Description
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks.
7/3/2013
2
The term Foreign exchange implies two things: A. Foreign currency and B. Exchange rate Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency.
7/3/2013
3
?
Foreign exchange market is that market in which national currencies are traded for one another. Transfer of funds from one country to another speculation is an important dimension of foreign exchange market. Its where money in one currency is exchanged for another.
?
?
7/3/2013
4
?
Its huge trading volume representing the largest asset class in the world leading to high liquidity.
Its geographical dispersion; Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The use of leverage to enhance profit and loss margins and with respect to account size.
7/3/2013 5
?
?
?
It’s already the world’s largest market and it’s still growing quickly ? It makes extensive use of information technology – making it available to everyone ? Traders can profit from both strong and weak economies ? Trader can place very short-term orders – which are prohibited in some other markets ? The market is not regulated ? Brokerage commissions are very low or non-existent ? The market is open 24 hours a day during weekdays
?
7/3/2013
6
?Central Banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, interest rates and often have official or unofficial target rates for their currencies. ?Hedge funds as speculators
70% to 90% of foreign exchange transaction are speculative.
7/3/2013
7
?Investment management firms
Manage large accounts on behalf of customers such as pension funds and endowments use the foreign exchange market to facilitate transactions in foreign securities.
?Retail foreign exchange brokers
participate indirectly through brokers or banks
7/3/2013
8
? Non-bank
foreign exchange companies
currency exchange to private individuals and and
Companies offer international payments companies
? Money
transfer/remittance companies
They perform high-volume low-value transfers generally by economic migrants back to their home country.
7/3/2013
9
Quoting
Direct Method Indirect Method
Spot Market Forward Market
Accounting
AS 11
T+1
Settlement T+2
7/3/2013 10
?
The equity market can impact the currency markets in many different ways.
The direct relation between foreign exchange market and the stock market.
?
7/3/2013
11
?Greater leverage ?No middlemen
?Buy/Sell programs do not control the Market
?Same price for broker assisted trades
?Trade with real time profits
7/3/2013
12
1. Spot
2. Forward 3. Future 4. Swap 5. Option 6. Exchange traded funds
7/3/2013
13
?
Its given by all major newspapers.
?
Major currencies have 4 different rates: ?Spot prices ?30 days ?90 days ?180 days
Bid-Ask spread is used to calculate the fee charged by bank in terms of large transactions. Spread (%) = Ask – Bid/ Ask *100
7/3/2013 14
?
?
? “An agreement between a bank and a customer to deliver a specified amount of currency against another currency at a specified future date and at a fixed exchange rate”.
? The main purpose of forward market is Hedging that is the act of reducing exchange rate risk.
7/3/2013
15
Calculating the forward Premium/Discount:
= F-S x 12 x 100 S n where ; F = The forward rate of exchange S = The spot rate of exchange n = The number of months in the forward contract
7/3/2013
16
Future Market
Exchange traded forward transaction. Standard contract size and maturity date. Interest inclusive and usually for 3 months. Swap Market Most prevalent market. Two parties exchange currencies for a particular period and reverse the same transaction at a pre decided latter date.
7/3/2013 17
? ?
Exchange Rate is the price for foreign money. It is defined as the price paid in the home currency for a unit of foreign currency. 2 Quotes: ? Indirect Quote 1 unit of foreign currency to a number of units of domestic currency. 1 Rs=$ 0.02
?
? Direct QuoteA certain number of units of foreign currency to 1 unit of domestic currency. 1$=55 Rs
7/3/2013 18
Spot Rate
Forward Rate Buying & Selling Rate Floating Exchange Rate Fixed Exchange Rate
7/3/2013 19
The delivery under a foreign exchange transaction can be settled in one of the following ways
?
Ready or cash – To be settled on the same day
– To be settled on the day next to the date of transaction
?Tom
– To be settled on the second working day from the date of contract
?Spot ?Forward
– To be settled at a date farther than the spot
date
7/3/2013 20
Exchange rates are quoted as two way quotes – • for purchase • and for sale transactions by the Bank Fixed and Floating exchange rates
? Fixed exchange rate is the official rate set by the monetary
authorities of the Governance for one or more currencies.
? Under floating exchange rate, the value of the currency is
decided by supply and demand factors
7/3/2013 21
? Fixed exchange rate is the official rate set by the
monetary authorities of the Governance for one or more currencies.
? Under floating exchange rate, the value of the currency
is decided by supply and demand factors
7/3/2013
22
? ? ? ? ?
?
? ? ?
