CURRENCY TRADING
Final Report Prepared Under the Sponsorship Sponsorship Of
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CURRENCY TRADING
Final Report Prepared Under the Sponsorship Sponsorship Of
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Table of Contents
Declaration.......................................................................................................7 Acknowledgements…………………………………………………… Acknowledgements………………………… ………………………………………………8 ……………………8 Abstract…………………………………………………… Abstract………………………… ………………………………………………… …………………………………9 …………9 Learning Experience…………………… Experience……………………………………………… ………………………………………………….10 ……………………….10 Introduction……………………………………………………… Introduction…………………………… …………………………………………………… …………………………11 11 Project Proposed………………………… Proposed………………………………………………… ……………………………........................11 ……........................11 Objective of the project…………………………………………………………………..11 project…………………………………………………………………..11 Methodology……………………………………………………………........................11 Limitations of the study……………………… study………………………………………………… …………………………………………..12 ………………..12 Synopsis of the project……………………… project………………………………………………… …………………………………………..13 ………………..13 Forex currency trading…………………………… trading……………………………………………………… ……………………………………….14 …………….14 Forex currency trading system…………………… system…………………………………………… ……………………………………..14 ……………..14 Hedging in currency trading…………………………… trading…………………………………………………… …………………………………14 …………14 Currency trading online…………………… online……………………………………………… ………………………………………………15 ……………………15 Currency exchange………………………… exchange…………………………………………………… ……………………………………………..15 …………………..15
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Factors deciding currency fluctuation………………………………………………….16 fluctuation………………………………………………….16 Market participants………………………… participants…………………………………………………… ……………………………………………..18 …………………..18 Company profile…………………… profile……………………………………………… ……………………………………......................19 …………......................19 The study………………………… study………………………………………………… ………………………………………......................20 ………………......................20 Rationale for the study…………………………… study…………………………………………………… ………………………………….20 ………….20 Study aims and objectives……………… ob jectives………………………………………… …………………………………..20 ………..20 Offerings………………………………………………… Offerings………………………… ………………………………………………… …………………………………21 ………21 Our schemes……………………… schemes………………………………………………… ………………………………………………… …………………………..22 …..22 Currency futures………………………… futures…………………………………………………… ……………………………………………….25 …………………….25 Research……………………………………………………… Research…………………………… ………………………………………………… ………………………….25 ….25 Chapter1 currency trading……………………… trading………………………………………………… ………………………………………26 ……………26 What is currency trading………………………… trading…………………………………………………… ………………………………..26 ……..26 Speculating as an enterprise…………………… ente rprise……………………………………………… ………………………………..26 ……..26 Currency as a trading vehicle………………… vehicle…………………………………………… ………………………………….26 ……….26 What effects eff ects currency rates…………………………… rates…………………………………………………… ………………………..27 ..27 Fundamentals drive the currency market………………………………………28 Finding your trading style………………………………………………………..29 style………………………………………………………..29 Planning the trade…………………………… trade…………………………………………………… ……………………………………29 ……………29 Executing the trade plan from starting to finish………………………………29 finish………………………………29 Chapter2 What Wha t is forex market………………………………………………………..30 market………………………………………………………..30 Trading for spot…………………………… spot…………………………………………………… …………………………………...31 …………...31 Speculating in currency market……………………………………………….31 market……………………………………………….31 Around the world in a trading day…………………………………………….32 day…………………………………………….32 The opening of the trading stock……………………………………...........33 Trading in Asia-pacific region……………………… region………………………………………………… …………………………33 33 Trading in European-London European -London session……………………………………….33 session……………………………………….33 Key daily times and events……………………… event s…………………………………………… …………………………..34 ……..34
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The U.S. dollar index…………………………………………………...........35 index…………………………………………………...........35 Currencies and other financial markets…………………………………….35 Getting started with trading trad ing account……………………………………….37 account……………………………………….37 Chapter 3 Who trade currencies……………………… currencies………………………………………………… …………………………….37 ….37 Meet the t he players…….……………… players…….………………………………………… ………………………………….........37 ……….........37 The interbank market is the market……………………… market…………………………………………37 …………………37 Trading in interbank market…………………………………………………38 market…………………………………………………38 Steeping onto a currency trading floor……………………………………39 floor……………………………………39 Hedgers and financial investors…………………………………………..40 investors…………………………………………..40 Global investment flows……………………… flows………………………………………………… ……………………………41 …41 Hedge funds…………………………… funds……………………………………………………… ……………………………………42 …………42 Bank for international internat ional settlements………………………………………..43 settlements………………………………………..43 The group of 7………………………………………………………………43 7………………………………………………………………43 Chapter4 the mechanics of currency trading……………………………………...44 Currency comes in pairs………………………………………………….44 pairs………………………………………………….44 Major currency pairs……………………… pairs………………………………………………… ………………………………44 ……44 Major cross currency pairs……………………………………………....45 pairs……………………………………………....45 Profit and loss………………………………………… loss……………………………………………………………..45 …………………..45 Unrealized and realized profit and loss…………………………………46 Currency is money, after all…………………………………………… all………………………………………………46 …46 Understanding currency rates…………………………………………….47 rates…………………………………………….47 Trading online……………………… online………………………………………………… ………………………………………48 ……………48 Phone trading…………………… trading……………………………………………… ………………………………………..49 ……………..49 Orders……………………………………………… Orders…………………… ………………………………………………… ………………………49 49 Types of orders………………………… orders…………………………………………………… …………………………………50 ………50 Chapter5 Getting to know the major currency pairs……………………………….52 pairs……………………………….52 The big dollar EUR/USD………………………………………………….52 EUR/USD………………………………………………….52
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Trading fundamentals of EUR/USD……………………………………52 EUR/USD……………………………………52 Trading EUR/USD by the members……………………………………53 members……………………………………53 Trading behaviour of EUR/USD………………………………………..54 EUR/USD………………………………………..54 Trading USD/JPY by the members……………………………………54 members……………………………………54 Important Japanese data reports………………………………………55 Trading fundamentals of GBP/USD…………………………………...55 GBP/USD…………………………………...55 Chapter6 minor currency pairs and cross-currency trading……………………….56 Trading USD/CAD by the numbers…………………………………….56 numbers…………………………………….56 Trading NZD.USD by the numbers………………… numbe rs……………………………………57 …………………57 Cross currency pairs…………………… pairs……………………………………………… …………………………………57 ………57 Why trade the crosses……………………………………………………57 crosses……………………………………………………57 Chapter7 currency futures………………………… futures………………………………………………… ……………………………………..58 ……………..58 Definition of currency futures………………………………………………58 futures………………………………………………58 Future terminology…………………… terminology…………………………………………… ……………………………………...59 ……………...59 Rationale for introducing currency futures………………………………..60 futures………………………………..60 Conclusion…………………………………………………… Conclusion………………………… ………………………………………………… …………………………….62 …….62 Recommendations to the company…………………………………………………….63 company…………………………………………………….63 Bibliography……………………………………………… Bibliography…………………… ………………………………………………… ………………………………..64 ………..64 References……………………………………………………… References…………………………… …………………………………………………….65 ………………………….65
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Declaration I hereby hereby declar declare e that that this this projec projectt work work titled titled “Curre “Currency ncy tradin trading” g” conducted at Religare Securities Ltd., New Delhi has been prepared by me during the academic year 2008-09 under the the guidance of my faculty Prof. Bijay Bhujabal Bhujabal (faculty-Mar (faculty-Marketin keting, g, IBS Dehradun), and guide Prof.
my Company guide Mr. Anand Sagar (Manager, Religare Securities ltd).
I also declare that this project is the result of my effort and has not been submitted to any other University or Institution for the award of any degr degree, ee, or pers person onal al favo favour ur what whatso soev ever er.. All All the the deta detail ils s and and anal analys ysis is provided in the report hold true to the best of my knowledge. 7 | Page
ACKNOWLEDGEMENT As a part of the MBA curriculum at ICFAI Business School, the ‘Summer Internship Internship Program’ enables the students students to enhance enhance their skills, expand expand their craniums by applying various theories, concepts and laws to real life scenario which would further prepare them to face in the near future. Summer internship is the part of curriculum of ICFAI BUSINESS SCHOOL which helps in overall development of the student and gives him or her plat platfo form rm to under nders stand tand the corp corpo orate rate envir nviro onment ment as well ell as to implement the theoretical knowledge. I would like to thank my company guide Mr. Anand Sagar , Branch Manager, Religare Securities Ltd , Delhi for allowing me to work in such a great organization.
I would like to thank my faculty guide Dr. Bijay Bhujabal for his valuable guidance and support during my summer internship.
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I would also like to thanks Prof. Love raj Takru (Dean IBS, Dehradun) for giving me the opportunity to work in such a great organization and carry the college’s name forward.
Abstract In today’s world of highly competitiveness and changing atmosphere, it is not so easy to carve a niche for oneself and stand on your own feet. As per the rule of the nature ‘Survival of the fittest’, this SIP has taught me many important things that one needs to inculcate within himself to face the cut-throat competition. In my opinion the internship program of this curriculum is very practical and important for learning the necessary skills for a bright future of a student and it will surely be helpful in the value addition to the knowledge base.
The study demonstrates how exchanges are versatile institutions, working across a variety of developing country contexts, addressing a diverse range of challenges - some rooted in a country country's 's historic historical al legacy, legacy, other other arising arising with with the globali globalizati zation on of the world world currency currency economy. Whilst the featured exchanges are operated by the private sector, the role of gover gov ernm nment ent - estab establi lishi shing ng an appro appropr pria iate te enabli enabling ng frame framewo work rk and provid providing ing ong ongoin oing g regulatory oversight - has been crucial in each country.
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It was found that exchange risk management instruments - such as futures and options contracts contracts can be made accessible to and useable by small clients clients to reduce exposure to price and, potentially, production risks. The responsibility which I have got in the form of this project by the company, I have completed the project in the best manner which I could do. I am enjoying working with company also. Without any doubt in mind I can say that this opportunity of my life will necessarily necessarily be beneficial for me and will add a value in terms of skills and knowledge that is going to help me in near future.
Learning Experience: The project has been a great learning experience. It has provided me with learning opportunities about currency market and various currency exchanges. The project involved gaining information about various currency exchanges and getting awareness about various terminologies associated with them.
After I began to use to use the personal network of my friends and asked them to speak to their acquaintances- personal and official and check if they know anything about currency markets. The currency market trends, the rising currency prices giving rise to inflation, how some currency linked are to linked with an economy also helped me a lot to gain more knowledge about currency market.
By handling the project under the guidance of company guide and faculty guide has given me exposure e xposure of organizational culture and environment. On the whole, I understood the psyche of prospective and current trends of the market.
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In the beginning of the project I was a bit uncomfortable as I did not knew anything about currency market, but the project has made me realize that to reach heights of success and position you have to start from the scratch.
Introduction Project Proposed: Currency trading Objective of the project: • •
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To study currency trading. To study about the usage and utility, hedging and arbitrage in currency trading. To study about the factors deciding currency fluctuation. To study about currency trading in India. What are the instruments to protect any losses from currency fluctuation? To study about the initiatives taken by Indian government for currency trading. What are the major participants in currency trading? To study about currency exchange and currency exchange exchange rates To study about hedging in currency trading.
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As company has started dealing in currency trading with NSE six months ago, so it will help company in explaining to their clients regarding currency trading.
Metho ethodo dolo logy gy 1) Primar Primary y Data Data Source Sources:s: The methodology used is to study currency trading and its usage and utility, hedging hedging and and arbitrage in currency trading. trading. To study about factors deciding currency fluctuation. What are the instruments to protect losses from from curr curren ency cy fluc fluctu tuat atio ion? n? How How curr curren ency cy trad tradin ing g is done done.. Curr Curren ency cy trading in India. India. What are the initiatives taken by Indian government for currency trading? Who are major participants in currency trading?
2) Secondary Data Sources: To To keep keep pace pace with with the the exis existi ting ng mark market et I seek seek to cons consul ultt vari variou ous s exis existi ting ng data ata als also in the the rela relate ted d comp compan any y prod roduct ucts so that that a compar comparati ative ve study study is formul formulate ated. d. The source sources s to be used used includ includes es internet, friends working in other companies, faculty members, books.
Limi Li mita tati tion ons s of The The Study tudy • •
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Study is limited to currency trading and its usage and utility. Study is limited to currency exchange and factors deciding currency fluctuations. Study is limited to forex exchange and how forex trading is done. Study is limited to forex brokers. Study is limited to currency trading in India. Owing to the dynamic nature of the global economy in particular, the findings of the report will not be applicable after a point of time. No practical access to global market exchanges. Time constraint.
