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Forex - Basics - Part 1

@*CS Siddharth Bumb. * 
on 03 February 2014

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Hello Friends,

Many of us afraid of Forex topic, I don't know why, but believe me it is one of the simple topic. Entire forex (at Final level) topic can be solved without using formula i.e by simple logics. You guys might be thinking that what rubbish I am talking but its true.

First, let us start with basics of forex then we will proceed with at advance level.

* FOREX - means Foreign Exchange.

* Currency:

What is currency ?

Currency is a legal tender of any country within its national frontiers.

* Currency may be quoted in market in 2 ways,

1. Direct Quote and 2. Indirect Quote

Now, What does exactly means Direct and Indirect Quote ?

1. Direct Quote:- Direct quotes means where foreign currency kept constant and home currency varied.

Example : 1$ = Rs 60

In this case, there is trading of $ and $ is foreign currency and Rs is home currency. Foreign currency i.e. $ is kept constant and home currency i.e. Rs is varied, hence it is Direct Quote for India.

2. Indirect Quote:- Indirect Quote means where, Home currency kept constant and Foreign currency varied.

Example : 1Re = $ 0.0167

In this case, there is trading of Rs and Rs is home currency and $ is foreign currency. Home currency i.e. Rs is kept constant and foreign currency i.e. $ is varied, hence it is Indirect Quote from Indian point of view.

* Base Currency and Incidental Currency:

What is Base Currency and What is Incidental Currency ?

--> To understand base and incidental currency lets have some look up for understanding purpose.

In commodity market we buy or sell commodity in exchange of currency, but in case of currency market 2 currencies are involved then it becomes very important to know which currency is bought and sold.

Currency which is BOUGHT and SOLD is called as Base Currency and Other currency is called as Incidental Currency.

For Example : 1$ = Rs 60

In this case, there is trading of $, $ is being bought and sold inexchange of Rs hence, $ is base currency and Rs is incidental currency.

Here, we will try to solve our queries mostly by Base and Incidental currency. It is because if we solve problems by Direct and Indirect quotes, it will create confusion. and by using base and incidental currency problems will be solved in easier way. Now you guys only tell me following situation by using Direct and Indirect quote method ,

1$ = DEM 10, in the given case tell me home currency and foreign currency ?

---> Dear, we are now in India and being in India we can trade in any currency. Indian currency is Rs and in the given problem there is no RS currency involved. Hence, we cannot say that either $ is home currency or DEM is home currency, infact our home currency is RS.

Now, the same question can be easily solved by using Base and Incidental currency. Though I am in India, I can say that $ is Base currency and DEM is incidental currency. See, there is no confusion while solving problem. (I hope you guys are getting what I am trying to clarify you).

TWO WAY QUOTES:

In case of commodity market, there is production and consumption but in case of currency market there is no production and consumption. Therefore, the person who is selling currency needs to buy currency also. It is customery in currency market to give in TWO WAY QUOTE i.e. one quote for and other one is for selling.

Friends, think from businessman's point of view, every businessman will try to purchase a commodity at lower price and the same commodity he will try to sell at higher price.

Exactly same situation happens overhere, two way quote is given by market and market wants to buy at cheaper rate whereas market wants to sell at higher rate. In these two way quotes one currency whose value is less, market will buy at that rate and other currency whose value is more, market will sell at that rate. 

For Example : 1$ = Rs 60 - 62

This is a two way quote. This quote is given by market. Think from market's point of view. Market will buy currency (i.e. $) at Rs 60 whereas the same currency ($) will be sold at Rs 62 by market. (It is a same concept of trading i.e. business).

Now, in this tell me which is base currency and which is incidental currency ?

---> Guys, here $ is base currency and Rs is Incidental currency.

In the given quote, Rs 60 will known as BID (buy) rate and Rs 60 is known as ASK (sell) rate.

Friends, always remember while solving forex problem, general rule of the market :

Rule: Market Gives Less, and Takes More.

Guys today we will stop here, I hope you guys will get some knowledge from this. Next time I will start with some other concepts of FOREX. If you have any query please do ask me without any hesitation and I will surely try to solve your problem. You can ask me your queries at siddharthbumb@gmail.com

Thank You so much for your patience while reading.

Regards,

Siddharth Bumb

siddharthbumb@gmail.com


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