- The FOREX market is a globally-connected community of currency brokers responsible for facilitating the exchange of the world's currencies. This exchange occurs at prices called exchange rates, which reflect the relative market value of two currencies at any given moment. Exchange rates experience fluctuations in direct proportion to the constant changes in the supply of and demand for specific currencies. The consequent uncertainty fosters an atmosphere of speculation conducive to short-term investing in addition to practical considerations.
- The need for converting money from one currency to another represents the FOREX market's practical function. Consumers engage in currency conversion any time they change money at a change kiosk located at an airport or major urban center. Currency conversion occurs on a large scale when countries import or export goods and services. It should be noted that the currency received in a conversion will not be exactly in line with the market exchange rate due to fees or percentages charged by the broker.
- For speculative investors, the FOREX market is an exciting trading environment. Widely regarded as the world's most solvent market, the FOREX market carries lucrative trading opportunities from only small changes in currency prices. With an expanding online presence which began in the early 2000s, currency speculation now constitutes the majority of trades placed on a given day. In addition to holding, speculative currency practices have grown to include currency options, as well.
- Currency options, sometimes called FOREX options or FX options, are options contracts where the underlying asset is a specific exchange rate (e.g., U.S. dollars against U.K. pounds sterling). Many investors hold currency options with a traditional options structure in order to hedge exchange rate risk associated with offshore holdings in a portfolio. For those seeking a fast clear-cut return, binary currency options offer a predetermined cash payoff if the underlying exchange rate reaches a specific level by the expiration date (with no payoff at all if unsuccessful).
- For those who invest in offshore securities, dividends, interest payments and capital gains are denominated in the currency of the issuing country. Such investors generally have standing instructions with their investment bank to repatriate, or convert, all offshore payments into the domestic currency. Under market rules, payments are credited to investors at the exchange rate on the date payment is due without regard to when the investment bank actually executes the conversion.
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