Question

FOREX & Apple Hi Kay & All, Apple is one of a few companies that has been global for a long time. There are more, to be sure, but Apple has been around as well. Apple's use of the FOREX market to hedge transactions is consistent with this nature. Was the FOREX designed for speculators as well? In other words, is this a hedge or a bet?

Answer 1

The FOREX market is a market in which market participants can trade in different currencies. They can buy, sell, exchange and speculate of different currencies of nations.The Forex market is comprised of banks, commercial companies, central banks, investment banks,hedge funds, retail Forex brokers and investors. It is considered to be the largest financial market. Speculators use the Forex market to make short term profits by short term trading in currencies. Speculation in Foreign Exchange is an act of buying and selling the foreign currency under the conditions of uncertainty with a view to earning huge gains. There is an uncertainty in place where there is no predictability regarding the movement of market, whether it goes up or down.

Apple is a global company having operations in different countries. They are transacting in different currencies around the globe. When different currencies are involves there comes transaction exposure and foreign currency risk.In order to reduce or eliminate the foreign exchange risk, the companies may resort to FOREX market in developing hedges to cover their risk exposure. There are various hedge instruments like forwards, futures, options and swaps available in the market. Most hedges are intended to remove a portion of the exposure risk rather than all of it, as there are costs to hedging that can outweigh the benefits after a certain point. Hedge is not a money making strategy but rather a risk reduction strategy.

Forward is a contract between two parties agreeing to buy and sell a particular commodity of a certain quantity at a certain price upon a certain period of time. In FOREX market the commodity will be the currency. Currency futures can also be used where it is similar to forward contracts but will be more regularized and controlled by stock exchanges. The particulars of the futures contact would be standardized. Options can also be used in hedging where it gives the option holder the right to either buy or sell a commodity in a specified quantity at a specified price at a specified future period. SWAP arrangements also can be used in hedging. Currency swaps are a great benefit to the investors.