Foreign exchange trading (commonly known as forex or FX) is the trading of currencies against each other. It is the trading of debt, usually held by banks, in the form of currency loans. These loans are often held for a short period until they mature or are rolled over. During this period, the owners receive interest on the borrowed currency. Traders in the forex market buy and sell currency in anticipation of the value of a given currency increasing or decreasing, relative to another currency.
Globally, over $5 trillion worth of currency changes hands every day. In countries with open foreign exchange markets, the forex trading volume can be anywhere between a fifth and a third of the country’s stock market trading volume.
In 2018, the daily global forex trading volume was around $2.7 trillion. Of this, around $2 trillion was spot market turnover, with the remainder made up of the over-the-counter (OTC) market.1 The bigger spot market traders include banks, hedge funds, and financial institutions. The larger OTC players are generally banks, though hedge funds and other large asset managers are increasingly becoming participants here too.
Major spot markets
There are several major worldwide foreign exchange markets (also known as forex markets or FX markets):
Several major international currency trading exchanges have been established, with two of the most prominent being the Intercontinental Exchange (ICE) Futures (which owns the New York Stock Exchange) and Singapore Exchange (which owns the London Stock exchange). Each has launched a series of global currency futures contracts, which are settled on clearing exchanges such as life (London Financial Futures and Options Exchange).
The biggest futures exchange in the world is the Intercontinental Exchange (ICE), which owns the New York Stock Exchange and other well-known U.S. exchanges. It also controls the London Stock Exchange, the world’s leading equities market. ICE Futures launched a series of global currency futures contracts in 2013. These are traded on the Eurex exchange, a Swiss clearing exchange, which also runs the euro currency futures market.
Singapore Exchange (SGX), which owns the London Stock Exchange, is a “preferred provider” for derivatives to the world’s major banks. It offers three global-exchange-traded foreign exchange futures contracts: a Canadian dollar contract, a Japanese yen contract, and a U.S. dollar contract (all maturing in December). The terms are the same as ICE’s contracts.
The Australian Securities Exchange (ASX), which runs the largest stock exchange in Australia, has likewise launched a series of global currency futures contracts. The ASX contracts are traded on the Cormack Canadian Futures Exchange, a clearing exchange in Toronto.
Futures contracts for currency pairs
One way to enter the forex market is to buy and sell futures contracts on currency pairs. These are offered on the three big futures exchanges mentioned above (ICE, SGX, and the ICE currency futures contract that trades a U.S. dollar-Canadian dollar pair). With these, you don’t buy or sell actual currencies; instead, you buy or sell a futures contract, which enables you to take a position in the U.S. dollar against the Canadian dollar. For example, if you buy a futures contract based on the U.S. dollar-Canadian dollar pair, rising U.S. dollar prices would boost your profit or reduce your loss.
A futures contract gives the buyer the right to take action against a seller at a set price on a specified date. In this case, the buyer of the futures contract (known as the buyer of delivery) would purchase Canadian dollars at the settlement price on the expiration date (usually at 4 p.m. London time on the second Friday in December). The seller of the futures contract, meanwhile, would receive the settlement price in U.S. dollars.
Long and short trading strategies
You can use futures contracts to put on a “long” position, meaning that you expect the U.S. dollar to rise in value against the Canadian dollar. This would be favorable for Canadian companies that earn money in Canadian dollars but sell their goods in U.S. dollars (and for anyone else who expects the U. S. dollar to strengthen against the Canadian dollar). Conversely, you could use futures contracts to put on a “short” position, meaning that you expect the U.S. dollar to fall in value against the Canadian dollar. This would be favorable for Canadian companies that earn money in Canadian dollars but sell their goods in U.S. dollars (and for anyone else who expects the U.S. dollar to fall).
As a general rule, it’s easier to go “long” than it is to go “short.” For example, consider two Canadians who think the U.S. dollar will fall in value against the Canadian dollar. The first Canadian owns $10,000 in U.S. dollars. The other Canadian needs to buy $10,000 in U.S. dollars. In both cases, the value of the U.S. dollar is expected to fall by 10 basis points (one-hundredth of 1 percent). However, the first Canadian can simply hold onto his U.S. dollars and realize a gain of 10 basis points, whereas the second Canadian will need to actually buy $10,000 in U.S. dollars in order to realize a gain of 10 basis points. This explains why going long is generally easier than going short.
The easiest way to use futures contracts is to either go long or.