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SYNOPSIS OF THE PROJECT: This project is about currency trading, its usage and utility, what are hedging and arbitrage in currency trading. How is currency trading done? What are its operations? What is pricing in currency trading. What are factors deciding currency fluctuations. What are instruments to protect any losses losses from curren currency cy fluctu fluctuati ation? on? How How tradin trading g is done. done. What What are initia initiativ tives es taken taken by Indian Indian govern governmen mentt for curren currency cy tradin trading? g? Who are major participants in currency trading? What is currency trading system? How hedging hedging is done done in curren currency cy tradin trading. g. What What are curren currency cy tradin trading g platforms? How is currency trading done online? How is currency trading done online? What is forex trading and forex trading in India?
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CURRENCY TRADING Currency trading means to exchange one currency for another currency is termed as currency trading. This industry is one of the largest in the world with with rega regard rds s to trad tradin ing g volu volume me.. Forei Foreign gn curre currenc ncy y is the the rati ratio o of one one currency in consideration with another. How this process takes place. For example if we take an interbank currency trade for instance, there are two banks A and B. Then bank A will call bank B and will ask for the quote of the currency. For example rupee against the dollar. Then bank B will reply to bank A with the rate of his bank. If the rate seems attractive to bank A then they will enter a deal. All the basic information like price, amount, and purchased amount will be entered in their systems. When the actual settlement takes place bank A will depart with the specified rupee amount and bank B will follow suit by turning in the dollar amount. If the rupee rises against the dollar then bank A will gain the difference as profit. When traders enter into currency trading they give a two- way quote. One of them is the rate of purchase and other is the price of sale. The two prices are mainly separated by a hyphen. On the left is the price at which the trader will purchase and on the right is the price at which is the price at which the trader will sell. The difference between the purchase rate and and sale sale is call called ed the the bidbid-as ask k sprea spread. d. The The trad trader er expe expect cts s the the slig slight ht variations on the sale and purchase rate. He will also trade in the similar amou amount nts s of what what he had had purc purcha hase sed. d. Ther There e will will not not be any any dras drasti tic c differences. The margin thus earned by the trader is the difference of the bid-ask spread. The profit gained depends on the variation in the exchange rate and the size of the position. Speculating over a period of time can be dangerous and hence every government has the strict rules laid down which have to be adhered to, to prevent the chaos.
FOREX CURRENCY TRADING Currency trading is done in Paris. They follow the International standards organi organizat zation ion (ISO) (ISO),, which which has built built a code code abbrevi abbreviati ation. on. For instan instance ce 14 | P a g e
EUR/USD- EURO AND US DOLLAR. Similarly we have USD/CHF, GBP/USD etc. Thus foreign exchange is the trading of one currency for another. It is the ratio of one currency as valued for another. While trading the first currency is known as the base currency and the other is known as the counter of quote currency. Counter currency is purchased on one unit of the base currency. While selling we are told how much the counter or quote currency we will receive for every base currency unit. For simplifying foreign currency trade one monetary unit is considered equal to the base currency. So if we are talking of the base currency i.e. Rupee, Euro, Dollar, it is 1 Rupee, 1 Euro, and 1 Dollar. As the US Dollar is mostly traded with any currency paired with the US Dollar is known as the direct rate. If the currency is not against the US Dollar it is known as the cross rate. As the quote currency is lower than the base currency it is conv conver erte ted d into into smal smalle lerr unit units s of the the base base curr curren ency cy.. Fore Foreig ign n curre currenc ncy y trad tradin ing g invo involv lves es many many intr intric icac acie ies s but but once once one one gain gain know knowle ledg dge e and and practice it, it soon get easy and attractive.
FOREX CURRENCY TRADING SYSTEM T The here re are are many many curr curren enci cies es trad tradin ing g syst system ems. s.1) 1) Pira Piranh nha a syst system em:: this this system depends upon prevailing interest rates. It helps to determine that whether on should play long or short. Smooth to enter and exit is the core is the core fund of this system. This system has solid profit ground. 2) Cross bow Swiss trading system: this system is based on entering long on dips and selling short on rallies, the system is designed to allow online trading, thus allowing online market information and a nd transactions.
HEDGING IN CURRENCY TRADING Risk is the factor that is involved everywhere. It is very high in currency trading. With the currency trading evolving as huge market it is important to cover the risks involved in case of a huge unexpected downfall. Hedging is the kind of a transaction where two positions are made to offset offset each other in case of price changes. changes. It is the risk covered by those who are desirous of taking it and who are capable of taking and handling it.
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In the currency trading market high amounts are traded with. Hence if there there is sudd sudden en decl declin ine e in pric prices es it can can be quit quite e dema demand ndin ing g on the the investors and the whole economy per say.
CURRENCY TRADING ONLINE Trad Tradin ing g is alwa always ys give given n an impe impetu tus s beca becaus use e of its its abil abilit ity y to promote an activity beyond its current realms. Be it basic trading or onli online ne curr curren ency cy trad tradin ing. g. It give gives s the the indiv individ idua uall a diff differ eren entt feel feelin ing. g. More More of one one to one one basi basis. s. It elim elimin inat ates es the the need need of midd middle leme men n and and thus thus redu reduce ces s cost cost.. Onli Online ne curr curren ency cy tradi trading ng is more dangerous unless you are adapting with its requirements. Some Some brok broker ers s offe offerr teac teachi hing ng the the uses uses of onli online ne trad tradin ing g at a minimal fee. Trading currency online gives one the advantage of working from home. If you are in individual investor you can delineate your comm comman ands ds to your your bro broker ker from from the com comfort fort of you your home home.. Rece Receiv ive e conf confir irmat matio ion n and and chec check k the the tran transf sfer er of fund funds s in your your account. On the other hand if you are an investor you can trade in the main market. Buy on dips and sell on rallies or trade on what whatev ever er syste ystem m. It’s It’s pos possibl sible e from rom you your home. me. Ano Another her adva advant ntag age e of tradi radin ng onlin nline e is that that no spe special cial sof softwar tware e is required. required. Connect yourself yourself to internet internet and get working. working. You can get prices 24 hours a day. Through the internet you can access the the late latest st exch exchan ange ge rate rates, s, repo report rts, s, news news and and anal analys ysis is.. It is absolutely commission free. However it depends upon the portal you are using for online currency trading as the charges differ from company to company.
CURRENCY EXCHANGE With With Indian Indians s going going global global and dealin dealing g in intern internati ationa onall trade, trade, curren currency cy exchange is very common. Indian rupee is exchange is anywhere in the world. However it’s still weak to US Dollar, GB Pound and EURO, so the exchange rate varies according to vagaries of the day to day market. For
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the common common trader or profes professio sional nal who who wished wished to invest invest in curren currency cy exchange the best way to do is through official channels. Banks, forex institutions, authorized travel agents are the only ones who can exchange the rupee to any other currency. When a person goes abroad for a holiday or for a business, a certain slab is reserved for exchange. Any amount of currency cannot be exchanged. Since there a restrictions some people try to smuggle hard cash in suitcases. Which is an offence, offence, and if caught caught they can be deported deported or not allowed allowed to leave leave the country, without giving proper explanation.
FACTORS DECIDING CURRENCY FLUCTUATION 1. CURRENCY FLUCTUATION
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less then available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a countries interest rates, the greater the demand for that currency. It has been argued that currency speculation can
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undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).
2. In the absence of government intervention, the main driver of currency fluctuations is the demand for the currency relative to the demand for other currencies. If many people want to trade dollars for Indian rupees, the value of the rupee will rise and the dollar will fall. This happens when there is a greater demand for one country's products, denominated in its home currency, relative to the demand for another country's products. India, I believe, runs a large trade surplus with the rest of the world, while the U.S., on the other hand, and runs a large trade deficit. There are several factors that can influence this dynamic. A country's central bank can reduce the money supply by issuing bonds and collecting currency for them. They can increase the required reserve level that banks must hold, therefore reducing the amount they can lend. On the other hand, the central bank can buy back bonds, injecting more money into the market, or they can simply start printing more money and buy things, thus getting it into circulation. This last tactic usually leads to runaway inflation, since the government often winds up issuing more money to keep ahead of individuals' perception of its value. Other governments can also affect the value of a country's currency, which has happened in the case of the U.S. Since the U.S. dollar is the world's de facto reserve currency (the one that most international transactions are done in), it is in the interest of many countries to keep large stocks of U.S, currency on hand, and to keep the value of the dollar stable. This allows the U.S. to float more of its debt on world markets without suffering the ill effects of devaluing its currency.
3. Supply & Demand
Supply: If countries are inflating their currency, there will be more available on international markets and it will not be as valuable. This will additionally cause lower interest rates in the domestic market. Demand: If investment opportunities are poor in the domestic economy, currency will not be as valuable internationally.
4. Currency fluctuation or rather the value of a currency is determined by various
factors depending upon what time frame, we are looking at. Short term values are determined by immediate supply and demand you may find during pre election time the rupee will appreciate because lot of funds from abroad will get converted to Indian currency .In the medium term it is the country's export /import and capital flows that will determine the value. In the long term it is the confidence of people in the country's policies, the stability of the system of government, its credibility etc
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which determines the value of a currency. Dollar enjoyed the reserve currency status because of this factor. 5. The value of a local currency is its value in real terms. i.e., its purchasing power in the international market. For example what you can buy by, say Rs. 100.If you can buy items worth US $2 then the value of Rupee is 1/50 American Dollar. Similar is the case with other currencies.
MARKET PARTICIPANTS According to research data 53% of the forex deals are arranged between dealers or banks; 33% are between a dealer (a bank) and a fund manager or other non- banking financial institutions; 14% involves a dealer and a non financial company.
BANKS The largest part of forex market belong to the banks. They cater both to the majority of commercial turnover and large amounts of speculative trading every day. Daily turnover of one large bank may reach billions of dollars. And only the small part of
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trading this trading is undertaken on behalf of customers. The rest trading banks arrange for their own account. Today large banks have moved on to electronic systems such as EBS, the Chicago mercantile exchange, Bloomberg and Trade book(R).
COMMERCIAL COMPANIES Commercial companies that seek foreign exchange to pay for goods or services are important part of forex market. Comparing with banks or speculators, commercial companies trade fairly small amount. Besides there trade usually have little short term impact on currency’s exchange rates. But sometimes multinational companies can have unpredictable impact on market rates. Especially when market participants do not know about very large positions, covered due to little littl e known exposures.
CENTRAL BANKS Nati Nation onal al cent centra rall bank banks s are are one one of the the most most impo import rtan antt part partic icip ipan ants ts of fore foreign ign exchange market. There purpose is to control money supply, inflation and interest rates. Usually they have official or unofficial target rates for their currencies. Usually their substantial foreign exchange reserves as a stabilization market tool. One of the best stabilization strategies, used by central banks, is to buy while the exchange rate is the loosest and to sell when the rate is high. In such a way central banks may get a good profit. Nevertheless, central banks are more protected then other market participants participants,, as they don’t go bankrupt bankrupt if they make large losses. losses. At the same time there is no convincing evidence that central banks do not make a profit trading. INVESTMENT MANGEMENT FIRMS
Their main activity is managing large accounts on behalf of customers such as pension funds, endowments etc. Investment managers usually use the forex market to facilitate transactions in foreign securities. Especially if an investment management firm is specialized in foreign equities, it will need to buy and sell foreign currencies in the spot market in order to pay for purchases. However some investment management firms have speculative specialist currency overlay units. They manage client's currency exposures with the aim of generating profits as well as limiting risk. But the number of this type of investment management firms is comparatively small.
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COMPANY PROFILE Religa Religare re Securi Securitie ties s Limite Limited d (RSL), (RSL), a 100% 100% subsi subsidia diary ry of Religa Religare re Enterp Enterpris rises es Limited is a leading equity and securities firm in India. The company currently handles sizeable volumes traded on NSE and in the realm of online trading and investments; it currently holds a reasonable share of the market. The major activities and offer offering ings s of the compan company y today today are Equity Equity Brokin Broking, g, Deposi Depositor tory y Partic Participa ipant nt Services, Portfolio Management Services, International Advisory Fund Management Services, Institutional Broking and Research Services. To broaden the gamut of services offered to its investors, the company offers an online investment portal armed with a host of revolutionary features.
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RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange of India, Depository Participant with National Securities Depository Limited and Central Depository Services (I) Limited, and is a SEBI approved Portfolio Manager . Religare has been constantly innovating in terms of product and services and to offer such incisive services to specific user segments it has also started the NRI, FII, HNI and Corporate Servicing groups. These groups take all the portf portfol olio io inve invest stme ment nt deci decisi sion ons s depe depend ndin ing g upon upon a clie client nt’s ’s risk risk / retu return rn parameter. Religare has a very credible Research and Analysis division, which not only caters to the need of our Institutional clientele, but also gives their valuable inputs to investment dealers.
