & FinanceInvesting · 2 months ago

I have a question about the Forex market?

I’m learning about the foreign exchange market and I’m starting to understand it better but I’m still mad confused about certain things. I know my questions might come off as stupid but I'm still learning. 

1. I know when different countries exchange goods, if the USA has to buy goods from the UK using the UK currency and then the forex market gives them the relevant exchange rate. The US can “fix” the Future exchange rate by buying on a forward contract. But why does the forex market’s exchange rate need to be fixed? Is the forex market’s exchange rate not exact? 

2. The buying company can fix the exchange rate but they’ll miss out on savings if the market moves in their favor. Would the market move in their favor if the price of USD in British Pounds winds up being cheaper? Or am I wrong? 

3. This would be the currency pair USD/GBP. Would the market go up or down if the US to UK conversion is cheaper? Or am I missing something?

Update:

2. How would the market move in the US’s favor?

2 Answers

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  • 2 months ago
    Favourite answer

    <<<1. I know when different countries exchange goods, if the USA has to buy goods from the UK using the UK currency and then the forex market gives them the relevant exchange rate. The US can “fix” the Future exchange rate by buying on a forward contract. But why does the forex market’s exchange rate need to be fixed? Is the forex market’s exchange rate not exact?>>>

    Let's say I control an American company and sign a contract to sell one million devices to another company every month for the next year for one hundred American dollars each. In order to make the device I need a component manufactured in the UK. I sign a contract to by buy one million of the components every month for the next year for ten British pounds each. Both contracts require payment upon receipt.

    I know I am going to need 120 million British pounds over the next year. If I bought all of them today I would have borrow the money and pay interest on the loan. Instead I use forward contracts to establish exactly how many American dollars I will pay for each ten million British pound payment. The use of the word "fix" does not mean anything is broken, it simply means to establish the rate regardless of any future fluctuations in the exchange rate.

    <<<The buying company can fix the exchange rate but they’ll miss out on savings if the market moves in their favor.>>>

    That is true.

    <<<Would the market move in their favor if the price of USD in British Pounds winds up being cheaper?>>>

    If they entered into the futures contracts it does not matter how the price (exchange rate) changes. 

    If they had not entered into the futures contract it would would cost the company paying American dollars for a product priced in British pounds.

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    If you are thinking about making speculative trades in the forex market remember it a "zero sum game" meaning that for every dollar one investor makes another investor loses a dollar. If you are a new trader expect to lose money to more experienced traders.

  • Anonymous
    2 months ago

    You and millions of others need to run away fast from forex. 99.9% are going to lose money and your chances of being the 1 in 1000 are 1 in 1000.

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