Impact of Inflation & Deflation Trends in the balance of trade Government Budget Changes in Interest rate Economic Growth Speculation Creditor v/s Debtor Nations Stock Market Operations Demand & Supply for Foreign Exchange
7/3/2013
23
?
The exchange of one currency for another, or the conversion of one currency into another currency.
7/3/2013
24
?Appreciation- An increase in the value of the domestic
currency with respect to the foreign currency. Importers gain from Appreciation of Domestic & loose when it depreciates. currency
?Depreciation- A decrease in the value of the domestic currency with respect to the foreign currency.
Exporters loose depreciation. from appreciation and gain from
7/3/2013
25
US DOLLAR(USD)
GREAT BRITAIN POUND(GBP) EURO JAPANESE YEN SWISS FRANC
7/3/2013 26
7/3/2013
27
? ?
?
? ? ? ?
Plan your trade and trade your plan. The trend is your friend. Focus on capital preservation. Know when to cut loss. Take profit when the trade is good Be emotionless. Not trade based on a tip from a friend or broker.
? ? ? ? ?
?
?
Trading Out of Boredom or Anger Having Unrealistic Expectations. Taking Highly Correlated Trades. Failing to Use a Stop. Taking Unnecessary Risks. Being Too Patient With Losers and Not Patient Enough With Winners. Being a “Possum Trader”.
?
Meaning:
Theories which determine the prices of forex rate considering inflation, interest rate, and elasticity of price etc..
?
Methods: a)Long run theory b)Short run theory
7/3/2013
31
? This are the theories which predominately take into
account the fundamental changes of economy.
? Here fundamental changes refers to the change which are
going to change the economic performance of the economy Purchasing power for all times to come.
7/3/2013
32
Types of theory:
Purchasing power parity. 1) Absolute purchasing power parity. 2) Relative purchasing power parity.
Interest Rate parity
1) Covered Interest Rate parity 2) Uncovered Interest Rate parity
7/3/2013
33
? This theories are based more on current information or
immediate performance of economic variables.
? This theories try to take into account the short run factor
which may be eliminated in the long run.
7/3/2013
34
Founder –Swedish economist Gustav Cassel in 1918. Meaning : According to this theory ,the price levels and the changes in these price levels in different countries determine the exchanges rates of these countries currencies. The basic principle of this theory is that the exchange rates between various currencies reflect the purchasing power of these currencies .This theory is based law of one price.
7/3/2013
35
? If the law of one price were to hold good for each and
every commodity then the theory is termed as Absolute form of PPP Theory.
? This theory describes the link between the spot
exchange rate and price levels at a particular point of time.
7/3/2013
36
? This theory describes the link between the changes in spot
exchange rate and in the price levels over a period of time.
? According to this theory ,changes in spot rates over a
period of time reflect the changes in the price level over the same period in the concerned economies.
? This
theory relaxes three assumptions of PPP i.e Absences of transportation cost ,transaction costs and tariffs.
7/3/2013
37
?
Definition :
The process that ensures that the annualized forward premium or discount equals the interest rate differential on equivalent securities in two currencies.
?
International Fisher effect:
I. Expected Rate of change = Interest rate of the exchange rate differential II. Interest Rate = Real Interest Expected Differential Rate + inflation rate
7/3/2013 38
? The most satisfactory explanation of the determination of
the rate of exchange is that a free exchange rate tends to be such as to equate the demand and supply of foreign exchange..
? The intersection of supply curve and demand curve gives
the equilibrium price
? Modern theory also called balance of payments theory of
foreign exchange
7/3/2013
39
•
Exposure to exchange rate movement. Any sale or purchase of foreign currency entails foreign exchange risk.
•
•
Foreign exchange transaction affects the net asset or net liability position of the buyer/seller.
Carrying net assets or net liability position in any currency gives rise to exchange risk.
•
7/3/2013
40
?Controlling losses
? You could control your losses, by mental stop or hard
stop. Mental stop means that you already set you limit of your loss. A hard stop is your initiative to stop when you think you must to stop it.
?Using correct lot size ? As a beginning just use smaller lots you could stay
flexible and logic than emotions while you trade.
7/3/2013
41
?Tracking overall exposure ? you go to short on EUR/USD and long on USD/CHF,
you exposed two times for USD in the same direction. If USD goes down , you have a double dose of pain. So, keep your overall exposure limited, it keeps you for the long haul for trading
?The bottom line
? Trading is about opportunities, you must take action
while the opportunities arise.
7/3/2013
42
7/3/2013
43
doc_337869987.pptx
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks.