The Study Rationale for Study It is reasonable to assume that a currency exchange generating high volu volume mes s of trad trade e will ill in some some way deliv eliver er tangi angib ble bene benefi fitt to its its stakeh stakehold olders ers.. After After all curren currency cy exchan exchange ge impose imposes s additi additiona onall costs costs on participants- membership fees, transaction fees, compliance costs, etc. However, what type of benefits does currency exchanges deliver? Who gains and who loses? How specifically have these institutions functioned in developing countries? Has there been a notable development impact? The definition of development is heavily contested and conceptually challenging. There is not scope to provide a full or
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adequate account here. Whilst definitions vary widely, development approaches typically pursue some mixture of two broad goals - poverty reduction and economic growth.
Study Aims and Objectives Aim: To identify, analyze and assess the impacts made by currency futures exchanges in developing countries on development. Objectives: Awareness-raising Awareness-raising:: to build awareness of the solutions that currency exchanges provide, and the extent of their track record in doing so, among key national, regional and international stakeholders – including governments, regulators, the private sector, civil society and the media.
Knowl Knowledg edgee accum accumula ulatio tion: n: to produc producee a high-q high-qua uali lity ty report report that that adds adds to the the exist existing ing knowledge base - it will seek to establish within a coherent framework the enduring social and economic impacts that currency exchanges have made in key markets over time.
Worldwide applicability: to demonstrate the extent to which exchange success in upgrading currency sectors and fostering development is part of a worldwide phenomenon.
Exchange of information: to share information, information, experience and perspectives from across the major developing country regions.
OFFERINGS
1. EQUITY EQUITY AND DERIVA DERIVATIV TIVES ES Trading in Equities with Religare truly empowers you for your investment needs. We ensure you have a superlative trading experience through –
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A highly process driven, diligent approach. Powerful Research & Analytics and One of the “best-in-class” “ best-in-class” dealing rooms.
Further, Religare also has one of the largest retail networks, with its presence in more than 1800* locations across more than 490* cities and towns. This means, you can walk into any of these branches and connect to our highly skilled and dedicated relationship managers to get the best services.
The Religare edge • •
• • •
Pan India footprint. Powerful research and analytics supported by a pool of highly skilled research analysts. Ethical business practices. Offline/Online delivery models. Single window for all investment needs through your unique CRN.
2. DEPOSITORY RSL provid provides es deposi depositor tory y servic services es to invest investors ors as a Deposi Depositor tory y Partic Participa ipant nt with NSDL and CDSL. The Depository system in India links issuers, Depository Participants, Depositories National National Securities Securities Depository Limited (NSDL) and Central Central Depository Depository Services Services (Ind (India ia)) Limi Limite ted d (CDS (CDSL) L) and and clea cleari ring ng hous houses es / clea cleari ring ng Corp Corpor orat atio ion n of Stoc Stock k Exch Exchan ange ges. s. Thes These e faci facilit litat ate e hold holdin ing g of secu securi riti ties es in dema demate teria rializ lized ed form form and and securities transactions are processed by means of account transfers. Our customer centric account schemes have been designed keeping in mind the investment psychology. With a competent team of skilled professionals, we manage over 380,000 accounts and have a dedicated customer care centre, exclusively trained to handle queries from our customers. With our country wide network of branches, you are never far from fr om Religare depository services. Religare’s depository service offers you a secure, convenient, paperless and cost effective way to keep track of your investment in shares and other instruments over a period of time, without the hassle of handling physical documents. Your DP acco accoun untt with with us take takes s care care of your your depo deposi sito tory ry need needs s like like dema demate teri rial aliz izat atio ion, n, dematerialisation, transfer and pledging of shares, stock lending l ending and borrowing.
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Your Your dema dematt acco accoun untt is safe safe and and abso absolu lute tely ly secu secure re in our our hand hands, s, ever every y debi debitt instruction is executed only after its authenticity is established. Our hi-tech in-house capabilities cater to the needs of software maintenance, database administration, network maintenance, backups and disaster recovery. This extra cover of security has gained the trust of our clients.
3. PORTFOLIO MANAGEMENT SERVICES Religare offers PMS to address varying investment preferences. As a focused service, PMS pays attention to details, and portfolios are customized to suit the unique requirements of investors. Religare PMS currently extends six portfolio management management schemes, viz Monarque, Panther, Tortoise, Elephant, Caterpillar and Leo. Each scheme is designed keeping in mind the varying tastes, objectives and risk tolerance of our investors.
OUR SCHEMES Monarque
At Religa Religare, re, we unders understan tand d ‘those ‘those who reign’ have have truly truly inimit inimitabl able e needs needs and and objectives and deserve an equivalently matchless partner to provide your wealth the care it deserves to grow and be preserved. Monarque is a portfolio structured to provide higher returns by taking aggressive positions across sectors and market capital capitaliza izatio tions. ns. Monarq Monarque ue is ideall ideally y suitab suitable le for invest investors ors with with "High "High Risk Risk High High Return" appetite.
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Panther
The Panther portfolio aims to achieve higher returns by taking aggressive positions across sectors and market capitalizations. It is suitable for the “High Risk High Return” investor with a strategy to invest across sectors and take advantage of various market conditions.
Tortoise
The Tortoise portfolio aims to achieve growth in the portfolio value over a period of time by way of careful and judicious investment in fundamentally sound companies having having good good prospe prospects cts.. The The scheme scheme is suitab suitable le for the “Mediu “Medium m Risk Risk Mediu Medium m Return” investor with a strategy to invest in companies which have consistency in earnings, growth and financial performance. Elephant
The Elephant portfolio aims to generate steady returns over a longer period by investing in Securities selected only from BSE 100 and NSE 100 index. This plan is suitable for the “Low Risk Low Return” investor with a strategy to invest in blue chip companies, as these companies have steady performance and reduce liquidity risk in the market. Caterpillar
The Caterpillar portfolio aims to achieve capital appreciation over a long period of time by investing in a diversified portfolio. This scheme is suitable for investors with a high risk appetite. The investment strategy would be to invest in scrip’s which are poised to get a re-rating either because of change in business, potential fancy for a particular sector in the coming years/months, business diversification leading to a better operating performance, stocks in their early stages of an upturn or for those which are in sectors currently ignored by the market. Leo
Leo is aimed at retail customers and structured to provide medium to long-term capital appreciation by investing in stocks across the market capitalization range. This scheme is a mix of moderate and aggressive investment strategies. Its aim is to 25 | P a g e
have a balanced portfolio comprising selected investments from both Tortoise and Panther. Exposure to Derivatives is taken within permissible regulatory limits. The Religare Edge
We serve you with a diligent, transparent & process driven approach and ensure that your money gets the care it deserves. PMS brou brough ghtt to you you by Reli Religa gare re with with its its soli solid d No expert experts, s, only only expert expertise ise.. PMS reputation of an ethical and scientific approach to financial management. While we offer you the services of a dedicated Relationship Manager who is at your service 24x7, we do not depend on individual expertise alone. For you, this means lower risk, higher dependability and unhindered continuity. Moreover, you are not limited by a particular individual’s investment style. No hidden hidden profits. profits. We ensure that a part of the broking at Religare Portfolio
Management Services is through external broking houses. This means that your portfolio is not churned needlessly. Using more broking firms gives us access to a larger number of reports and analysis, enabling us to make better, more informed deci decisi sion ons. s. Furth Further ermo more re,, your your port portfo folilio o is cust custom omiz ized ed to suit suit your your inve invest stme ment nt objectives. Daily disclosures. Religare Portfolio Management Services gives you daily updates
on your investment. You can pinpoint where your money is being invested, 24x7, instead of waiting till the end of the month to keep track. No charge till you profit*.So sure are we of our approach to Portfolio Management
that we do not charge you for our services, until your investments start showing profit. With customized investment options Religare Portfolio Management Services invites you to invest across five broad portfolios to suit your investment needs.
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CURRENCY FUTURES Benefits of Currency Futures • • • •
High Liquidity. Extended trading hours - 9 am to 5 pm. Opportunities to reap benefits owing to a highly dynamic market. Small lot size of only US $1000 with low exchange specified margins. Currency Futures is best suited for-
• •
SMEs / Individuals involved in Imports/Exports. Corporate/ Institutions involved in Imports/Exports and anybody else who has foreign currency exposure
RESEARCH We at Religare believe in providing independent research for clients to make investment decisions, with strict emphasis on self-regulation, avoiding possible conflict of interest in objectivity. Our Research Products •
Fundamental Research
•
Technical Research
•
Daily Reports
•
Intraday trading tech calls
•
Intraday Derivative call
•
Directional F&O calls
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CHAPTER 1 CURRENCY TRADING WHAT IS CURRENCY TRADING? Trading is about speculating on the value of one currency versus another. The key words in the last sentence are speculating and currency. We think that looking at currency trading from two angles- or two dimensions. On the other hand, it’s speculation, pure and simple, just like buying an individual stock, or any other financial security, in hope that it will make a profitable return. On the other hand, the securities you are speculating with with are the curren currencies cies of variou various s countr countries ies.. Viewed Viewed separa separatel tely, y, that that mean means s that hat curr curren ency cy trad rading ing is both oth abou bout dynam ynamic ics s of marke arkett speculation, or trading, and the factors that affect the value of currencies. If we put put them them toge togeth ther er we can can get get the the larg larges est, t, most most dyna dynami mic c and and exciting financial market in the world.
SPECULATING AS AN ENTERPRISE Speculating is all about taking on financial risk in the hope of making a profit profit.. But it’s not gambl gambling ing and it’s it’s not investin investing. g. Gambli Gambling ng is about about playing with money even when you know the odds are stacked against you. Investing is about minimizing risk and maximizing return, usually over a long time period. Speculating, or active trading, is about taking calculated financial risks to attempt to realize a profitable return, usually over a very short time horizon. To be a successful trader in any market requires • • • • •
Dedication ( in terms of both time and energy) Resources ( technological and financial) Decisiveness Perseverance Knowledge
CURRENCY AS THE TRADING VEHICLE 28 | P a g e
The forex market is the largest financial market in the world, at least in term terms s of dail daily y trad tradin ing g volu volume mes. s. The The fore forex x mark market et is uniq unique ue in many many respects. The volumes are indeed, huge, which means that liquidity is ever present. It also operates around the clock six days a week, giving traders access to market any time they need it.
Few trading restrictions exist- no trading limits up or down, no restrictions on position sizes, and no requirements on selling a currency pair short. Sell Sellin ing g a curr curren ency cy pair pair shor shortt mean means s you you are expe expect ctin ing g the the pric price e to decline. Because of the way currencies are quoted and because currency rates move up and down all the time, going short is as common as being long. Most of the action takes place in the major currency pairs, which pit the US dollar (USD) against the currencies of the EUROZONE (the European countries that have adopted the euro as their currency), Japan, Great Britain, and Switzerland. There’s also plenty of trading opportunities in the minor pairs, which see the U.S. dollar traded against the Canadian, Australian, and New Zealand dollars. On the top of that, there’s crosscurrency trading, which directly pits two non- USD currencies, against each other, such as the Swiss franc against the Japanese yen. Altogether, there are anywhere from 15 to 20 different currency pairs, depending on which forex brokerage you deal with. Most Most indi indivi vidu dual al trad trader ers s trad trade e curr curren enci cies es via via the the inte intern rnet et thro throug ugh h a brokerage firm. Online currency trading is typically done on a margin basi basis, s, whic which h allo allows ws indi indivi vidu dual al trad trader ers s to trad trade e in larg larger er amou amount nts s by leveraging the amount of margin on deposit. The leverage, or margin trading ratios, can be very high, sometimes as much as 200:1 or greater, meaning a margin deposit of $ 1,000 could control a position size of $ 200,000. But trading on margin carries its own rules and requirements and is backdrop against which all your trading will take place. Leverage is a two- edged sword, amplifying gains and losses equally, which makes risk management the key to any successful trading strategy. Before you ever start trading, in any market, make sure you are only risking money that you can afford to lose, what’s commonly called risk capi capita tal. l. Risk Risk mana manage geme ment nt is the the key key to any any succ succes essf sful ul trad tradin ing g plan plan.. Without a risk- aware strategy, margin trading can be an extremely short29 | P a g e
lived endeavour. With a proper risk plan in place, you stand a much better chance of surviving losing trades and making winning ones.
WHAT AFFECTS CURRENCY RATES? In a word- information. Information is what drives every financial market, but the forex market has its own unique roster of information inputs. Many different cross- currencies are at play in the currency market at any given movement. After all, the forex market is setting the value of one currency relative to another, so at the minimum, you are looking at the themes affecting two major international economies .
