Table of Contents
Chapter 1: What is Forex Trading
Chapter 2: History of Money and Origins of Forex Trading
Chapter 3: Forex Trading Terminology
Chapter 4: Important Aspects of Forex Trading
Chapter 5: Players in The Forex Market
Chapter 6: Factors that Affect the Forex Market
Chapter 7: Risks Involved With Trading Forex
Chapter 8: Why Trade in the Forex Market
Chapter 9: How Forex Trading Works
Chapter 10: How to be a Successful Forex Trader
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Chapter 8: Why Trade in the Forex Market
– Hedging for Protection from Risks
– Speculation for Making Profits
Chapter 8: Why Trade in the Forex Market
Forex trading is conducted to primarily achieve either of two investment goals – lowering risks and making profits. The first one is the objective of hedgers while speculators aim to fulfill the second goal.
Hedging for Protection from Risks
Currencies are very volatile, with prices changing almost constantly. For those who will need a specific foreign currency at a future date, there is no way to predict exactly how the price will stand then. If the currency is required for business needs, then the uncertain price poses many problems.
For example, let’s say a component needs to be imported from Japan for production of TV sets in the US three months from now and the component needs to be paid for using yens. This component is critical to the production of TV sets.
The purchase will need adequate funds three months from now. Unless the company has a fair idea of the expenditure involved, it is difficult to make funding arrangements in time.
The value of Yen as compared to the Dollar three months in the future will determine how much money is needed to purchase the components. As currency prices fluctuate all the time, it is impossible to make an accurate prediction of Yen value three months down the line. The business can take advantage of forex trading in such a case to hedge the risk of Yen rising in value by component delivery date.
This brings a certain amount of certainty in the price of Yen for this deal and lets the company fix the price of its TV sets with reasonable accuracy.
Speculation for Making Profits
Many investors trade in forex with purely speculative motives. In this case, they do not really have a need for the counter currency. The aim of the investment is to make a gain from the fluctuation in values of currencies when compared with each other.
For example, an investor may take a EUR/ USD currency pair for his investment. If he believes that the dollar will grow in value against euro in future, he will buy more dollars with euros, shorting his position. If his prediction comes true, he closes the position to buy back euros with his dollars, gaining more euros than he had to sell for his dollars at the beginning of the transaction.
Investors must remember that the physical currency exchange almost never takes place, , and it is only the outcome of the trade that is reflected in the margin account of the investor – whether it is a gain or loss.
Next Chapter: How Forex Trading Works