Foreign Exchange Issues

The main role of the exchange rate is to allow international regulations related to international trade: an exporter wants to be paid in foreign currency, because they need currency to pay its employees or its suppliers, while the importer does not have a priori that its own currency to pay. Every time there is an international commercial transaction, there will be a foreign exchange transaction. The exchange rate fluctuations will affect the prices of export goods. For example, if a product sold in France and the USA is 100 €, with an exchange rate of $ 1.25 per euro, therefore it will cost $ 125 (100 x 1.25) to U.S. consumers . A decline in the exchange rate at $ 1.10 per euro will drop the export price at 110 € (100 x 1.10), while a rise in the exchange rate will rise. Conversely, a well made in the USA, sold in France and worth $ 100, cost 80 € (100 / 1.25) to French consumers in the first case and 90.10 € (100 / 1.10) in the second case. Thus, any decline in the exchange rate of the national currency promotes exports and imports disadvantage, and vice versa for an increase in the exchange rate. So there is a possibility for a country to improve its balance of trade (and hence growth) if it gets a drop in the value of its currency. Countries that consistently under-estimate their currencies to facilitate their exports are accused of making monetary protectionism. To prevent this form of protectionism that countries may agree on a system of fixed exchange rates - such as the Bretton Woods (1944-1971) or the European Monetary System (1979-1992). But some economists point out that a flexible exchange system allows you to balance trade. The reasoning is based on the functioning of the foreign exchange market. If a country has a deficit in its current payments, this means that the country lacks foreign currency to pay for purchases with the rest of the world, and must be requested in the foreign exchange market which lowers the value of its currency in relation to other currencies. Accordingly, the exchange rate of the national currency down, which encourages exports and restricts imports, which, ultimately, the foreign trade balance. The mechanism is reversed in case of current account surplus.

This idea that fluctuations in the exchange rate alone could balance the trade has been highly criticized, if only because the exchange rate movements do not depend on that of international trade rules, and therefore a deficit may be accompanied by an increase in the rate of change - as in the case of the USA in the 1980s or late 1990s.

Forex Currency Pairs

Forex Currency pairs in Forex trading have been standardized by the IMF. The pairs most commonly traded are:

• EUR/USD, the Euro and the U.S. dollar
• USD/CHF, the U.S. dollar and the Swiss franc (sometimes called "the Swissie")
• GBP/USD, the pound sterling of Great Britain and the U.S. dollar (sometimes called "the cable")
• USD/JPY, the U.S. dollar and the Japanese yen
• USD/CAD, the U.S. dollar and the Canadian dollar
• AUD/USD, the Australian dollar and the U.S. dollar

These pairs account for 80% of all trades in the Forex market. They all involve the U.S. dollar, because it's still the biggest economy in the world and one of the most inviting to trade. But this is also a holdover from the Bretton Woods Accord of 1944, which pegged all currencies to the U.S. dollar as a benchmark. Although the Accord was abandoned in the early 1970s, some of its effects are still evident in the market.

The first currency in the pair is known as the base currency, and it's the important one. Its value is always one in the exchange rate, and it controls the direction of the trade and the chart. The second currency is called the cross.

For example, in the GBP/USD, the British pound is the base currency and the U.S. dollar is the cross. If the price on this pair is 1.7609, that means that one pound is worth 1.7609 U.S. dollars. If the chart goes up, that means the pound is strengthening against the dollar; if it goes down, the dollar is strengthening against the pound.

Because a purchase automatically includes two currencies, one being traded against the other, it's just as possible to make a profit in a bear market as a bull market. For the same reason, there's no prohibition against selling short in Forex trading as there is in the stock market; it's built into the system.

Prices are measured in pips, which is an acronym for Price Interest Point, and it's the smallest digit in the price. This is an important point, because not all pips are created equally; they reflect the base currency of the pair. If the U.S. dollar is the base currency, then one pip equals one dollar in a mini account or ten dollars in a standard account. If you place a trade with one of these currencies and earn fifty pips, that would be a profit of $50 in a mini account or $500 in a standard one.

But if the base currency is not the U.S. dollar, then the value of one pip is equal to one unit of the base currency. In the GBP/USD, because the pound sterling is the base currency, one pip is equal to one pound; in the AUD/USD, one pip equals one Australian dollar. Therefore, when you take profits in these currencies, you're taking them in the base currency, which then must be exchanged into the U.S. dollar at the current exchange rate.

If the exchange rate is one or more, then this works in favor of U.S. traders; but if the value is below one, it's not such a good thing. For example, a gain of fifty pips in the GBP/USD equals not U.S. $50, but £50. If the exchange rate was still 1.7609, then the profit after conversion would be around U.S. $88.