FUNDAMENTALS DRIVE THE CURRENCY MARKET Fund Fundam amen enta tals ls are are the the broa broad d grou groupi ping ng of news news and and info inform rmat atio ion n that that reflects the macroeconomic and political fortunes of the countries whose currencies are traded. Most of the time when you hear someone talking about the fundamentals of a currency, he’s referring to the economic fundamentals. Economic fundamentals are based on: • • • • •
Economic data reports Interest rate levels Monetary policy International trade flows International investment flows
The There re are also also poli politi tica call and and geop geopol olit itic ical al fund fundam amen enta tals ls.. An esse essent ntia iall element of any currency’s value is the faith or confidence that the market places in the value of the currency. If political events, such as an election or scan scanda dal, l, are are seen seen to be unde underm rmin inin ing g the the conf confid iden ence ce in a nati nation on’s ’s leadership, the value of its currency may be negatively reflected. Gathering and interpreting all this information is just part of a currency trader’s daily routine, which is one reason why we put dedication at the top of our list of successful trader attributes.
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UNLESS IT’S THE TECHNICALS THAT ARE DRIVING THE CURRENCY MARKET The The term term tech techni nical cal’s ’s refe refers rs to tech techni nica call anal analys ysis is,, a form form of mark market et analysis most commonly involving chart analysis, trend- line analysis, and mathematical studies of price behaviour, such as momentum or moving averages. We don’ don’tt know know of too too many many trad trader ers s who who don’ don’tt foll follow ow some some form form of technical analysis in their trading. Even the stereotypical seat-of- thepants, trade-your-gut-traders are likely to at least be aware of technical price levels identified by others. If you have been an active trader in other financial markets, chances are, you have been engaged in some technical analysis or at least heard of it. Technical analysis is especially important in the forex market because of the amount of fundamental information hitting the market at any given time. Currency traders regularly apply various forms of technical analysis to define and refine their trading strategies, with many people trading on technical indicators alone.
FINDING YOUR TRADING STYLE What do you mean by trading style? Basically it boils down to how you approach currency trading in terms of •
•
Trade timeframe: how long you hold a position? Are you looking at shortshort- term term trade trade oppor opportun tuniti ities es (day (day tradin trading), g), trying trying to captur capture e more significant shifts in currency prices over days or weeks, or something in between? Curr Curren ency cy pair pair elec electi tion on:: are are you you inte intere rest sted ed in trad tradin ing g in all all the the different currency pairs, or are you inclined to specialize in only one or two?
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•
•
Trade rationale: are you fundamentally or technically inclined? Are you considering creating a systematic trading model? Are you a trend follower or a breakout trader? Risk appetite: how much are you prepared to risk and what are your return expectations?
PLANNING THE TRADE Whatever trading style, you ultimately choose to follow, you won’t get very far if you don’t establish a concrete trading plan and stick to it. Trading plans are what keep small bad trades from becoming big bad trades and what can turn small winners. More than anything, though, they are are your your road road map, ap, help helpin ing g you you to navi naviga gate te the the mark market et afte afterr the the adre adrena nali line ne and and emot emotio ions ns star startt pump pumpin ing, g, no matt matter er what what the the mark market et throws your way. We are not telling you that trading is any easier than any other financial mark market et spec specul ulat atio ion. n. But But we can can tell tell you you that that trad tradin ing g with with a plan plan will will greatly improve your chances of being a successful in the forex market over time. Most important, we want to caution you that trading without plan is a surf ire recipe for disaster.
EXECUTING THE TRADE PLAN FROM START TO FINISH The start of ant trade comes when you step into the market and open up a position. How you enter your position, how you execute the first step of your trading plan, can be as important as the trade opportunity itself. After all, if you never enter the position, the trade opportunity will never be exploited. And probably nothing is more frustrating as a trader than havi having ng pinp pinpoi oint nted ed a trad trade e oppo opport rtun unit ity, y, havi having ng it go the the way way you you expected, but having nothing to show for it because you never put the trade on. The The effo effort rt and and reso resour urces ces you you inve invest st in rese resear arch chin ing, g, moni monito torin ring, g, and and analyzing the market come to a concrete result when you open a trade. You are now exposed to price fluctuations and your trading account will register a profit or loss as a result. But that’s just the beginning of it. 32 | P a g e
Active trade management is also critical to keeping more of what you make in the market. In our experience, making money in the forex market is not necessarily the hard part. More often than not, keeping what you have made is the really hard part. Exiting each trade is the culmination of the entire process and you are either going to be pleased with a profit or disappointed with a loss. Every trade ends in either a profit or a loss (unless you get out at the entry price); it’s just the way the market works. While you trade is still active, however, you are still in control and you can choose to exit at any time.
Chapter 2 WHAT IS FOREX MARKET? The The fore forex x mark market et is the the cros crossr sroa oads ds for for inte intern rnat atio iona nall capi capita tal, l, the the intersection through which global commercial and investment flows have to move. move. Intern Internati ationa onall trade trade flows, flows, such such as when when a Swiss Swiss electro electronic nics s company purchases Japanese- made components, were the original basis for the development of the forex markets. Today, however, global financial and investment flows dominate trade as the primary non speculative source of forex market volume. Whether it’s an Australian pension fund in U.S. Treasury bonds, or a British insurer allocating assets to the Japanese equity market, or a German conglomerate purchasing a Canadian manufacturing facility, each crossborder transaction passes through the forex market at some stage. More than anything else, the forex market is a trader’s market without equa equal. l. It’s It’s a mark market et that that’s ’s open open arou around nd the the cloc clock k six six days days a week week,, enabling traders to act on news and events as they happen. It’s a market where half-billion- dollar trades can be executed in a matter of seconds and may not even move prices noticeably. Try buying or selling a halfbillion of anything in another market and see how prices react.
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Average daily currency trading volumes exceed $2 trillion per day. It’s about 10 to 15 times the size of daily trading volume on the entire world’s stock market combined. That $2- trillion-a- day number, which you may have have seen seen in the the fina financ ncial ial pres press s or othe otherr book books s on curr curren ency cy trad tradin ing, g, actually overstates the size of what the forex market is all about- spot currency trading.
TRADING FOR SPOT Spot refers to the price where you can buy or sell currencies now, as in “on the spot”. If you are familiar with stock trading, the price you can trade at is essentially a spot price. Technically, the term refers to the near neares estt sett settle leme ment nt date date on whic which h a tran transa sact ctio ion n can can be made made and and is prim primari arily ly mean meantt to diff differ eren enti tiat ate e spot spot,, or cash cash,, trad tradin ing g from from futu future res s trad tradin ing, g, or trad tradin ing g for for some some futu future re deli delive very ry date date.. The The spot spot curr curren ency cy market is normally traded for settlement in two business days. The bank for international settlements (BIS), the international supervisory body for banks around the world, surveys forex market volumes every three years. The 2004 BIS survey (the most recent available) revealed a daily daily spot-t spot-trad rading ing volume volume of about about $620 $620 billio billion, n, with with anothe anotherr $100+ $100+ billion in estimated gaps due to reporting. The rest of the volume that makes up the $2 trillion figure is comprised of swap and outright forward currency trading (trades made for settlement dates other than spot).
SPECULATING IN CURRENCY MARKET While While commer commercia ciall and financ financial ial trans transact action ions s in the curren currency cy market markets s represent huge nominal sums, they still pale in comparison to amounts based on speculation. By far the vast majority of currency trading volume is based on speculation- traders buying and selling for short- term gains base based d on minu minute te-t -to o-min -minut ute, e, hour hour-t -to o-ho -hour, ur, and dayday-to to-d -day ay pric price e fluctuations. Esti Estima mate tes s are that that upwa upward rds s of 90 perc percen entt of daily daily trad tradin ing g volu volume me is derived from speculation (meaning, commercial or investment-based FX trades account for less than 10 percent of daily trading volume). The depth and breadth of the speculative market means that the liquidity of the overall forex market is unparalleled among global financial markets. 34 | P a g e
The bulk of spot currency trading, about 75 percent by volume, takes place in the so-called “major currencies”, which represent the world’s largest and most developed economies. Trading in the major currencies is largel largely y free free from from govern governmen mentt regula regulatio tion n and takes takes place place outsid outside e the authority of any national or international body.
GETTING LIQUID WITHOUT GETTING SOAKED
Liquidity refers to the level of market interest- the level of buying and selling volume- available at any given movement for a particular asset or security. The higher the liquidity, or the deeper the market, the faster and easier it is to buy or sell a security. From a trading perspective, liquidity is a critical consideration because it determines how quickly prices move between trades and over time. A highly liquid market like forex can see large trading volumes transacted with relatively minor price changes. An illiquid, or thin market will tend to see prices prices move move more more rapidl rapidly y on relati relativel vely y lower lower tradin trading g volume volumes. s. a mark market et that that only only trad trades es duri during ng cert certain ain hour hours( s( futu future res s cont contra ract cts, s, for for example) also represents a less liquid, thinner market.
AROUND THE WORLD IN A TRADING DAY The forex market is open and active 24 hours a day from the start of business hours on Monday morning in the Asia Pacific Time zone straight through to the Friday close of business hours in New York. At any given move moveme ment nt,, depe depend ndin ing g on the the time time zone zone,, doze dozens ns of glob global al fina financ ncial ial cent centres res-- such such as Sydn Sydney ey,, Toky Tokyo, o, or Lond London on-- are are open open,, and and curre currenc ncy y trading desks in those financial centres are active in the market. In addi additi tio on to the the majo majorr glob lobal fin financi ancial al cen centres tres,, many any fina finan ncial cial institutions operate 24-hour-a-day currency trading desks, providing an ever-present source of market interest. It may be a U.S. hedge fund in Boston that needs to monitor currencies around the clock, or it may be a major international bank with a concentrated global trading operation in one financial sector. Curren Currency cy tradin trading g doesn’ doesn’tt even even stop stop for holida holidays ys when when other other financ financial ial markets, like stocks or futures exchanges, may be closed. Even though it’s a holiday in Japan, for example, Sydney, Singapore, and Hong Kong 35 | P a g e
may still be open. It might be the fourth of July in the United States, but if it’s a business day, Tokyo, London, Toronto, and other financial centres will still be trading currencies.
THE OPENING OF THE TRADING STOCK
There is no officially designated starting time to the trading day or week, but but for for all all inte intent nts s the the mark market et acti action on kick kicks s off off when when Well Wellin ingt gton on,, New Zealand, the first financial centre west of the international dateline, opens on Monday morning local time. Depending on whether daylight saving time is in effect in your own time zone, it roughly corresponds to early Sunday afternoon in North America, Sunday evening in Europe, and very early morning in Asia. The Sunday open represents the starting point where currency markets resume resume trading after the Friday close of trading in North America( America( 5 p.m. eastern time). This is the first chance for the forex market to react to news and events that may have happened over the weekend. Prices may have have clos closed ed New New York York trad tradin ing g at one one leve level, l, but but depe depend ndin ing g on the the circumstances, they may start trading at different levels at the Sunday open. As a trading consideration, individual traders need to be aware of the week weeken end d gap gap risk risk and and know know what what even events ts are are sche schedu dule led d over over the the weekend. There’s no fixed set of potential events and there’s never any way of ruli ruling ng out what hat may may tran trans spire pire,, such such as a terr terro or atta attac ck, a geopolitical conflict, or a natural disaster.
TRADING IN ASIA-PACIFIC SESSION
Currency trading volumes in the Asia- pacific session account for about 21 percent of total daily volume, according to the 2004 BIS survey. The principal financial trading centers are Wellington, New Zealand, Sydney, Australia, Tokyo, Japan, Hong Kong and Singapore. The overall trading direction for the NZD, AUD, and JPY can be set for the entire session depending on what news and data reports are released and what they indicate.
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In addition news from China, such as interest rate changes and official comments or currency policy adjustments, may also be released. Occasionally as well, late speakers from the United States, such as Federal Reserve officials speaking on the West Coast of the United States, may offer remarks on the U.S. economy or the direction of U.S. interest rates that affect the value of the U.S. dollar against major currencies. For individual traders, overall liquidity in the major currency pairs is more than sufficient, with generally orderly price movements. In some most liquid, non- regional currencies, like GBP/USD or USD/CAD, price movements may be more erratic or nonexistent, depending on the environment.
TRADING IN THE EUROPEAN/ LONDON SESSION About midway through the Asian trading day, European financial centers begi begin n to open open up and and the the mark market et gets gets into into its its full full swin swing. g. Euro Europe pean an financial centers and London account for over 50 percent of total daily global trading volume, according to the 2004 BIS survey. The European session overlaps with half of the Asian trading day and half of the North American trading session, which means that market interest and liquidity is at its absolute peak during this session. Asian trading centers begin to wind down in the late- morning hours of the European session and North American financial centers come in a few hours later, around 7 a.m.
