Foreign Exchange: A Practical Guide to the FX Markets

CHAPTER 1

Trading Money

INTRODUCTION

When many of us think of foreign exchange, what comes to mind are those little booths in the airport at which we can exchange, say, our United States Dollars for British Pounds Sterling when on our way to or from a vacation or business trip. Indeed, in some ways, there is nothing more complicated about the market for foreign exchange than that; it is all about buying and selling money.

But there are two things to note up front about foreign exchange that make it appear a bit daunting.

First, the realm of foreign exchange is rife with incomprehensible slang, confusing jargon, a proliferation of different names for the same thing, and the existence of convoluted conventions that make working in this field (unless you have already gained a facility with the rules) a real challenge. Banks and other financial institutions can’t even agree as to what this business area or “desk” should be called: FX, Currencies, Treasury Products, ForEx or Forex, Bank Notes, Exchange Rates, . . .

Second, and more fundamentally, what constitutes “foreign” depends upon where you consider “home” (e.g., whether you are from the U.S. or the U.K.). Having taught about this product for years, working for a large global bank, I know that what is “foreign” for me may very well be “domestic” for you. For that reason, I will make every attempt to avoid the use of the expressions “foreign” and “domestic” in our explanations—not so much out of my hope that this book may achieve ...