Question

5. What is the source of most profits and losses on foreign exchange trading? What foreign currency activities provide a secondary source of revenue?

Answer 1

The sources of profits and loss on foreign exchange trading is the variation in the underlying foreign exchange rates away from the price at which the buy or sell was made which allows an investor to make profit. For example, if an forex trader in India buys US dollar when the exchange rate was 1 USD = 65 Indian Rupees and after completion of the trade, the Dollar strengthens that is the exchange rate becomes 1 USD = 69 Indian Rupees, then the forex trader has gained 4 Indian Rupees for each Dollar purchased.

Thus the forex variation is the source of gain or loss in the case of forex trading.

The foreign currency buying or selling in an foreign currency exchange or buying or selling of derivatives on the underlying currency pairs can be a source of secondary income or revenue. Also any favourable movement of the currency in case of multinational corporations can lead to translational gains when multiple currencies are involved.