KEY DAILY TIMES AND EVENTS Expiry options Curren Currency cy option options s are typically typically set to expire expire either either at the Tokyo expiry (3 p.m. Tokyo time) or the New York expiry (10 a.m.). The New York option expiry is the most significant one, because it tends to capt captur ure e both both Euro Europe pean an and and Nort North h Ameri America can n opti option on mark market et interest. When an option expires, the underlying option ceases to exist. Any hedging in the spot market that was done based on the option being alive suddenly needs to be unwound, which can trigger
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significant price changes in the hours leading up to and just after the option expiry time. The amount and variety of currency option interest is just too large to suggest any single way that spot prices will always react around the expiry ( there may not even be any significant option interest expi expiri ring ng on many many days days), ), but but you you shou should ld be awar aware e that that opti option on-related interest is most in evidence around the daily expiries. Setting the rate at currency fixings There are several daily currency fixings in various financial centres, but the two most important are the 8:55 a.m. Tokyo time and the 4 p.m. London time fixings. A currency fixing is a set time each day where the prices of currencies for commercial transactions are set, or fixed. From a trading standpoint, these fixings may see a flurry of trading in a part partic icul ular ar curr curren ency cy pair pair in the the runrun-up up (gen (gener erall ally y 15 to 30 minutes) to the fixing time that abruptly ends exactly at the fixing time time.. A shar sharp p rall rally y in a spec specif ific ic curr curren ency cy pair pair on fixi fixing ng-re -rela late ted d buying, for example, may suddenly come to an end at the fixing time and see the price quickly drop back to where it was before.
Squaring up the currency future markets The Chicago mercantile exchange (CME), one of the largest future markets in the world, offers curre rrency futures through its intern internati ationa onall Moneta Monetary ry Market Market (IMM) (IMM) subsid subsidiar iary y exchan exchange. ge. Daily Daily curr curren ency cy futu future res s trad tradin ing g clos close e each each day day on the the IMM IMM at 2 p.m. p.m. central time (CT), which is 3 p.m.ET. Many futures traders like to square up or close any open positions at the end of each trading session to limit their overnight exposure or for margin requirements.
The 30 to 45 minutes leading up to the IMM closing occasionally generates a flurry of activity that spills over into the spot market. Because the amount of liquidity in the spot currency market is at its lowest in the New York afternoon, sharp movements in the futures markets can drive the spot market around this time. There’s no reliable way to tell if or how the IMM close will trigger a move in the New York afternoon spot market, so you just need to be aware of it and know that it can distort prices in the short term. 38 | P a g e
THE U.S. DOLLAR INDIEX The U.S. dollar index is a futures contract listed on the New York Board Board of Trade Trade (NYBO (NYBOT) T) and Dublin Dublin-- based based financ financial ial instru instrumen ments ts exchange (FINEX) futures exchanges. The dollar index is an average of the value of the U.S. dollar against a basket of six other major currencies, but it’s heavily weighted toward European currencies.
• • • • • •
The exact weightings of other currencies in the U.S. dollar index are Euro: 57.6 percent Japanese yen: 13.6 percent British pound: 11.9 percent Canadian dollar: 9.1 percent Swedish krona: 4.2 percent Swiss franc: 3.6 percent The The Euro Europe pean an curr curren ency cy shar share e of the the bask basket et-- Euro Euro zone zone,, Unit United ed Kingdom, Sweden, and Switzerland- totals 77.3 percent.
CURRENCIES AND OTHER FINANCIAL MARKETS As much as we like to think of the forex market as the be-all and end-all end-all of financ financial ial tradin trading g market markets, s, it doesn’ doesn’tt exist exist in vacuum vacuum.. There are some markets like gold, oil, stocks, and bonds.
GOLD Gold old is com commonl monly y view viewed ed as a hedge edge agai agains nstt inf inflat lation ion, an alternative to the U.S. dollar, and as a store of value in times of eco economi nomic c or polit olitic ical al unce uncert rtai aint nty. y. Over ver the long long term term,, the the rela relati tion onsh ship ip is most mostly ly inve invers rse, e, with with a weak weaker er USD USD gene genera rall lly y accompanying a higher gold price, and a stronger USD coming with a lower gold price. However, in the short run, each market has its own own dyna dynami mics cs and and liqu liquid idit ity, y, whic which h make makes s shor shortt-te term rm trad tradin ing g relationships generally tenuous. Over Overal all, l, the the gold gold mark market et is sign signif ific ican antl tly y smal smalle lerr than than the the fore forex x market, so if we were gold traders, we would sooner keep an eye on what’s happening to the dollar, rather than the other way around. 39 | P a g e
With that noted, extreme movement in gold prices tend to attract curren currency cy trader traders s attent attention ion and usuall usually y influe influence nce the dollar dollar in a mostly inverse fashion.
OIL A lot of misinformation exists on the internet about the supposed relationship between oil and the USD or other currencies, such as CAD CAD or JPY. JPY. The The idea idea is that that,, beca becaus use e some some coun countr trie ies s are are oil oil producers, their currencies are positively (or negative) affected by increases (or decreases) in the price of oil. If the country is an importer of oil (and which countries aren’t today?) The best way to look at oil is an inflation input and as a limiting factor on overall economic growth. The higher the price of oil, the higher inflation is likely to be and the slower an economy is likely to grow. The lower the price of oil, the lower inflationary pressures are likely (but not necessarily) to be.
STOCKS Stocks are micro economic securities, rising and falling in response to individual corporate results and prospects, while currencies are essent essential ially ly macroe macroecon conomi omic c securi securitie ties, s, fluctu fluctuati ating ng in respon response se to wider- ranging economic and political developments. As such there is a little intuitive reason that stock markets should be related to curr curren enci cies es.. Long Long term term corr correl elat atio ion n stud studie ies s bear bear this this out, out, with with correlation coefficients of essentially zero between the major USD pairs and U.S. equity markets over the last five years. The two markets occasionally intersect, though this is usually only at the extremes and for very short periods.
BONDS Fixed income or bond markets have a more intuitive connection to the the forex forex mark market et beca becaus use e they they are are both both heav heavil ily y infl influe uenc nced ed by interest rate expectations. However, short term market dynamics of supply and demand interrupt most attempts to establish a viable link between the two markets on a short term basis. Sometimes the forex market reacts first and fastest depending on shifts in interest rate expectations. At other times, the bond market more accurately reflects changes in interest rate expectations, with the forex market later playing catch-up 40 | P a g e
(Because it takes longer to turn a bigger ship around).
GETTING STARTED WITH THE TRADING ACCOUNT For newcomers to currency trading, the best way to get handle on what currency trading is all about is to open a practice account at any any onli online ne fore forex x brok broker ers. s. Most Most onli online ne brok broker ers s offe offerr prac practi tice ce accounts to allow you to experience the real- life price action of the forex market. Practice accounts are funded with “virtual money, so you are able to make trades with no real money at stake and gain experience in how margin trading works. Prac Practi tice ce acco accoun unts ts give give you you a grea greatt chan chance ce to expe experi rien ence ce the the minute-to-minute price movements of the forex market. You all be able to see how prices change at different times of the day, as well as how various currency pairs may differ from each other. How the forex market really moves, you can Start trading in real market conditions without any fear of losing money. Experiment with different trading strategies to see how they work. Gain experience using different orders and managing open positions. Impr Improv ove e your your unde unders rsta tand ndin ing g of how how marg margin in trad tradin ing g and and leverage work. Start analyzing charts and following technical indicators . •
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Chapter3 Who trades currencies? Meet the players The forex market is regularly referred to as the largest financial market in the the world world base based d on trad tradin ing g volu volume mes. s. But But this this mass massiv ive e mark market et was was unknown and unavailable to most individual traders and investors until the start of this decade. That leaves a lot of the people in the dark when it comes to exactly exactly what the currency market is: how it’s organized, organized, who’s trading it, and why.
THE INTERBANK MARKET IS “THE MARKET”
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When people talk about the “currency market”, they are referring to the interbank market, whether they realize it or not. The interbank market is where the really big money changes bands. Minimum trade sizes are one million of the basic currency, such as euro 1 billion of EUR/USD or $ 1 million of USD/JPY. Much large trades of between $10 million and $100 million are routine and can go through the market in a matter of seconds. Even larger trades and orders are a regular feature of the market. For the individual trading FX online, the prices you see on your trading platform are based on the prices being traded in the interbank interbank market. The sheer size of interbank market is what helps makes it such a great trading market, because investors of every size are able to act in the market, usually without significantly affecting prices. It’s one market where we would say size really doesn’t matter. We have seen spot traders be right with with millio million-do n-dolla llarr bets, bets, and sophis sophistic ticate ated d hedge hedge funds funds be wrong wrong with with half-billion-dollar bets.
GETTING INSIDE THE INTERBANK MARKET So what is the interbank market and where did it come from? The forex market market origin originall ally y evolve evolved d to facili facilitat tate e trade trade and commer commerce ce betwee between n nation nations. s. The The leadin leading g intern internati ationa onall commer commercia ciall banks, banks, which which financ financed ed intern internati ationa onall trade trade throug through h letter letters s of credit credit and and banker bankers s accept acceptanc ances, es, were the natural financial institutions to act as the currency exchange intermediary. They also had the foreign branch network on the ground in each each countr country y to facili facilitat tate e the curren currency cy transf transfers ers needed needed to settle settle FX transactions. Currency futures markets operate alongside the interbank market, but they are definitely the tail being waged by the dog of the spot market. As a marke markett curre currenc ncy y futu future res s are are gene genera rall lly y limi limite ted d by exch exchan ange ge-b -bas ased ed trading hours and lower liquidity than is available in the spot market.
BANK TO BANK AND BEYOND The interbank market is a network of international banks operating in financial centers around the world. The banks maintain trading operations to facilitate speculation for their own accounts, called proprietary trading or just prop trading in short, short, and to provide provide currency currency trading services for their their custo customer mers. s. Bank’s Bank’s custom customers ers can range range from from corpor corporati ations ons and government agencies to hedge funds and wealthy private individuals. 42 | P a g e
TRADING IN INTERBANK MARKET The interbank market is an over-the-counter (OTC) market, which means that each trade is an agreement between the two counterparties to the trade. There are no exchanges or guarantors for the trades, just each bank’s balance sheet and the promise to make payment. The bulk of spot trading in the interbank market is transacted through electronic matching services, such as EBS and Reuters Dealing. Electronic matching services allow traders to enter their bids and offers into the market, hit bids ( sell at the market), and pay offers ( buy at the market). Price spreads vary by curr curren ency cy pair pair and and chan change ge thro throug ugho hout ut the the day day depe depend ndin ing g on mark market et interest and volatility.
The matching systems have pre-screened credit limits and a bank will only see prices available to it from approved counterparties. Pricing is anonymous before deal, meaning you can’t tell which bank is offering or bidding, but the counterparties names are made known immediately after a deal goes through. The rest of the interbank trading is done through currency currency brokers, referred to as voice brokers brokers to differentia differentiate te them from the electronic ones. Traders can place bids and offers with these brokers the same as they do with the electronic matching services. Prior to the electr electroni onic c matchi matching ng servic services, es, voice voice broker brokers s were were the primar primary y market market intermediaries between banks.
STEPPING ONTO A CURRENCY TRADING FLOOR Inte Interb rban ank k trad tradin ing g room rooms s are are staf staffe fed d by a vari variet ety y of diff differe erent nt mark market et professionals and each has a different role to play. The typical currency trading room has •
Flow traders: sometimes called execution traders, these are the market makers, showing two-way prices at which to buy or sell, for the bank’s customers. If the customer makes a trade, the execution trader then has to cover the resulting deal in the interbank market, hope hopefu full lly y at a prof profit it.. Thes These e trad trader ers s are are also also resp respon onsi sibl ble e for for watching and executing customer orders in the market. These are
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the traders who are generating most of the electronic prices and price action.
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Proprietary Proprietary traders: traders: these these trader traders s are focuse focused d on specu speculat lative ive trading for the bank’s own account. Their strategies can run the gamut from short term day trading to longer-term macroeconomic bets.
are acti active ve in the the forw forward ard curr curren ency cy mark market et,, Forward Forward traders: traders: are which refers to trades made beyond the normal spot value date. T The he forw forwar ard d mark market et is esse essent ntial ially ly an inte intere rest st rate rate diff differe erent ntia iall mark market et,, wher where e the the inte interes restt rate rates s of the the vari variou ous s curr curren enci cies es are are traded. Options Options traders: traders: they they mana manage ge the the bank bank port portfo folio lio or book book of outstanding currency options. They hedge the portfolio in the spot mark market et,, spec specu ulat late for for the the bank’ ank’s s own own accou ccount nt with ith optio ption n stra strate tegi gies es,, and and prov provid ide e pric pricin ing g to the the bank bank’s ’s cust custom omer ers s on requested option strategies.
