ISO 4217 has been an international standard established by ISO to defined currencies of different countries. The need for such standardization was felt when it was realized that some of the names of currencies like dollar, pounds and franc are used in many different countries and all have different values in the market. So, by giving a designated code to all the currencies, one cannot get confuse one currency with the other.
The ISO 4217 standard also defines a relationship between major currency unit and its minor currency unit which can be 1/100, 1/10 or 1/1000 of the major unit. Some currencies do not have any minor unit of currency at all like Mauritania. Not only currencies, the ISO 4217 standard is also used for valuable metals such as gold, palladium, platinum and silver and some other entities of international finance like Special Drawing Rights. With this code, forex trading becomes easier and confusion-free and there are less chances for the traders to make silly mistakes.
Like any other field in your life, discipline is also necessary if you are involved in forex trading. Some people are born with the discipline while others need to acquire it. The best way to acquire discipline in trading is to keep some kind of journal with you. The journal can be of very basic type and in that, you have to write what trades you made in the whole day and your reasons for entering into this trade. This kind of journal will be of much help to you and gradually you will acquire discipline in your trading processes.
The contents of this journal will help you in keeping in a line and in this way, you will become your own supervisor. In some time, you will acquire all the discipline that you need and then, you can stop keeping the journal, as its purpose has been served and now you have become a disciplined person.
For more than 160 years, Forex Trading has been a popular form of trading among people who are ready to take risks. However, you may not want to take these risks every time and you want to gain profit for most of the time, here are two timeless rules that will increase your chances of gaining profits.
First and most important of all is to have the basic knowledge of whatever you do. Know your short and long term goals and know how the Forex market functions even before investing into it. The second rule is to select a proper strategy for your Forex trading and applying it in the best possible manner. There are two kinds of strategies which are technical analysis and fundamental analysis. Traders who believe in technical analysis deem that market repeats its past movements and history while traders who believe in fundamental analysis deem that the forex market depends upon the latest news of the country.
Whatever methodology you choose for your Forex trading, remember that you will not always be the winner and be ready to face some losses also.
Forex trading is an investment where you pit one currency against the other. You obviously think that the currency would do better than the other in the coming period. This may or may not be the case however and the result might be a huge loss.
People use Forex price charts to get them enlightened with the positions. For laymen, bar charts are available with normal level representation on bar graphs. The Manhattan built is made on the graph and the highest point is obviously the currency zenith. This makes comparison easier.
Candlesticks are another graphical representation. Here you get the same rectangular designs on the graph but with colors in its inside. Red color indicates that a currency is falling while blue color signifies the converse. Thy make it easy for traders to take decisions, though again they should use their own discretion before getting involved in the trade.
Trade exits are common occurrences in Forex trading. People check the volatile of the times and then see how that is reflecting their current finances. Whether they will survive the onslaught or not is a question. Often one knows that there would an upside but cannot hold stocks till then, resulting in a loss. It is better to pre-empt that and exit the trade losing much less.
People take recourse on the Moving Average Convergence Divergence and see whether a particular stock is failing the trigger. This is done over a 12 or 26 day period. Then there are 1 minute charts laid over 18 to get Relative Strength Index of that pat same share. If the number fails to waver between 25 and 75, it is wise to leave the trade beforehand.
It is obviously advised to take advises from analysts and trading authorities. They know where the trend will be bucked and are in a position to counsel you.
Forex trading is exactly similar to a gambling game, which can be fun when playing and dangerous when losing money. You should always know the market before you attempt to trade forex.
You should never trade in original forex trading without practicing yourself in a demo account. Set apart at least two months for trading in forex demo account. Try to understand the trend in the market and move according to that trend which will bring you success in forex trading. Take help of some good forex trading experts in case you wish to get into forex trading.
Never go for taking more risks than around 2-3% because, you will have to face more unfavorable conditions in the market.
There are different ways of mitigating the exchange rate risk exposure.
- Natural Hedges
- Cash management
- International financing hedge
- Currency hedge
The relationship between the pricing and the costs of the products and services of a foreign subsidiary, many a times, provides for a natural hedge. The key element is the extent to which the cash flows can adjust to currency rate changes.
