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Turning Finance into Science Risk Management & the Black- Scholes Options Pricing Model (Article) by Albert Kim
Turning Finance into Science Risk Management & the Black- Scholes Options Pricing Model (Article) by Albert Kim
Forex Trading – Foreign Exchange Course
You want to learn about Forex?
Foreign exchange, or forex, is the conversion of one country’s currency into another.
In a free economy, a country’s currency is valued according to the laws of supply and demand.
In other words, a currency’s value can be pegged to another country’s currency, such as the U.S. dollar, or even to a basket of currencies.
A country’s currency value may also be set by the country’s government.
However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation.
In an effort to comprehend finance scientifically, a new field called financial engineering has evolved in recent years. In this field, mathematicians, physicists, and traders collaborate to apply sophisticated mathematics to real-world finance (Stix,1998). Although financial engineering covers a wide range of financial topics, risk management in the stock market is where this field is most commonly used. Risk is always present, regardless of the kind of stock market transaction one does. However, these so-called “financial engineers” focus on managing this risk. People want a quick and accurate method of calculating and controlling the risk associated with all of their stock transactions. The Black- Scholes Option Pricing Model enters the picture here. This formula’s underlying principles, developed by Professors Robert C. Merton, Myron S. Scholes, and the late Fisher Black, have been dubbed “the most effective theory not only in finance but in all of economics” by one expert.
What is forex?
Quite simply, it’s the global market that allows one to trade two currencies against each other.
If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.
If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.
Foreign Exchange
You go up to the counter and notice a screen displaying different exchange rates for different currencies.
An exchange rate is the relative price of two currencies from two different countries.
You find “Japanese yen” and think to yourself, “WOW! My one dollar is worth 100 yen?! And I have ten dollars! I’m going to be rich!!!”
When you do this, you’ve essentially participated in the forex market!
You’ve exchanged one currency for another.
Or in forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.
Currency Exchange
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have left over (Tokyo is expensive!) and notice the exchange rates have changed.
It’s these changes in the exchange rates that allow you to make money in the foreign exchange market.
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