Sales staff: The sales staff acts as the intermediary between the trading desk and the bank’s customers. They advise the bank’s customers on market flow, as well as who’s buying and selling; recommend spot and option trading strategies; and execute trades between the bank and its customers.
HEDGERS AND FINANCIAL INVESTORS The The fore forex x mark market et sits sits at the the cros crossr sroa oads ds of glob global al trad trade e and and international finance and investing. Wheth ether it’s a U.S. conglomerate managing its foreign affiliate’s balance sheets or a German mutual fund launching an international stock fund, they all have to go through the forex market at some point. Financial transactors are important to the forex market for several reasons:
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Thei Theirr tran transa sact ctio ions ns can can be extr extrem emel ely y size sizeab able le,, typi typica call lly y hundreds of millions or billions. Their deal is frequently one-time events. They are generally not price sensitive or profit maximizing.
HEDGING YOUR BETS Hedgers come in all shapes and sizes, but don’t confuse them will hedge funds. funds. Hedgin Hedging g is about about elimina eliminatin ting g or reduci reducing ng risk. risk. In financ financial ial markets, hedging refers to a transaction designed to insure against an adve advers rse e pric price e move move in some some unde underl rlyi ying ng asse asset. t. In the the fore forex x mark market et,, hedg hedger ers s are are look lookin ing g to insu insure re them themse selv lves es agai agains nstt an adve advers rse e pric price e movement in a specific currency rate. 1. Hedging Hedging for for internatio international nal trade trade purpos purposes es Trade Trade related related hedging hedging regularly comes into the spot market in two main forms: At several of the daily currency fixings. Mostly in USD/JPY, where Japanese exporters typically have large amounts of USD/ JPY to sell. • •
1. Hedging for currency options .
GLOBAL INVESTMENT FLOWS One of the reasons forex market remain as lightly regulated as they are is that no developed nation wants to impose restrictions on the flow of global capital. International capital is the lifeblood of the developed economies and the principal factor behind the rapid rise of developing economies like China, Brazil, Russia, and India. The forex market is central to the smooth functioning of international debt and equity
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markets, allowing investors to easily obtain the currency of the nation they want to invest in. Cross brokers with mergers and acquisitions a cquisitions
Mergers and acquisitions activity is becoming increasingly international and shows no sign of abating. International firms are now involved in a global race to gain and expand market share and cross- border acquisitions are frequently the easiest and fastest way to do that. When a company seeks to buy a foreign business, there can be a substantial foreign exchange implication from the trade.
SPECULATORS Speculators are market acquisitions who are involved in the market for one reason only: to make money. In contrast to hedgers, who have some form of existing currency market risk, speculators have no currency risk until they enter the market. Hedgers enter the market to neutralize or reduce risk. Speculators embrace risk taking as a means of profiting from long-term or short-term price movements.
Speculators are what really make a market efficient. They add liquidity to the market by bringing their views and, most important, their capital into the market. That liquidity is what smoothes out price movements, keeps trading spreads narrow, and allows a market to expand. In the forex market, speculators are running the show. Conventional market estimates are that upwards of 90 percent of daily trading volume is speculative in nature. If you are trading currencies for your own account, welcome to the club. If you are trading to hedge a financial risk, you can thank the specs for giving you a liquid market and reducing your transaction costs.
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Hedge funds are type of leveraged fund, which refers to any number of diff differe erent nt form forms s of specu specula lati tive ve asse assett mana manage geme ment nt fund funds s that that borr borrow ow money money for specul speculati ation on based based on real real assets assets under under manage managemen ment. t. For instance a hedge fund with $100 billion under management can leverage those assets to give them trading limits of anywhere from $500 million to $ 2 billi illio on. He Hed dge fun funds are are sub subject ject to the the same same type type of marg margin in requirements as you or we are, just with whole lots of zeros involved. The other main type of leveraged fund is known as commodity trading Advisor (CTA). A CTA is principally active in futures markets. But because the forex market operates around the clock, CTAs frequently trade spot FX as well. The major difference between the two types of leveraged funds comes down to regulation and oversight. CTAs are regulated by the Commodity Futures Trading Commission (CFTC), the same governmental body that regulates retail FX firms. As a result, CTAs are subject to raft of regulatory and reporting requirements. Hedge funds, on the other hand, remain remain largel largely y unregu unregulat lated. ed. What’s What’s import important ant is that that they they all pursue pursue simi simila larl rly y aggr aggres essi sive ve trad tradin ing g stra strate tegi gies es in the the fore forex x mark market et,, trea treati ting ng currencies as a separate asset class, like stock or commodities.
GOVERNMENTS AND CENTRAL BANKS National governments are routinely active in forex market, but not for purp purpos oses es of atte attemp mpti ting ng to real realig ign n or shif shiftt the the valu values es of the the majo majorr currencies. currencies. Instead, Instead, national national governments governments are active active in the forex market market for routine funding of government operations, making transfer payments, and managi managing ng foreig foreign n curren currency cy reserv reserves. es. The first first two functi functions ons have have generally little impact on the day-to-day forex market. CURRENCY RESERVE MANAGEMENT
It refers to how national governments develop and invest their foreign currency reserves. Foreign currency reserves are accumulated through international trade. Countries with large trade surpluses will accumulate reserv reserves es of foreig foreign n curren currency cy over over time. time. Trade Trade surplu surpluses ses arise when when a nati nation on expo export rts s more more than than it impo import rts. s. Beca Becaus use e it is rece receiv ivin ing g more more curr curren ency cy for for its its expo export rts s than than it is spen spendi ding ng to buy buy impo import rts, s, forei foreign gn currency balances accumulate. The problem is one of perception p erception and also prudent portfolio management: 47 | P a g e
1. The perceptio perception n problem problem stems from from the continuin continuing g growth of of U.S. deficits, which equates to your continually borrowing money from a bank. 2. The portfolio portfolio-manag -management ement proble problem m arises from from the need to diversify assets in the name of prudence.
BANK FOR INTERNATIONAL SETTLEMENTS The The bank bank for intern internati ationa onall settle settlemen ments ts is the centra centrall bank bank for centra centrall bank banks. s. Loca Locate ted d in Base Basel, l, Swit Switze zerla rland nd,, the the BIS BIS also also acts acts as the the quas quasii government regulator of the international banking system. It was BIS that establ establish ished ed the capita capitall adequ adequacy acy requir requireme ements nts for banks banks that that today today unde underp rpin in the the inte intern rnat atio iona nall bank bankin ing g syst system em.. As the the bank bank to nati nation onal al governments and central banks, the BIS frequently acts as the market intermediary of those nations seeking to diversify their currency reserves. By goin going g thro hrough ugh the BIS, IS, tho those coun counttries ries can can rem remain ain rela relati tiv vely ely anonym anonymous ous and preven preventt specul speculati ation on from from drivin driving g the market market agains againstt them.
THE GROUP OF SEVEN The group of seven, or G7, is composed of the seven largest developed econ econom omie ies s in the the worl world: d: Cana Canada da,, Fran France ce,, Germ German any, y, Ital Italy, y, Japa Japan, n, the the United Kingdom, and the United States. The G7 is the primary venue for the the majo majorr glob global al powe powers rs to expr expres ess s thei theirr coll collec ecti tive ve will will on rela relati tive ve currency values and the need for any adjustments. For forex markets, the big big gun guns of the G7 are are the the hott hottes estt game game in town. own. Depe Depend ndin ing g on circumstances, currency values may be on the agenda for these meetings and the communiqué, the official statement issued at the end of each gathering, may contain an explicit indication for a desired shift among the major currencies. If currencies are not a hot- button topic, the G7 will include a standard boilerplate statement that currencies should reflect econ econom omic ic fund fundam amen enta tals ls and and that that exce excess ssiv ive e curr curren ency cy vola volati tili lity ty is undesirable. The power of G7 statements lies in the perception that all the the part articip icipan antts are are in agre agreem emen entt with ith what is cont contai ain ned in the the communiqué. Most important, it is seen as giving the market a green light to carry out the G7’s expressed wishes. If the G7indicates that a recently 48 | P a g e
weak currency is not reflecting fundamentals, for example, it’s a signal to the market that the G7 would like to see that currency appreciate.
Chapter 4 The mechanics of currency trading BUYING AND SELLING SIMULTANEOUSLY The The bigg bigges estt ment mental al hurd hurdle le faci facing ng newco ewcome mers rs to curr curren enci cies es,, especially trader’s familiar with other markets, is getting their head around the idea that each currency trade consists of a simultaneous purchase and sale. In the stock market, for instance, if you buy 100 shares of Google, it’s pretty clear that you now own 100 shares and hope to see the price go up. When you want to exit that position, you you simp simply ly sell sell what what you you boug bought ht earli earlier er.. But But in curr curren enci cies es,, the the purchase of one currency involves the simultaneous sale of another curr curren ency cy.. This This is the the exch exchan ange ge in fore foreig ign n exch exchan ange ge.. To put put it anot anothe herr way, way, if you you are are look lookin ing g for for a doll dollar ar to go high higher er,, the the question is “higher against what?” the answer has to be the other currency. In relative terms, if the dollar goes up against another curren currency, cy, it also also means means that that the other currency currency has gone gone down down against dollar.
CURRENCIES COME IN PAIRS Forex markets refer to trading currencies by pairs, with names that combin combine e the two differ different ent curren currencie cies s being being traded traded agains againstt each each other, or exchanged for one another. Additionally, forex markets have have give given n most most curre currenc ncy y nick nickna name mes s or abbr abbrev eviat iatio ions ns,, whic which h refere reference nce the pair pair and not necess necessari arily ly the indivi individua duall curren currencie cies s involved.
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The U.S. dollar’s central role in the forex markets stems from a few basic factors: 1. The U.S. econom economy y is the largest largest national national economy economy in the the world. world. 2. The U.S. dollar dollar is the the primary internat international ional reserve reserve currency. currency. 3. The U.S. dollar dollar is the the medium of exchang exchange e for many cross-b cross-border order transactions. 4. The United United States States has largest largest and most most liquid liquid financial financial markets markets in the world. 5. The United United States States is a global global military military superpower, superpower, with with a stable stable political system.
MAJOR CURRENCY PAIRS The major currency pairs all involve the U.S. dollar on one side of the deal. The designations of the major currencies are expressed using international standardization organization (ISO) codes for each currency. Currency names and nicknames can be confusing when you are following the forex market or reading commentary and research.
MAJOR CROSS CURRENCY PAIRS Although the vast majority of currency trading takes place in the dollar dollar pairs, pairs, cross cross –curre –currency ncy pairs pairs serve serve as an altern alternati ative ve to always trading the U.S. dollar. A Cros Crosss- curr curren ency cy pair pair,, or cros cross s or cros crosse ses s for for shor short, t, is any any currency pair that does not include the U.S. dollar. Cross rates are are derived from res respective USD pairs but are quoted inde indepe pend nden entl tly y and and usua usuall lly y with with a narr narrow ower er spre spread ad than than you you could get by trading in the dollar pairs directly. Crosses enable trad trader ers s to more more dire direct ctly ly targ target et trad trades es to spec specif ific ic indi indivi vidu dual al currencies to take advantage of news or events. For example, your analysis may suggest that the Japanese yen has the worst prospects of all the major currencies going forward, based on interest rates or the economic outlook. Cross trades are especially effective when major cross- border mergers and acquisitions are announced. If a UK conglomerate is buying a Canadian utility company, the UK Company is going to 50 | P a g e
need to sell GBP and buy CAD to fund the purchase. The key to trading on M&A activity is to note the cash portion of the deal. If the deal is all stock, then you don’t need to exchange currencies to come up with the foreign cash. The most actively traded crosses focus on the three major nonUSD currencies (namely EUR, JPY, and GBP) and are referred to as euro crosses, yen crosses and sterling crosses. The remaining currencies (CHF, AUD, CAD, and NZD) are also traded in cross pairs.