7/3/2013
2
The term Foreign exchange implies two things: A. Foreign currency and B. Exchange rate Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency.
7/3/2013
3
?
Foreign exchange market is that market in which national currencies are traded for one another. Transfer of funds from one country to another speculation is an important dimension of foreign exchange market. Its where money in one currency is exchanged for another.
?
?
7/3/2013
4
?
Its huge trading volume representing the largest asset class in the world leading to high liquidity.
Its geographical dispersion; Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The use of leverage to enhance profit and loss margins and with respect to account size.
7/3/2013 5
?
?
?
It’s already the world’s largest market and it’s still growing quickly ? It makes extensive use of information technology – making it available to everyone ? Traders can profit from both strong and weak economies ? Trader can place very short-term orders – which are prohibited in some other markets ? The market is not regulated ? Brokerage commissions are very low or non-existent ? The market is open 24 hours a day during weekdays
?
7/3/2013
6
?Central Banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, interest rates and often have official or unofficial target rates for their currencies. ?Hedge funds as speculators
70% to 90% of foreign exchange transaction are speculative.
7/3/2013
7
?Investment management firms
Manage large accounts on behalf of customers such as pension funds and endowments use the foreign exchange market to facilitate transactions in foreign securities.
?Retail foreign exchange brokers
participate indirectly through brokers or banks
7/3/2013
8
? Non-bank
foreign exchange companies
currency exchange to private individuals and and
Companies offer international payments companies
? Money
transfer/remittance companies
They perform high-volume low-value transfers generally by economic migrants back to their home country.
7/3/2013
9
Quoting
Direct Method Indirect Method
Spot Market Forward Market
Accounting
AS 11
T+1
Settlement T+2
7/3/2013 10
?
The equity market can impact the currency markets in many different ways.
The direct relation between foreign exchange market and the stock market.
?
7/3/2013
11
?Greater leverage ?No middlemen
?Buy/Sell programs do not control the Market
?Same price for broker assisted trades
?Trade with real time profits
7/3/2013
12
1. Spot
2. Forward 3. Future 4. Swap 5. Option 6. Exchange traded funds
7/3/2013
13
?
Its given by all major newspapers.
?
Major currencies have 4 different rates: ?Spot prices ?30 days ?90 days ?180 days
Bid-Ask spread is used to calculate the fee charged by bank in terms of large transactions. Spread (%) = Ask – Bid/ Ask *100
7/3/2013 14
?
?
? “An agreement between a bank and a customer to deliver a specified amount of currency against another currency at a specified future date and at a fixed exchange rate”.
? The main purpose of forward market is Hedging that is the act of reducing exchange rate risk.
7/3/2013
15
Calculating the forward Premium/Discount:
= F-S x 12 x 100 S n where ; F = The forward rate of exchange S = The spot rate of exchange n = The number of months in the forward contract
7/3/2013
16
Future Market
Exchange traded forward transaction. Standard contract size and maturity date. Interest inclusive and usually for 3 months. Swap Market Most prevalent market. Two parties exchange currencies for a particular period and reverse the same transaction at a pre decided latter date.
7/3/2013 17
? ?
Exchange Rate is the price for foreign money. It is defined as the price paid in the home currency for a unit of foreign currency. 2 Quotes: ? Indirect Quote 1 unit of foreign currency to a number of units of domestic currency. 1 Rs=$ 0.02
?
? Direct QuoteA certain number of units of foreign currency to 1 unit of domestic currency. 1$=55 Rs
7/3/2013 18
Spot Rate
Forward Rate Buying & Selling Rate Floating Exchange Rate Fixed Exchange Rate
7/3/2013 19
The delivery under a foreign exchange transaction can be settled in one of the following ways
?
Ready or cash – To be settled on the same day
– To be settled on the day next to the date of transaction
?Tom
– To be settled on the second working day from the date of contract
?Spot ?Forward
– To be settled at a date farther than the spot
date
7/3/2013 20
Exchange rates are quoted as two way quotes – • for purchase • and for sale transactions by the Bank Fixed and Floating exchange rates
? Fixed exchange rate is the official rate set by the monetary
authorities of the Governance for one or more currencies.
? Under floating exchange rate, the value of the currency is
decided by supply and demand factors
7/3/2013 21
? Fixed exchange rate is the official rate set by the
monetary authorities of the Governance for one or more currencies.
? Under floating exchange rate, the value of the currency
is decided by supply and demand factors
7/3/2013
22
? ? ? ? ?
?
? ? ?
