| Question 1: | What is Foreign Exchange/Forex?
Foreign Exchange is the trading of one currency against another. Professionals refer to this as foreign exchange, or use the acronyms Forex or FX. The financial asset constituting Forex are “currency-pairs” like Euro and US Dollar, or US Dollar and Japanese Yen, and so on. (In the same way as Scripts constitute the Stock Market) |
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| Question 2: | Where does Forex Trade take place?
Forex Trade takes place in “Forex Market” which is chiefly an Over-The-Counter market, meaning that transactions are conducted between any two counter parties that agree to trade via the telephone or electronic network. Ideally there would be an entity providing the structure which makes the trading possible, such entities are called “Market-maker”. Market Makers assume the role of counterparty in all trades that happen through their clients. (The Market-maker in Forex Market may be compared to the Stock Exchanges in the case of Equity Market) |
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| Question 3: | Where is the location of Forex Market?
There is no central location of the Forex Market. It’s an OTC market where trades are conducted on phone or through internet, so you can virtually put a trade from anywhere and anytime. |
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| Question 4: | What is the size of the FX market?
In terms of trading volume, the currency exchange market is the world’s largest market, with daily trading volumes of nearly $2 trillion. For example, one of the largest Stock Exchanges in the world the New York Stock Exchange has a daily trading volume of approximately $60 billion. |
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| Question 5: | Is the Forex Market as Liquid as Indian Equities or Commodities Market? Can it be manipulated easily?
The Foreign exchange market is the most liquid market in the world today. Because of the volume in trading, (nearly $2 Trillion) it is nearly impossible for a handful of Market Players to have a lasting impact on exchange rates. In fact, even central banks and governments find it increasingly difficult to affect the exchange rates of the most liquid currencies, such as the US dollar, Japanese Yen, Euro, Swiss Frank, Canadian Dollar or Australian Dollar. |
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| Question 6: | What are the trading hours in FX Market?
The currency exchange market is a true 24-hour market, 5 days a week. There are dealers in every major time zone. Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night. |
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| Question 7: | What are the most commonly traded/ most liquid currency-pairs in the FX markets?
Today, over 85% of all currency exchange transactions involve a few major currencies: the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), Swiss Frank (CHF), British Pound (GBP), Canadian Dollar (CAD), and Australian Dollar (AUD). The most Liquid currency-pairs are EUR/USD, USD/JPY, GBP/USD, AUD/USD and USD/CHF. The most often traded or ''liquid'' currencies are those of countries with stable governments, respected central banks, and low inflation. |
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| Question 8: | Who regulates the Global Forex Market?
The Forex Market is regulated through the regulation of the entities offering Forex Trading services. For example, in USA, all the entities offering Forex Trading Services to its clients are regulated by National Futures Association (NFA) and Commodities Futures Trading Commission (CFTC). In UK, entities offering Forex are governed by Financial Services Authority (FSA). (In the case of Reliance Forex, the entity, HotSpot is governed by NFA and CFTC regulations.) |
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| Question 9: | Can an Indian National invest/trade in the Forex Market?
Yes. After RBI’s circular dated November 04, 2004 on “Liberalized Remittance Scheme of USD 25,000” Indian Individuals may freely remit up to $25,000 per calendar year for any permissible current or capital account transaction or a combination of both. This opens up a Window for Indian clients to remit funds abroad to do Forex trading. |
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| Question 10: | What are the requirements to be complied with by the remitter?
The individual will have to designate a branch of an AD through which all the remittances under the Scheme will be made. He has to furnish an application-cum-declaration in the specified format, called A2 Form, regarding the purpose of the remittance and declare that the funds belong to him and will not be used for purposes prohibited or regulated under the Scheme. |
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| Question 11: | If an investment of USD 25,000 rises in value within the year, can one book profits and invest abroad again?
The investor is free to book profit or loss abroad and to invest abroad again. He is under no obligation to repatriate the funds sent abroad. |
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| Question 12: | Can an individual, who has repatriated the amount sent during the calendar year, avail of the facility once again?
Once a remittance is made for an amount up-to USD 25,000 during the calendar year, he would not be eligible to make any further remittances under this route, even if the proceeds of the investments have been brought back into the country. |
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| Question 13: | How are Forex rates quoted?
The rates of Currency-pairs are always quoted two-way, i.e. the quote would include Both Buy and Sell Price for a Currency-pair. Rates would typically appear as: EUR/USD = 1.2001/1.2003 (or just 1.2001/03) EUR/USD refers to the two currencies Euro (the European currency) and U.S. Dollar. The first is referred to as the base currency, while the second as the quote currency. As a Trader you can buy or sell EUR/USD: - Buying EUR/USD means Buying Euro by Paying in USD;
- SellingSelling Euro and Getting USD
- If you are Buying EUR/USD, you will Buy it at the Offer/Ask Price on the Right side, i.e. @ 1.2003 USD per Euro.
- If you are Selling EUR/USD, you will Sell it at the Bid Price on the Left Side, i.e. @ 1.2001 USD per Euro.
- You are Long in the currency you have Bought and Short in the currency you have Sold.
The Bid Price will always be less than the Ask Price (1.2001 < 1.2003). |
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| Question 14: | Who quotes the Forex Rates at which I trade?
The Tradable Forex Rates are quoted by the Market Maker. The Market Maker, in-turn, gets these rates from the Banks they have tied up with. So, whenever you are trading in a Forex Market, you are Buying From and Selling To the Market Maker. |
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| Question 15: | What is the meaning of Bid/Ask?
Bid is the highest price that the market maker, is willing to pay for the particular currency at the moment; Ask/Offer is the lowest price that the market maker, is willing to accept for the particular currency. Together, the two prices constitute a quotation. In our earlier example: EUR/USD = 1.2001/1.2003 (or just 1.2001/03) The Market Maker is willing to Pay, at the most, 1.2001 USD for every Euro you wish to sell; while he will take from you at least 1.2003 USD for every Euro you wish to buy. |
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| Question 16: | What is Bid/Ask Spread?
Bid/Ask Spread is the difference between the Bid Rate and the Ask or Offer Rate. Spread is determined by the breadth and depth of the market for the concerned currency-pair as well as on the currency-pair’s volatility. For currency-pairs, higher the Liquidity- Lower the Spread; |
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| Question 17: | Is Retail Forex a Leveraged Product? Is Margin-trading allowed in Forex?
A typical Forex trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade. (Reliance Forex offers a Leverage of 100-times to its clients.) |
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| Question 18: | Are there any Risks/Rewards of trading on Margin/Leveraged Trading?
Margin-trading has its own risks and rewards. The good thing about margin is that, as an investor you are not required to put down the full value of the trade you got into. Instead, you are just required to put down a deposit known as “margin” which enables you to gear up your trade size to institutional level. In typical sense margin works as collateral with the broker through which your trade is getting executed. So, with a 1% margin you can take a position worth a 1000 USD by just blocking $10 out of your trading resources. The risk of trading on margin is that, you may lose your entire deposit when the market moves against you, because, the leverage associated with the margin magnifies your losses. |
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| Question 19: | What are the Costs associated with Forex Trading?
Forex Trading, per-se, involves no transaction costs. Clients are not charged any Brokerage or Commission. Banking Costs are involved in Remittance of Money to a foreign bank account and Bringing Money back to India. These costs would depend on the Bank through which you do your remittance. Operational Costs associated with Forex Trading is the “Roll-over Cost” or Carrying Forward Charges. |
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| Question 20: | What is Forex
Forex is Foreign Exchange |
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