PROFIT AND LOSS Profit and loss (P &L) is how traders measure success and failure. You You don’ don’tt want want to be look lookin ing g at the the fore forex x mark market et as some some academic or thrill- seeking exercise. Real money is made and los lost ever every y minu minute te of ever every y day. ay. If you you are are going ing to trad rade currencies actively, you need to get up close and personal with P&L. A clear understanding of how P&L works is especially critical to onli online ne marg margin in trad tradin ing, g, wher where e your your P&L P&L direc directl tly y affe affect cts s the the amount of margin you have to work with. MARGIN BALANCES AND LIQUIDATIONS When When you open an onlin online e curren currency cy tradin trading g accoun account, t, you will need need to pony pony up cash cash as coll collat ater eral al to supp suppor ortt the the marg margin in requir requireme ements nts establ establish ished ed by your your broker broker.. That That initia initiall margin margin deposit becomes your opening margin balance and is the basis on which all your subsequent trades are collateralized. Unlike futures markets or margin- based equity trading, online forex brokera brokerages ges do not issue issue margin margin calls. calls. Instea Instead, d, they they establ establish ish rati ratios os of marg margin in bala balanc nces es to open open posi positi tion ons s that that must must be maintained at all times.
UNREALIZED AND REALIZED PROFIT AND LOSS Most Most onli online ne fore forex x brok brokers ers prov provid ide e real real-t -tim ime e mark mark-t -too-ma mark rket et calculations showing your margin balance. Mark-to-market is the calculation that shows you unrealized P&L based on where you could close your open positions in the market at that instant. Depending on your broker’s trading platform, if you are long the calculation will typically be based on where you could sell at that 51 | P a g e
movement. If you are short, the price used will be where you can buy at that movement. Your margin balance is the sum of your initial margin deposit, your unrealized P&L, and your realized P&L. Real Realiz ized ed P&L P&L is what what you you get get when when you you chos chose e out out a trad trade e position, or a position of a trade position. If you close out the full posi positi tion on and and go flat flat,, what whatev ever er you you made made or lost lost leav leaves es the the unrealized P&L calculation and goes into your margin balance. If you only close a portion of your open positions, only that part of trade’s P&L is realized and goes into the trading balance. Your unrealized P&L will continue to fluctuate based on the remaining open positions and so will your total margin balance.
UNDERSTANDING ROLLOVERS AND INTERSET RATES One One mark market et uniq unique ue to curr curren enci cies es is roll rollov overs ers.. A tran trans sacti actio on where here an open open positi sitio on fro from one (set (settl tlem emen entt date date)) is roll rolled ed over over into into the the nest nest Rollovers represent the intersection of interest-rate forex markets.
roll rollov over er is a value alue date ate valu value e date date.. markets and
CURRENCY IS MONEY, AFTER ALL Rollover rates are based on the difference in interest rates of the two currencies in the pair you are reading. That’s because what you are actually trading is good old-fashioned cash. That’s right: currency is cold, hard cash with a fancy name. When you are long a currency (cash), it’s like having a deposit in the bank. If you are short currency (cash), it’s like having borrowed a loan. Just as you would expect to earn interest on a bank deposit or pay pay inte intere rest st on a loan loan,, you you woul would d expe expect ct an inte intere rest st gain gain// expe expens nse e for for hold holdin ing g a curr curren ency cy posi positi tion on over over the the chan change ge in value. The catch currency in currency trading is that if you carry over an open position from one value date to the nest, you have two bank bank acco accoun unts ts invo involv lved ed.. Thin Think k of it as one one acco accoun untt with with a posi positi tive ve bala balanc nce e (the (the curr curren ency cy you you are are long long)) and and one one with with a negative balance (the currency you are short). But because your accounts are in two different currencies, the two interest rates of the different countries will apply. 52 | P a g e
The difference between the interest rates in the two countries is called the interest-rate differential. The larger the interest-rate differential, the larger the impact from rollovers. The narrower the the inte intere rest st-- rate rate diff differ eren enti tial al,, the the smal smalle lerr the the effe effect ct from from rollo rollove vers rs.. So how how do inte intere rest st rate rates s get get turn turned ed into into curr curren ency cy rates? After all, interest rates are in percent and currency rates are, well, not in percent. The answer is that deposit rates yield actual returns, which are netted, producing a net cash return. That net cash return is then divided by the net position size, which gives you the currency pips, which is rollover rate.
UNDERSTANDING CURRENCY PRICES Now we are getting down to the brass tasks of actually making trades in the forex market. Before we get ahead of ourselves, though, it’s critical to understand exactly how currency prices work and what they mean to you as a trader. Keep in mind that different online forex brokers use different formats to display prices on their trading platforms. A thorough picture of what the pric prices es mean mean will will allo allow w you you to navi naviga gate te diff differ eren entt brok broker er’s ’s platforms and know what you are looking at. Bids and offers When you are in the front of your screen and looking at an online forex broker’s trading platform, you will see two prices for each company pair. The price on the left-hand side is called the bid and the price on the right hand side is called the offer (some call this the ask). Some brokers display the prices above and below each other, with the bid o the bottom and the offer on the top. The easy way to tell the difference is that the bid price will always be lower than the offer price. The price quotation of each bid and offer you see will have two components: the big figure and the dealing price . SPREADS A spread is the difference between the bid price and the offer price. Most online brokers utilize spread- based trading platforms for individual traders. In one sense you can look at the spread as the commis commissio sion n that that the online online broker brokers s charge charge for execut executing ing your trades. So even if they say you are commission free, they 53 | P a g e
may be earning difference when one trader sells at the bid price and another trader buys at the offer price. Another way to look at the spread is that it’s the compensation the broker receives for being being the market market-ma -maker ker and provid providing ing a regula regularr two-wa two-way y market.
EXECUTING A TRADE There are two main ways of executing trades in the FX market: live live trades trades and orders orders.. If you are an adrena adrenalin line e junkie junkie,, don’t don’t focus only on the “ live dealing” section- the orders section gives you a plenty of juice to keep you going, too .
TRADING ONLINE Clicking and dealing Most forex brokers provide live streaming prices that you can deal on with a simple click of your computer mouse. On these platforms to execute a trade: 1. Specify Specify the amoun amountt of the the trade you want want to make. 2. Click on the the buy or sell sell button button to to execute execute the the trade trade you you want. The forex trading platform will respond back, usually within seco second nd or two, two, to let let you you know know whet whethe herr the the trad trade e went went through: If the trade went through, you will see the trade and your your new new posi positi tion on appe appear ar in your your plat platfo form rm’s ’s list list of trades. If the trade failed because of a price change, you need to start again from the top. If the the trad trade e fail failed ed beca becaus use e the the trad trade e was was too too larg large e based on your margin, you need to reduce the size f the trade. •
•
•
When the trade goes through, you have a position in the market and you will see your unrealized unrealized P&L, begin updating according to market price fluctuations.
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Here are the parameters that you can usually set up in advance: ✔ ✔
✔
Present trade amounts Automa Automatic tic stop-l stop-loss oss orders orders at a predet predeterm ermine ined d distance from the trade- entry price. Square buttons Some online brokers advertise narrower trading spreads as a way to attract traders. If you clickand-deal trade attempts frequently fail, and the platform then asks if you would like to make the trade at a worse price, you are probably being requoted.
PHONE TRADING Placing live trades over the phone is available from most online forex brokers. You need to find from your broker whether it offers this service and exactly what its procedures are before you can ready to use it.
To place a trade over the phone, you will need to:
1. Call the the telephone telephone number number at your your broker broker for placing placing a trade. trade. 2. When When you are connect connected ed to a repres represent entati ative, ve, identit identity y yourse yourself lf by name and give your trading account number. 3. Ask what what the current current price is for for the currency currency pair you are are trading. trading. 4. If you don’t don’t want want the price, price, say, say, “NO, thank thank you”. you”. 5. If you want the price, price, specif specify y exactly exactly what trade trade you would like like to make. 6. Confirm Confirm with your your broker broker exactly exactly what trade trade you you just made. made. 7. Get Get the the name name of the the brok broker er’s ’s repr repres esen enta tati tive ve you you just just made made the the trade with in case you have to call back.
ORDERS
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Currency Currency traders use orders orders to catch market movements when they are not in front of their screens. The forex market is open 24hours a day. A market move is just as likely to happen while you are asleep or in the shower as it is while you are watching your screen. If you are not a fulltime trader, then you have to probably get a full-time job that requires your attention when you are at work- at least your boss hopes he has your attention. Experienced currency traders also routinely use orders to: ✔ ✔ ✔ ✔ ✔ ✔
Implement a trade strategy from entry to exit. Capture sharp, short-term price fluctuations. Limit risk in volatile or uncertain markets. Preserve trading capital from unwanted losses. Maintain trading discipline. Protect profits and minimize losses .
TYPES OF ORDERS 1. Take –profit –profit orders An order used by currency traders specifying the exact rate or number of pips from the current price point where to close out their current position for a profit. The rate deemed to be the level where the trader wants to take a profit is sometimes referred to as the "take-profit point". As the name suggests, take-profit orders are used to lock in profits in the event the rate moves in a favourable direction. For example, if you are long a currency pair position and believe the price will rise to a certain level, but are unsure what it will do beyond that level, placing a take-profit order at that point will automatically close out your position allowing you to lock in profit. Place a take-profit order at 108.80. Price then rises from 107.40 to 108.80 Takeprofit order automatically executed to sell $100 and buy 10,880 yen Profit of 140 yen realized.
2. Limi Limitt orde orders rs To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the 56 | P a g e
limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled. For example, if you want to buy the stock of a "hot" IPO that was initially offered offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses if the stock drops later in the day or the weeks ahead. ahead.
3. St Stop op loss loss orde orders rs What does stop loss order Mean?
An order placed with a broker to sell a security when it reaches a certain price. It is designed to limit an investor's loss on a security position. Also known as a "stop order" or "stop-market order". order".
In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%. It's also a great idea to use a stop order before you leave for holidays or enter a situation in which you will be unable to watch your stocks for an extended period of time. A stop loss is an order to buy (or sell) a security once the price of the security climbed above above (or dropped dropped below) below) a specif specified ied sto stop p price. price. When the specifie specified d sto stop p price price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price). With With a stop stop order order,, the the trad trader er does does not not have have to acti active vely ly moni monito torr how how a stoc stock k is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order or a limit order.
4. Trading Trading stop loss orders orders A stop loss is an order that is sold automatically if the currency trading venture you invest in reaches a certain price, preventing more losses to occur. When you place a stop order, you need to set an exit point, to happen if the trade losses a specific value. The stop order is basically what it sounds like, it stops your losses and lowers your risks, and so even if the trading in foreign currency fails to make a profit, your investment is relatively safe. 57 | P a g e
Chapter 5 Getting to know the major currency pairs The vast majority of trading volume in the major currency pairs: EUR/USD, GBP/USD, and USD/CHF. These currency pairs account for about two-thirds of daily trading volume in the market and are the most watched barometers of the overall forex market. When you hear about the dollar rise and falling, it’s usually referring to the dollar against these other currencies. Even though these four pairs are routinely grouped together as the major currency pairs, each currency pair represents an individual economic economic and political relationship. relationship. It’s important important to understand understand of how different pairs rates move. Most currency trading is very shortterm term in natu nature, re, typi typica call lly y from from a few few minu minute tes s to few few days days.. This This make makes s under nders stand anding ing a curr curren ency cy pair’ air’s s pric price e act action ion a key key component of any trading strategy.
THE BIG DOLLAR: EUR/USD 58 | P a g e
EUR/USD is by far the most actively traded currency pair in the global forex market. The same goes for the big banks. Every major desk has at least one, and probably several, EUR/USD EUR/USD traders. traders. This is in cont contra rast st to less less liqu liquid id curre currenc ncy y pairs pairs such such as GBP/ GBP/US USD D or AUD/USD, for which trading desks may not have dedicated trader. All All thos those e EUR/ EUR/US USD D trad trader ers s add add up to vast vast amou amount nts s of mark market et interest, which increases overall trading liquidity.
TRADING FUNDAMENTALS OF EUR/USD EUR/USD is the currency pair that pits the U.S. dollar against the single currency of Euro zone, the euro. The Euro zone refers to a groupi grouping ng of count countrie ries s in the the
Europe European an Union Union (EU) (EU) that that in in 1999 1999
retired their own national currencies and adopted a unified single currency. The move to a single currency was the culmination of fina financ ncia iall unif unific icat atio ion n effo effort rts s by the the foun foundi ding ng memb member ers s of the the European Union. In adopting the single currency, the nations agreed to abide by fiscal policy constraints that limited the ratio of national budget
deficits
to
gross
domestic
product
among
other
requirements.
TRADING EUR/USD BY THE MEMBERS Standard market convention is a quote EUR/USD in terms of the number of USD per EUR. For example, a WUR/USD rate of 1.3000 means that it takes takes $1.30 to buy 1 euro. EUR/USD EUR/USD trades inversely to the overall value of the USD, which means when EUR/USD goes up, up, the the euro euro is gett gettin ing g stro strong nger er and and the the doll dollar ar weak weaker er.. When When EUR/ EUR/US USD D goes goes down down,, the the euro euro is gett gettin ing g weak weaker er and and the the doll dollar ar stronger. If you believed the U.S. dollar was going to move higher, you are looking to sell EUR/USD. If you thought the dollar was going to weaken, you would be looking to buy EUR/USD.