A prudent and pro active cash management of intra currencies reduces the risk exposure to a great level. If the movement of the currency rate of the foreign subsidiary can be deduced in advance, the cash reserves can be reduced or increased, the trade credit value (debtors) and trade credit days can be increased / decreased (as the situation warrants). This is called leading or lagging.
International financing hedges
- Commercial bank loans and Trade bills
- Eurodollar financing – deposits outside the US but denominated in US dollars
- International bond financing
- Currency-option and Multiple currency bonds – the right to choose the base currency in which payments are to be made / received
Currency market hedges
- Forward exchange market
- Currency futures
- Currency options
One needs to first understand and conduct an assessment of one’s exchange rate risk exposure before adapting any of the hedging techniques.
There are three types of exchange rate risk exposure for a Financial Planner or a Risk manager:-
- Translation exposure
- Transaction exposure
- Economic exposure
Translation exposure is the change in accounting income and balance sheet statements caused by changes in exchange rates. Under the rules of Financial Accounting Standards Board, a US company must determine a functional currency for all and each of its offshore subsidiaries. If such a subsidiary is a stand alone firm with vertical or horizontal integration with the particular country, the functional currency can be the local currency otherwise it has to the dollar.
Transaction exposure is the gain or loss that might occur during settlement of foreign exchange transaction. Such a transaction could be the sale / purchase of product or services lending or borrowing of money or any other transaction involving mergers and acquisitions.
Economic exposure, the most important of the three, is the change in value of a company that accompanies an unanticipated change in the exchange rates. There is a clear distinction between the anticipated and the unanticipated change of exchange rates. The anticipated change has already been factored into the valuation of the company by the market forces. The unanticipated comes as an unforeseen risk.
Forward bookings are like forward contracts, the same as in futures and options (derivatives market).
It is an effective tool for mitigating the risks of exchange rate volatility. There are forward forex booking companies which book contracts with their clients for a fixed exchange rate for a particular currency. Such contracts are to be executed within a given time frame. They (the companies) charge a fixed percentile of the contract value as per the agreed terms and conditions between them and their clientele.
Effectively these companies (risk agents) transfer the risk from their client to themselves.
Mr. A (in US) has purchased cars from Mr. B (in Japan). As per the agreed terms and conditions Mr. A would be making payment of 115,000 Yen to Mr. B on a specified date.
Currency for US: USD
Currency for Japan: : Yen
Current exchange rate:115
Now if on the actual date of payment the exchange rates of Yen/USD are stable then that’s no problem to either of the party. But if the exchange rate surges to 118/USD, Mr. A will benefit by paying less USD for making payment of 115,000 Yen.
The cost for Mr. A would be 115,000/118 = 974.58 USD
However if the Yen/USD exchange rate plunges to 112 Mr. A would pay higher than the budgeted amount.
The cost for Mr. A would be 115,000/112 = 1026.78 USD
To safeguard against any such volatility Mr. A could enter into a forward contract with a Risk agent for a nominal fee. By doing so, the forex risk would be transferred to the risk agent and Mr. A would be guaranteed the Yen/USD exchange rate of 115 for the specified time period.
Like all other trading markets of the capital world the forex rates are also subjected to volatility on account of various parameters like demand & supply, investment flow etc.
Due to such volatility the cost & revenue budgeting of the importers and exporters of various goods and services get affected.
The affect is due to the change is exchange rate.
For example a person Mr. A in US has exported fruits to country Mr. B in Japan.
Currency for US: USD
Currency for Japan: Yen
Hence Mr. B would be making payments to Mr. A on a specific date for a specific amount of USD.
Current exchange rates for Yen/USD is 115
Now, if the exchange rate holds stable on the date of payment its fine for both the stakeholders.
However an increase in the forex rate to 118 would mean that the costing for Mr. B in Japan has increased by around 2.50% whereas a decrease would mean that his costing has proportionately gone down.
On the other hand if the payment is to be done in Yen then an increase of forex rate of Yen/USD to 118 would result in lower revenues for Mr. A in US because the purchasing power of USD has gone up. Effectively Mr. B will get only 1 USD for 118 Yen against the earlier rates ( 115 Yen = 1 USD) where he would have secured 1.02 USD for 118 Yen (118/115)
In order to mitigate the risk of volatility in exchange rates, the risk managers indulge in forward forex bookings.