Forex

Forex is short for foreign exchange. When one speaks of a forex profit or loss, he is talking about the increased or decreased value of an investment caused solely by currency movements. For example, if an investor thought that the dollar was weak, he might purchase German money markets. The investor's account might earn 3% annualized, but the real profit or loss could be in how the DM (German mark) moves against the US$ (United States dollar). If the investor held the DM money market for an entire year, and if the DM rose 5% against the dollar, the investment would, in real returns, make not only the 3% annualized interest, but 5% on the principal and 5% of the 3% interest.

Example: Say the investor put US$10,000 in DM at 3%, with the 3% held to maturity. If the DM rose 5% against the dollar during the year, when the investor was paid at maturity and exchanged his DM back into US$, he would receive, in total, his $10,000 investment -- plus five percent of the $10,000 (the forex increase)-- plus three percent of the interest paid on $10,000 (stated money market interest rate) -- plus five percent of the three percent interest (the forex increase which would accrue even on the interest, because the interest would be paid in DM).

The investor would receive: $10,000 + .05 ($10,000) + .03 ($10,000) + .05 (.03) $10,000 = $10,815, or a profit of $815. This is a return of 8.15%. The investor would have made 3% at any rate, even if the mark had not changed against the dollar. That is, he would have made .03 ($10,000) = $300. Therefore his forex profit is $815-$300= $515, or 5.15%.

Source - http://www.garyascott.com/currez/glossary.html