Foreign Exchange (FX) Markets

Since the demise of fixed foreign currency exchange rates in the early 1970's, the world economy has undergone sweeping changes. The collapse of the Bretton Woods Agreement in 1973 signaled an increase in currency market volatility and trading opportunities. What is the lure of the Foreign Exchange markets? What is its power? How did it grow to be the most important market in the World? How can you benefit from it?

The foreign exchange market dwarfs the combined operations of the New York, London & Tokyo futures and stock exchanges. Daily turnover approximates US$ 1 Trillion per day and this figure is growing. The foreign exchange market, then, is a dominant factor in the world financial system. This market supports both international trade and international capital movements. Banks, institutional traders, corporations needing to hedge foreign exchange commitments, international hedge funds and individual speculators all participate in these markets in an effort to either protect their interests or to improve their positions.

The foreign exchange markets are extremely volatile markets, offering a myriad of opportunities for profit (and for loss). The trader who is willing to take on substantial risk can frequently realize returns not achievable in other markets.

Of the one trillion dollars worth of trades consummated each day in the global foreign exchange market, approximately 83 percent occur in either spot foreign exchange or in currency swap transactions; forward contracts constitute another 5 percent.

Spot transactions, currency swaps, and forward contracts all take place in the interbank market. Currency options make up another 10 percent of interbank transactions.

All together, the interbank market accounts for 98 percent of all global foreign exchange trading; the remaining 2 percent is divided among all the global futures exchanges.

Interbank currency contracts and currency options, unlike futures contracts, are not traded on exchanges and are not standardized: banks and dealers act as principals,each transaction is negotiated on an individual basis and contracts are "tailored" to the requirements of the client or trader.

Spot and forward trading in currencies is generally unregulated; there are no limitations on daily price movements and SPECULATIVE POSITIONS LIMITS ARE NOT APPLICABLE. There are never liquidity problems because dealers have an almost unlimited number of market participants for better execution.

The Interbank market is the primary market while futures are secondary markets. The volume of Interbank market trading is approximately 24 times that of currency futures. Interbank trading deals in "cash" instruments with huge volumes worldwide daily. Interbank markets provide better liquidity, execution and are open virtually twenty-four hours a day. Because of the high volatility in the foreign exchange markets and the rapid movement of foreign exchange prices, trading foreign exchange is considered to be very risky. Hence it is strongly advised that only investors with a substantial amount of risk capital, i.e. capital that they are prepared to lose, should participate.

CFL traders will assume day-to-day responsibility for the risk capital you allocate to investments in FX.

Currencies traded through CFL may be bought on a "spot" basis, for delivery two days later, or for "forward" delivery, on a date in the future agreeable to both buyer and seller.

Individuals who believe the value of one currency might appreciate relative to that of another would purchase that currency and hold it until the anticipated appreciation occurs and then sell. Of course, that anticipated appreciation may never occur and an adverse move in the market would result in a loss. Traders should try to limit their losses if the markets do not move in the directions they hope.

An attractive feature of the foreign exchange market is the use of leverage. Traders can control substantial investments in currencies with as little as ten percent of that investment's value on deposit. Therefore, even a relatively small movement in the currency can translate into an extraordinary percentage gain. For example, a trade with a market value of $100,000 can be made with a deposit of only $10,000. Assuming an exchange rate of JPY 120/USD, a trader who believes that the dollar will strengthen could purchase a contract with a value of $100,000, selling 12 million yen in the process. If the trader is correct and the dollar strengthens to JPY 125/USD, he could sell the contract and receive 12,500,000 yen, netting a profit of 500,000 yen. Converting the yen to dollars at the rate of JPY 125/USD gives him $4,000, or a return of 40 percent on his original ten thousand dollar investment. Of course, leverage works in two directions. If the dollar falls to JPY 115/USD and the trader sold his contract at that price, he would receive only 11, 500,000 Yen, a loss of 500,000 Yen. Converting the Yen to dollars at the rate of JPY 115/USD leaves him with a loss of $4,348 or a return on his investment of negative-43 percent.

Only the most liquid G7 currencies -- Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar against the US Dollar and against each other-will be traded in the CFL account.

Chicago Forex Ltd. also gives you the opportunity to trade gold and silver for spot delivery. Individuals and companies may trade these precious metals in units as small as 100 ounces for gold and 5,000 ounces for silver.