The Global Purpose of FOREX?

Hi all,

I'm new to FOREX, having spent the last couple of months learning about spread betting. FOREX is something I'm taking an interest in now, and I've enjoyed reading your forum, so thanks.

One question though, similar to the question I had when I first started spread betting, which was, what is the point of the stock market, why do we need it?

So, why do we have FOREX? I understand how traders can profit from it, similar to how traders can profit from stocks. But why was FOREX even born? Is it just a game or does it serve some purpose in relation to a countries economy, or a banks stability etc?

Maybe a better question would be, what would happen if we didn't have FOREX?

Please excuse me if I've missed the answer to this in the sticky's.

Thanks.

Hi Sanook,

Forex is a derivative of Globex designed by the insatiable thirst to make money from the woes of others.

First, Globex.

Globex is a Currency Futures Exchange traded on the Chicago Mercantile Exchange.
Is it neccessary? You bet. For anything from my rate of exchange {Spot Forex would probably be used for this now} when I take a vacation in a foriegn land to a large European Car manufacturer buying US Steel for delivery in December or March of next year.
{I really don't know which manufacturer buys from which supplier but I think you will get the picture}

Let's say BMW in Europe needs 1,000 tonnes of US Steel every 3 months to maintain production and the CFO asks you what are your projections are for Steel Costs This Year. Would you say
"HTF do I know? Depends what the US$ does I guess."
Or would you say
"We have locked in a maximum cost at 'x'$ by way of buying the Steel Futures at 'y'$ as well as, buying US$ Futures Contracts and offset our risk by supplementing that startegy with some US$ Options as well."
Note* this probably is not the exact scenario they would use but you get my drift. I'm not in that type of business.

So you see a Currency Market is required by major Industrials to project costs and budget accordingly. Approx 5% of trades on CME are Corporate with the intent of taking delivery. 95% Speculation.
However, that's Globex.

Forex is the Casino built around that structure. No Futures Contracts. Spot Only. Small Anti required to let New Inexperienced Players in. Trade execution solely in the hands of the MM. Don't ask permission, just do it and [ if they get caught] ask forgiveness}
I know it sounds harsh {more than I intended} but I believe it. I also Trade it. But I am aware of the pitfalls and avoid them if/when I can.


Only my HO.
I'm sure others will give their view.

Bemac,

Knowing this, why wouldn't everyone eventually head to Globex instead of Forex? Don't know if I'm getting paranoid, but sure seems like it's hard to get even odds in Forex.

Squid

You mean, if something goes wrong, you would actually like to keep the 1,000 tonnes of US steel ?

Dane

LOL: Gone are the days of truckloads of Frozen Pork Bellies being dumped on your front lawn because you forgot to close your Long Position.
It's in the agreement you sign with your Brkr and he will close the Position on or before Last Notice Day even if you are somewhere in the Bahamas and the only thing frozen you are thinknig about is your Marguarita.

But that service is reflected in the Commission they charge. There is also the fact that Margins can and do change without notice. Although the currencies are certainly levereged the most.

Charting a Currency Future is somewhat different also.
A Future contract has a definative Lifespan. So when the September Contract expires and you move onto the Dec contract there could be a 30 pip difference between the two of them so how do you get a Continuous History Chart from that without all the gaps? Well it's called Back Adjusted and it's not perfect but that's what you get. You are also swimming in a much bigger pond with much much bigger sharks around.

The market closes every day and you hope nobody baums anybody overnight cause if they do your only exit is by telephone to the Night Desk which is usually some stranger who really doesn't give a chit.

Actually I was on the phone to a guy beside the cocoa pit in WTC when he said I gotta go... Sure put a different slant on the live TV i watched over the subsequent hours.

If we don't have forex, every business in this world would be exposed to currency fluctuations risk which would threat their margins & might even them to losses...Hedgers are those who secure themselves against currency fluctuations...If you are a Japanese manufacturer selling your products in the US in US dollars, you might see your margins evaporate if the USD goes down against the Yen, so eventually you want to short the USD in advance so that if this scenario happens, you are locking in your profits from selling your goods...


Thanks,

Nader

this is a great quesiton and some great answers have been given already.

a related question...what service is a commodity trader providing? some traders are paid millions, some billions, what purpose did they serve to be paid such a handsome sum?

the answer is that he provided liquidity. without liquidity (ie someone is there willing to take the other side of your trade) the hedgers would be screwed. when oil goes to $100 and all the corporations run to hedge, there will be no sellers and the price would go through the roof. so this liquidity providing is big business, and thats what we do as currency traders.

another point...it may seem that this market is so complicated that its a miracle the thing even works. you have to remember there is history here, the markets did not appear over night. they are an evolution that has been in the making, right along side the concept of money. this is why we have so much faith in the system.