Impact of Inflation & Deflation Trends in the balance of trade Government Budget Changes in Interest rate Economic Growth Speculation Creditor v/s Debtor Nations Stock Market Operations Demand & Supply for Foreign Exchange
7/3/2013
23
?
The exchange of one currency for another, or the conversion of one currency into another currency.
7/3/2013
24
?Appreciation- An increase in the value of the domestic
currency with respect to the foreign currency. Importers gain from Appreciation of Domestic & loose when it depreciates. currency
?Depreciation- A decrease in the value of the domestic currency with respect to the foreign currency.
Exporters loose depreciation. from appreciation and gain from
7/3/2013
25
US DOLLAR(USD)
GREAT BRITAIN POUND(GBP) EURO JAPANESE YEN SWISS FRANC
7/3/2013 26
7/3/2013
27
? ?
?
? ? ? ?
Plan your trade and trade your plan. The trend is your friend. Focus on capital preservation. Know when to cut loss. Take profit when the trade is good Be emotionless. Not trade based on a tip from a friend or broker.
? ? ? ? ?
?
?
Trading Out of Boredom or Anger Having Unrealistic Expectations. Taking Highly Correlated Trades. Failing to Use a Stop. Taking Unnecessary Risks. Being Too Patient With Losers and Not Patient Enough With Winners. Being a “Possum Trader”.
?
Meaning:
Theories which determine the prices of forex rate considering inflation, interest rate, and elasticity of price etc..
?
Methods: a)Long run theory b)Short run theory
7/3/2013
31
? This are the theories which predominately take into
account the fundamental changes of economy.
? Here fundamental changes refers to the change which are
going to change the economic performance of the economy Purchasing power for all times to come.
7/3/2013
32
Types of theory:
Purchasing power parity. 1) Absolute purchasing power parity. 2) Relative purchasing power parity.
Interest Rate parity
1) Covered Interest Rate parity 2) Uncovered Interest Rate parity
7/3/2013
33
? This theories are based more on current information or
immediate performance of economic variables.
? This theories try to take into account the short run factor
which may be eliminated in the long run.
7/3/2013
34
Founder –Swedish economist Gustav Cassel in 1918. Meaning : According to this theory ,the price levels and the changes in these price levels in different countries determine the exchanges rates of these countries currencies. The basic principle of this theory is that the exchange rates between various currencies reflect the purchasing power of these currencies .This theory is based law of one price.
7/3/2013
35
? If the law of one price were to hold good for each and
every commodity then the theory is termed as Absolute form of PPP Theory.
? This theory describes the link between the spot
exchange rate and price levels at a particular point of time.
7/3/2013
36
? This theory describes the link between the changes in spot
exchange rate and in the price levels over a period of time.
? According to this theory ,changes in spot rates over a
period of time reflect the changes in the price level over the same period in the concerned economies.
? This
theory relaxes three assumptions of PPP i.e Absences of transportation cost ,transaction costs and tariffs.
7/3/2013
37
?
Definition :
The process that ensures that the annualized forward premium or discount equals the interest rate differential on equivalent securities in two currencies.
?
International Fisher effect:
I. Expected Rate of change = Interest rate of the exchange rate differential II. Interest Rate = Real Interest Expected Differential Rate + inflation rate
7/3/2013 38
? The most satisfactory explanation of the determination of
the rate of exchange is that a free exchange rate tends to be such as to equate the demand and supply of foreign exchange..
? The intersection of supply curve and demand curve gives
the equilibrium price
? Modern theory also called balance of payments theory of
foreign exchange
7/3/2013
39
•
Exposure to exchange rate movement. Any sale or purchase of foreign currency entails foreign exchange risk.
•
•
Foreign exchange transaction affects the net asset or net liability position of the buyer/seller.
Carrying net assets or net liability position in any currency gives rise to exchange risk.
•
7/3/2013
40
?Controlling losses
? You could control your losses, by mental stop or hard
stop. Mental stop means that you already set you limit of your loss. A hard stop is your initiative to stop when you think you must to stop it.
?Using correct lot size ? As a beginning just use smaller lots you could stay
flexible and logic than emotions while you trade.
7/3/2013
41
?Tracking overall exposure ? you go to short on EUR/USD and long on USD/CHF,
you exposed two times for USD in the same direction. If USD goes down , you have a double dose of pain. So, keep your overall exposure limited, it keeps you for the long haul for trading
?The bottom line
? Trading is about opportunities, you must take action
while the opportunities arise.
7/3/2013
42
7/3/2013
43
doc_337869987.pptx