Introduction to Options and Currency Pairs
When you are trading currencies, you are making bets that you know what the exchange rates will be between the two pairs of a currency pair. let's say between Slovartian Kruceks ans US Dollars. You make a bet like this: “I will pay you a specified sum today if you promise that in two weeks you will sell me 100 US Dollars at today's rate, paid in Kruceks.” In this way you are locking in the price of US Dollars as measured in Kruceks. You lose the bet if the Krucek goes up. You win the bet if US Dollars drop in price with respect to Kruceks.
Alternatively, you might make a bet that says “I will pay you a specified sum today if you promise that in two weeks I can sell you 100 US Dollars for the same number of Kruceks that it would cost me today.” Here you are betting that Kruceks will go up, and you will get more of them for 100 Dollars than you would get today.
Now who is going to take such a bet? A foreign exchange brokerage.
What is a foreign exchange brokerage? They are bookmakers for people who want to bet on the price of different currency pairs.
What will they charge? Quite a bit of money. The longer the bet (option) the more they charge. And, they won't go beyond a certain time period. No one will bet with you on what the price of Dollars will be in three years, for example.
What are the major currencies that you would likely be interested in trading? The US Dollar, the Euro, the British Pound, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the Swiss Franc, and the Chinese Yuan.
What is the Base Currency in a Currency Pair? The first currency in a currency pair is called the Base Currency. It stands first in the codes of currency rates, and the rate shows how much the Base Currency is worth when measured against the second currency. In the Currency Pair of US Dollar versus Swiss Franc (USD/CHF), the US Dollar is the Base Currency.
What are PIPs? PIPs are “Price Interest Points” that are set up by mathematical formulae according to the exchange rate of each particular Currency Pair. Each PIP or “point” is the smallest unit of price for any foreign currency. In the USD/CHF Currency Pair, fr example, a PIP equals .0001 Swiss Francs. A trader tries to capture as many PIP points as possible.
What is Margin Trading in the Foreign Exchange? When you buy an option to buy or sell a currency, you pay based on how many units of a currency you will be entitled to buy or sell in this transaction. The more US Dollars you want the option to buy (or sell) at a specific price, the more you will have to pay. This is because the bookmakers will have to secure your potential purchase or sale by having the foreign currency available to satisfy your buy (or sell) order.
Alternatively, you might make a bet that says “I will pay you a specified sum today if you promise that in two weeks I can sell you 100 US Dollars for the same number of Kruceks that it would cost me today.” Here you are betting that Kruceks will go up, and you will get more of them for 100 Dollars than you would get today.
Now who is going to take such a bet? A foreign exchange brokerage.
What is a foreign exchange brokerage? They are bookmakers for people who want to bet on the price of different currency pairs.
What will they charge? Quite a bit of money. The longer the bet (option) the more they charge. And, they won't go beyond a certain time period. No one will bet with you on what the price of Dollars will be in three years, for example.
What are the major currencies that you would likely be interested in trading? The US Dollar, the Euro, the British Pound, the Japanese Yen, the Australian Dollar, the Canadian Dollar, the Swiss Franc, and the Chinese Yuan.
What is the Base Currency in a Currency Pair? The first currency in a currency pair is called the Base Currency. It stands first in the codes of currency rates, and the rate shows how much the Base Currency is worth when measured against the second currency. In the Currency Pair of US Dollar versus Swiss Franc (USD/CHF), the US Dollar is the Base Currency.
What are PIPs? PIPs are “Price Interest Points” that are set up by mathematical formulae according to the exchange rate of each particular Currency Pair. Each PIP or “point” is the smallest unit of price for any foreign currency. In the USD/CHF Currency Pair, fr example, a PIP equals .0001 Swiss Francs. A trader tries to capture as many PIP points as possible.
What is Margin Trading in the Foreign Exchange? When you buy an option to buy or sell a currency, you pay based on how many units of a currency you will be entitled to buy or sell in this transaction. The more US Dollars you want the option to buy (or sell) at a specific price, the more you will have to pay. This is because the bookmakers will have to secure your potential purchase or sale by having the foreign currency available to satisfy your buy (or sell) order.