But a gain of fifty pips in the AUD/USD equals AU $50, and the exchange rate is more likely to be around 0.7467. So the profit would be closer to U.S. $37.

Tips on Personal Finance

Do you ever wonder where your money goes every month? Does it sometimes seem as though you cannot afford to do things because your financial obligations are holding you back? If you find that you are asking yourself these sorts of questions, perhaps you should take a look at your financial situation and assess whether you are practicing good personal finance management or not. Good personal finance management spends within their income, plan for the future and solve financial problems as they arise. Poor personal finance management pay more, do without and fall behind. If you find yourself in the second category, you can do something about it. You can learn to take charge of your finances by planning your personal finances.
Planning your personal finances doesnt always come naturally, and even if you are just beginning to take your financial matters seriously, then you likely need a few personal finance tips.
Evaluate your current financial situation. One of the most important goals for most people is financial independence. Collect accurate information about your personal financial situation. Calculate your net worth which includes the real estate, saving and retirement accounts, and all other assets. This will help you decide how much money you can set aside for meeting future needs and goals.
A basic personal finance tip is to make a budget. A personal finance budget is information made up of your income and expenses and the more accurate this information is, the more likely you are be able to meet your goals and realize your dreams. A personal finance budget should be made for at most one year at a time and include a list of your monthly expenses.
All expenses must be included. To be sure of that go through all your paid bills, check register and credit card receipts to find expenditures that recure every month and expenditures that happen less frequently. Personal finance budgeting requires some small sacrifices. To be able to make good personal financial decisions and set priorities, you must know where your money is actually going. Start your budget and accomplish your goals.
Get an electronic bill pay. This is a very convenient way to pay your bills. You pay them electronically, by direct withdrawal from your bank account. The transaction is processed immediately. You can even link your bill pay service to your personal finance budget, so that your expenditures are automatically entered in the appropriate category. Personal financial management can be really easy.
Make an investment and finance plan. Now that the fundamental state of your personal financial security has been established, the time has come for the more prosperous part of your personal financial life. You need to make a personal finance plan of what you really want in life that money can buy. Your personal financial plan can be as simple or as detailed as you want it to be. Find out how to finally start to implement this plan and get the money to finance it. This is the long term part of your financial. This journey is the most interesting and exciting part of personal financing you can have toward financial freedom.
You can prepare for a secure personal financial future by following these simple tips. When you take control with your money, you don’t have to worry about debt taking control of you.

Exchange Rate Regime

The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors.
The basic types are a floating exchange rate, where the market dictates the movements of the exchange rate, a pegged float, where the central bank keeps the rate from deviating too far from a target band or value, and the fixed exchange rate, which ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro.

Float
Floating rates are the most common exchange rate regime today. For example, the dollar, euro, yen, and British pound all float. However, since central banks frequently intervene to avoid excessive appreciation or depreciation, these regimes are often called managed float or a dirty float.

Pegged float
Here, the currency is pegged to some band or value, either fixed or periodically adjusted. Pegged floats are:
Crawling bands: the rate is allowed to fluctuate in a band around a central value, which is adjusted periodically. This is done at a preannounced rate or in a controlled way following economic indicators.
Crawling pegs: Here, the rate itself is fixed, and adjusted as above.
Pegged with horizontal bands: The currency is allowed to fluctuate in a fixed band (bigger than 1%) around a central rate.
Fixed

Fixed rates are those that have direct convertibility towards another currency. In case of a separate currency, also known as a currency board arrangement, the domestic currency is backed one to one by foreign reserves. A pegged currency with very small bands (<>

Consumer Price Index

A consumer price index (CPI) is a measure of the average price of consumer goods and services purchased by households. A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It is a price index determined by measuring the price of a standard group of goods meant to represent the typical market basket of a typical urban consumer. Related, but different, terms are the United Kingdom's CPI, RPI, and RPIX. It is one of several price indices calculated by most national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, and regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.

Two basic types of data are needed to construct the CPI: price data and weighting data. The price data are collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times. The weighting data are estimates of the shares of the different types of expenditure as fractions of the total expenditure covered by the index. These weights are usually based upon expenditure data obtained for sampled decades from a sample of households. Although some of the sampling is done using a sampling frame and probabilistic sampling methods, much is done in a commonsense way (purposive sampling) that does not permit estimation of confidence intervals. Therefore, the sampling variance is normally ignored, since a single estimate is required in most of the purposes for which the index is used. Stocks greatly affect this cause.
The index is usually computed yearly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, clothing, each of which is in turn a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, (for example, men's shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so elementary aggregate indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers. (However, the growing use of scanner data is gradually making weighting information available even at the most detailed level.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher-level aggregates, and then into the overall index, relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered.

