by Sithambaranathan Prithiviraj

Created on: September 07, 2008

The foreign currency trading is popular because of several reasons. The most important in the current foreign exchange market is due to the easy access of individuals to participate in foreign exchange transactions. This has happened because of the information technology revolution and the easy access given by brokers in the market for individuals to participate in the foreign exchange market to earn a quick profit. Sometimes people are involved in foreign exchange market because of speculative purposes exploiting foreign exchange rate volatility.

In addition companies and large banks enter in to foreign exchange market to hedge their risks against their exposure to foreign exchange risks. This they do it by forward exchange markets and reduce the foreign exchange risks to some extent. However, foreign exchange market is very volatile and for an individual if he is leveraged highly it may wipe out the value of their investments very quickly and they may suffer huge losses. It is like gambling because it is a zero-sum game. That is some win and some loose in the same time. In this respect, an individual must be aware of the negative impacts of foreign exchange transactions as they may not be able to profitably trade compared to the companies and banks who employs highly paid economists and other financial professionals to earn a profit with minimum risk. They also, form effective hedge strategies than an individual. In addition, banks can access to loans at a favorable interest rate than individual as they are wholesalers of credit. To earn a profit by speculation by an individual given the high volatility of the foreign exchange market is very limited in practical terms compared to big banks and companies. That is, the individuals must be knowledgeable as well as experienced and must have sufficient funds and know how the spot and forward exchange market is affected by interest rate and random political decisions by the central banks of many countries and by the governments. These are very difficult for an individual to predict. As well, the foreign exchange market do not work like the share or stock market. In this light, an individual investor must not be persuaded by online foreign exchange transactions by brokers because they may suffer losses in the same time others earn a huge profit. This because, foreign exchange transactions are like gambling and it is a zero-sum game.

If the purpose of the foreign exchange transaction is to hedge against foreign exchange

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