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The foreign exchange market also called the Forex market is a global business set up to help in currency exchange. Global traders depend on the foreign exchange market for currency conversion throughout their endeavors. Speculators participate in the trade with an intention of making a profit out of the spread between the exchange prices of a given currency pair.
The trade involves converting currency into probably a foreign one when the relative rate is low. On converting the foreign currency back, one either incurs a loss or gets a profit. This depends on the currency conversion rate at the time of converting back the currency (Wamg, 2009. p. 133).
The foreign exchange market exhibits fluctuations thus being volatile. Only traders who use the peak points of these fluctuations as entry or exit points make profits. Traders and scholars in the field claim that one of the safest ways to participate in the trade is by taking the trend of the market. The final decisions made depend on the nature of the predictable future trend.
This helps to minimize the chances of incurring losses. The business requires a close track of the trend for maximum profits. For instance, if a favorable trend appears to stabilize at some time, most likely it will soon be falling. It is advisable to take the profits at this time or else risk the loss (Berg, 2010, p. 138).
Most people opt to invest in this trade instead of holding excess currency. This is a wise decision although risky as it can easily lead to losses. Investing $10 in foreign exchange can result in significant profits. It is though wise to convert currency into several different currencies. This guarantees success in case the trend reverts unexpectedly (Wamg, 2009. p. 137). In this regard, I choose to divide the amount into three portions then convert the three into different currencies that have shown a favorable trend for the past three days.
I would have $ 3.5 million of the total amount converted to Mexican Peso. This decision follows an evaluation of the trend of the currency pair in the past three days. The historical exchange rates graph for the USD/MXN indicates a falling trend meaning that the selling price is falling with time. On the other hand, the MXN/USD graph features an upward trend. Therefore, converting the cash to Mexican peso then reverse back to US dollar yields profits as depicted here (Berg, 2010, p. 138).
The gain over a three-day period would have been as follows. Converting $3.5 million would give 49.0161 million of the Mexican Peso. Converting the currency back after three days, we would have $ 3.50188 million hence a $0.00188 million profit. The period considered here is between May 28 and May 31, 2012.
I would also convert $3.5 million to the New Zealand dollar as the two currencies depict a possibility of making a profit. In this case, $3.5 million would convert to 5.80839 million of the New Zealand dollar as of May 28, 2012. Converting this amount back to US dollars would give $ 3.53934 million after three days. This is a profit margin of $0.03934. This gain is due to currency conversion at a time when the rate favors the New Zealand dollar comparative to the US dollar (Berg, 2010, p. 140).
Finally, I would have $3 million converted to Japanese Yen. This currency pair promises profits from the evaluation of their conversion rates graphs developed from their earlier trend. This would amount to 238.90 million Japanese Yen if converted on May 28, 2012. Reversing the conversion on 31st would amount to $3.01426 million hence a profit of $0.01426.
Similar to the above two cases, a profit is realized because the reconversion is done when the rates favor the Japanese currency. The total profits would have been $0.40954 million in three days. With consideration to this, one will certainly expect a gain if all goes well with the market.
References
Berg, H. (2010). International Finance and Open-Economy Macroeconomics: Theory, History, and Policy. London: World Scientific.
Wamg, P. (2009). The Economics of Foreign Exchange and Global. Berlin: Springer publishers.
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