Thus the index is a fixed-weight index, but rarely a true Laspeyres index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide. It takes time to assemble and process the information used for weighting which, in addition to household expenditure surveys, may include trade and tax data.

Base Currency

In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is named the quote currency (counter currency, terms currency). Exchange rates are quoted in per unit of the base currency. Note that FX market convention is the reverse of mathematical convention.
Currently the euro is the dominant base currency against all other global currencies. As a result all currency pairs traded against the euro are quoted per EUR 1. e.g. the USD - EUR exchange rate will be identified as EUR USD and quoted as US dollars per 1 euro (USD/EUR).

The currency hierarchy for the majors is as follows:
Euro
Pound sterling
Australian dollar
New Zealand Dollar
United States dollar
Canadian Dollar
Swiss franc
Japanese Yen
Other currencies (the minors) are generally quoted against one of the major currencies and their cross rates between each other are less well defined.

"Base currency" in foreign exchange can also mean the accounting currency or domestic currency. For example, a British bank may have a "base currency" (accounting currency) of GBP, because all profits and losses are converted to GBP. For example, if a EUR/USD position is closed out with a profit in USD by a British bank, then the "rate-to-base" will be expressed as a GBP/USD rate. Because of the ambiguous meaning of "base currency", many market participants use the expressions "currency 1" and "currency 2", where one unit of CCY1 equals a variable number of units of CCY2.

The History of Forex Market

At the beginning, the values of different goods were being expressed by means of other types of goods. This type of system was known as barter. Centuries ago, people trade objects in place of other objects. During these times, everything was traded, from teeth to decorative stones. Soon, metals started to become valuable, especially the gold and silver. However, this type of trading has limitations.
Before the era of modern technology, coins were minted from a metal of preference. This was before the introduction of governmental paper form of IOUs (this means "I owe you") was accepted in the Middle Ages. These IOUs were the roots of the present currencies. Before the start of World War I, majority of central banks supported currencies with convertibility into gold. Even though paper money can be traded for gold, this did not happen often. And in the later stages of the World War II, Bretton Woods agreement was settled in July 1944. It resulted into a system of permanent exchange rates. However, this system went through great pressure when the national economies took their own separate ways. The idea of the fixed exchange rates died.
The lack of maintenance of fixed forex rates gained relevance with the Southeast Asian events during the later parts of 1997 where currencies were continuously being undervalued against US dollar. While companies have to face much more unstable currency environment, the financial institutions and investors found a new playground in the form of foreign exchange market. The forex market currently dwarfs any kinds of financial markets. Presently, US$3,000 billion or $3 trillion is being traded daily, more than the bond and stock market combined.

History Of Forex Trading

The forex news in December showed a drop in the overall increase of 9.1% which has benefited the U.S. dollar in 2008 has boosted the value of gold, although it remains down 1 , 4% on the year. The analyst Commodity Archer Financial Services, Stephen Platt, tells Bloomberg that "The dollar seems to be facing enormous pressure and with the uncertainty that remains regarding the economic outlook, this has contributed to the stimulation of gold. The latter was much better maintained than any active monetary prospects uncertain.Yet, the history of gold in the U.S. is unstable. Last time we explained the origin of the gold standard and its adoption by the United States. Now we'll move to the transition between the gold and currency to finally finish on the forex trading online as we know it today. Following the acceptance of the Gold Standard Act in 1900, some major events eventually led to its abandonment.
1. First World War -

The Great War led to significant disruptions and political conditions that have weighed on government finances caused him to the gold standard in oblivion for all these years of war. It is obvious that gold was not flexible enough to help the global economy both in time of prosperity during the difficult times. The smaller countries then turned to the values represented by the USD and the GBP rather than gold.

2. The Great Depression

While the stock market collapsed, many countries are increasing their interest rates to discourage investors to convert their deposits in gold, but these high interest rates that will further cripple the economy, leading the Great Britain to suspend the gold standard in 1931. At this stage, it remains to France and the U.S. gold reserves significant.

3. In 1933, Franklin Delano Roosevelt banned the ownership of gold (except for the jewelry industry.)
4. The United States re-evaluate the gold and put the $ 20.76 an ounce (a little less than thirty grams) at $ 35 an ounce in 1934, prompting the increase in conversion of gold into dollars Americans in other countries.

5. At the end of the Second World War, the U.S. had the majority of the world. The Bretton Woods Agreements were signed in 1944. They set a fixed exchange rate between countries and allow others to sell their gold to the United States at a price of $ 35 an ounce.
6. In 1971, the system established by Bretton Woods ends when the modern system of fluctuating exchange rates, which regulates the trade of forex is adopted.