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EUR/USD has the euro as the base currency and the U.S. dollar as the secondary or counter currency. That means ✔ ✔
EUR/USD is traded in amounts denominated in Euros. The pip value, or minimum price fluctuation, is denominated in USD.
✔
Profit and loss accrue in USD.
✔
Margin calculations in online trading platforms are typically based in USD.
SWIMMING IN DEEP LIQUIDITY Liquidity in EUR/USD is based on a variety of fundamental sources, such as ✔
Global trade and asset allocation.
✔
Central bank credibility.
✔
Enhanced status as a reserve currency.
WATCHING THE DATA REPORTS ✔
Euro Europe pean an cent central ral bank bank (ECB (ECB)) inte intere rest st rate rate deci decisi sion ons s and and pres press s conferences after ECB Central Council meetings.
✔
Spee Speech ches es by
ECB offic fficia ials ls and and
ind individ ividu ual
Euro uropean pean finan inance ce
ministers. ✔
EU-harmonized Consumer price index (CPI), as well as national CPI and Producer Price Index (PPI) reports.
✔
Industrial production.
✔
Retail sales.
✔
Unemployment rates.
TRADING BEHAVIOR OF EUR/USD The price action behaviour in EUR/USD regularly exhibits a number of traits that traders should be aware of: 60 | P a g e
✔
Trading tick by tick.
✔
Fewer price jumps and smaller price gaps.
✔
Backing and filling.
TACTICAL TRADING CONSIDERATIONS IN EUR/USD ✔
Deciding whether it’s a U.S. dollar move or a euro move.
✔
Being patient in EUR/USD.
✔ ✔
Taking advantage of backing and filling. Allowing for a margin of error on technical levels.
TRADING USD/JPY BY THE NUMBERS USD/JPY has the U.S. dollar as the base currency and the JPY as the secondary or counter currency. This means ✔ ✔
USD/JPY is traded in amounts denominated in USD. The pip value, or minimum price fluctuation, is denominated in JPY.
✔
Profit or loss accrues in JPY.
✔
Margin calculations are typically calculated in USD.
IMPORTANT JAPANESE DATA REPORTS ✔
Industrial production.
✔
Machine orders.
✔
Trade balance and current account.
✔
Retail trade.
✔
Bank lending.
✔
Domestic corporate goods price index (CGPI).
✔
National CPI and Tokyo-area CPI.
✔
All- industry activity index and tertiary industry activity index.
TACTICAL TRADING CONSIDERATIONS IN USD/JPY 61 | P a g e
✔ ✔ ✔
Actively trading trend-line and price-level breakouts. Jumping on spike reversals. Monitoring EUR/JPY and other JPY crosses.
TRADING FUNDAMENTALS OF GBP/USD ✔ ✔
GBP/USD is traded in amounts denominated in GBP. The pip value, or minimum price fluctuation, is denominated in USD.
✔
Profit and loss accrue in USD.
✔
Margin calculations are typically calculated in USD in online trading platforms.
PRICE ACTION BEHAVIOR IN GBP/USD AND USD/CHF ✔
Price action tends to be jumpy, even in normal markets.
✔
Price Price acti action on tend tends s to see see oneone-wa way y traf traffi fic c in high highly ly dire direct ctio iona nall markets.
✔
False breaks of technical levels occur frequently.
✔
TACTICAL TRADING CONSIDERATIONS IN GBP/USD and USD/CHF ✔
Reducing position size relative to margin.
✔
Allowing to greater margin of error on technical breaks.
✔
Being quick on the trigger.
✔
Picking your spots wisely.
Chapter 6 Minor currency pairs and cross- currency trading
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TRADING USD/CAD BY THE NUMBERS USD/CAD has the USD as the primary currency and the CAD as the counter currency. This means ✔ ✔
USD/CAD is traded in amounts denominated in USD. The pip value, or minimum price fluctuation, is denominated in CAD.
✔
Profit and loss register in CAD.
✔
Margin calculations are typically based in USD, so to see how much margin is required to hold position in USD/CAD its simple calculation using leverage ratio.
TRADING AUD/USD BY THE NUMBERS AUD is the primary currency in the pair, and the USD is the counter currency, which means ✔ ✔
AUD/USD is traded in amounts denominated in AUD. The pip value is denominated in USD.
✔
Profit or loss accrues in USD.
✔
Margin calculations are typically in USD on online trading platforms.
TRADING NZD/USD BY THE NUMBERS ✔ ✔
NZD/USD is traded position sizes denominated in NZD. The pip value is denominated in USD.
✔
Profit and loss accrues in USD.
✔
Margin calculations are typically based in USD on margin trading platforms.
CROSS CURRENCY PAIR A cross currency pair is any currency pair that does not have the U.S. dollar as one of the currencies in the pairing. For example, one of the 63 | P a g e
most active crosses is EUR/JPY, pitting the two largest currencies outside the U.S. dollar directly against each other. But the EUR/JPY rate at any given instant is a function of the current EUR/USD and USD/JPY rates. The The most most popula popularr cross cross pairs pairs involv involve e the most most active actively ly traded traded major major currencies, currencies, like EUR/GBP, EUR/GBP, EUR/GBP, EUR/GBP, and EUR/CHF. According According to the 2004 BIS BIS surv survey ey of fore foreig ign n exch exchan ange ge mark market et acti activi vity ty,, dire direct ct cros cross s trad tradin ing g accounted for a relatively small percentage of global daily volume-less than 10 percent for the major crosses combined.
WHY TRADE THE CROSSES? Cross pairs represent entirely new sets of routinely fluctuating currency pairs pairs that that offer offer anothe anotherr univers universe e of tradin trading g opport opportuni unities ties beyond beyond the primary primary USD pairs. Developments Developments in the currency market are not always a simple but on what’s happening to the U.S. dollar. Crosses are the other half half of the the stor story, y, and and thei theirr sign signif ific ican ance ce appe appear ars s to be incr increa easi sing ng dramatically as a result of electronic trading.
Cross trading offers the following advantages: ✔
You can pinpoint trade opportunities based on news or fundamentals.
✔
You can take advantage of interest-rate differentials.
✔
You can exploit technical trading opportunities.
✔
You can expand the horizon of trading opportunities.
✔
You can go with the flow .
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CHAPTER 7 CURRENCY FUTURES DEFINATION OF CURRENCY FUTURES A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a “commodity futures contract”. When the underlying is an exchange rate, the contract is termed a “currency futures contract”. In other words, it is a contract to exchange one currency for another currency at a specified date and a specified rate in the future. Therefore, the buyer and the seller lock themselves into an exchange rate for a specific value or delivery date. Both parties of the futures contract must fulfil their obligations on the settlement date. Currency futures can be cash settled or settled by delivering the respective obligation of the seller and buyer. All settlements however, unlike in the case of OTC markets, go through the exchange. Currency futures are a linear product, and calculating profits or losses on Currency Futures will be similar to calculating profits or losses on Index futures. In determining profits and losses in futures trading, it is essential to know both the contract size (the number of currency units being traded) and also what the tick value is. A tick is the minimum minimum trading increment or price differential differential at which which traders are able to enter bids and offers. Tick values differ for different currency pairs and different underlying. For e.g. in the case of the USD-INR currency futures contract the tick size shall be 0 .25paise or 0.0025 Rupees.
FUTURES TERMINOLOGY •
Spot price: The price at which an asset trades in the spot market. In the case of USDINR, spot value is T + 2.
•
Futures price: The price at which the futures contract trades in the futures market.
•
Contract cycle: The period over which a contract trades. The currency future contracts on the NSE have one- month, two-month, three-month upto twelve month expiry cycles. Hence the NSE will have 12 contracts outstanding at any given point of time.
•
Value date/final settlement date: The last business day of the month month will will be termed termed the value value date/ date/ final final settle settlemen mentt date date of each each contract. The last business day would be taken to be the same as that for for inte interr-ba bank nk sett settle leme ment nt in Mumb Mumbai ai.. The The rule rules s for for Inte Interr-ba bank nk
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settle settlemen ments, ts, includ including ing those those for’ for’ known known holida holidays’ ys’ and ‘subse ‘subseque quentl ntly y decla declared red holi holida day’ y’ woul would d be thos those e as laid laid down down by FEDA FEDAI( I(Fo Forei reign gn Exchange Dealers Association of India). •
Expiry date: It is the date specified in futures contract. This is the last day on which contract will be traded, at the end of which it ceases to exist. The last trading day will be two business days prior to the value date/final settlement date.
•
Contract size: the amount of asset that has to be delivered under one contract. Also called as a lot size.
•
Basis: in the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. contract. In the normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.
•
Cost of carry: The relationship between the spot prices and future price prices s can can be summ summar ariz ized ed as the the cost cost of carry carry.. This This meas measure ures s the the storage cost plus the interest that is paid to finance or carry the asset till delivery less the income earned on the asset. For equity derivatives carry cost is the rate of interest.
•
Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.
•
Marking-to-market : In the the futu future res s mark market et,, at the the end end of each each trading day, the margin account is adjusted to reflect the investor’s gain or loss loss depen dependi ding ng upon upon the the futu futures res clos closin ing g price price.. This This is call called ed as marking-to-market.
•
Maintenance Maintenance margin: this is somewhat lower than the initial margin. This This is set to ass assure ure that the balance balance in the margin margin acc accoun ountt never never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up margin margin account account to the initial initial margin margin level before before tradin trading g commences on the next day.
RATIONALE FOR INTRODUCING CURRENCY FUTURES Futures markets were designed to solve the problems that exist in forward markets. A future future market is an agreement between between two parties parties to buy or sell an asset at a certain certain time in the future at a certain certain place. But unlike unlike forward forward contracts, contracts, the future contracts contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchan exchange ge specif specifies ies certai certain n stand standard ard featur features es of the contra contract. ct. A futures futures contra contract ct is standa standardi rdized zed contra contract ct with with standa standard rd underl underlyin ying g instru instrumen ment, t, a standa standard rd qualit quality y and quality of the underlying instrument that can be delivered, ( or which can be use for references purposes in the settlement) and a standard timing of such settlement.
The standardized items in a futures contract are: •
Quantity of underlying.
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•
Quality of underlying.
•
The date and month of delivery.
•
The units of price quotation and minimum price change.
•
Location of settlement.
The rationale for introducing currency futures in the Indian context has been outlined in the Report of the Internal Working Group on Currency Currency Futures (Reserve Bank of India, India, April 2008) as follows; The rationale for establishing the currency futures market is manifold. Both residents and non-residen non-residents ts purchase domestic currency assets. If the exchange rate remains remains unchanged from the time of purchase of the asset to its sale, no gains and losses are made out of currency exposures. But if domestic currency depreciates depreciates (appreciat (appreciates) es) against the foreign foreign currency, currency, the exposure would result in gain (loss) for residents purchasing foreign assets and loss (gain) (gain) for non reside residents nts purchas purchasing ing domest domestic ic ass assets ets.. In this this backdr backdrop, op, unpredi unpredicte cted d moveme movements nts in exchan exchange ge rates rates expose expose invest investors ors to curren currency cy risks. risks. Curren Currency cy futures futures enable them to hedge these risks. Nominal exchange rates are often random walks with or without drift, while real exchange rates over long run are mean reverting. As such, it
is possible that over a long – run, r un, the incentive to hedge currency risk may not be large. However, financial planning horizon is much smaller than the long-run, which is typically inter-generational in the context of exchange rates. As such, there is a strong need to hedge currency risk and this need has grown manifold with fast growth in cross-border trade and investments flows. The argument for hedging currency risks appear to be natural in case of assets, and applies equally to trade in goods and services, which results results in income income flows flows and lags lags and and get convert converted ed into into different different currenc currencies ies at the market rates. Empiri Empirical cally, ly, change changes s in exchan exchange ge rate rate are found found to have have very very low correl correlati ations ons with with foreign equity and bond returns. This in theory should lower portfolio risk. Therefore, sometimes argument is advanced against the need for hedging currency risks. But there is strong empirical evidence to suggest that hedging reduces the volatility of returns and indeed considering the episodic nature of currency returns, there are strong arguments to use instruments to hedge currency risks.
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Conclusion
During this project work I have tried my best to touch each and every aspect which would affect the business process of the company. All exchanges generate impacts in the core functions of price discovery, price risk management and as a venue for investment. Each exchange offers liquid markets, a central counter party to all but eliminate counter party risk, market data that is freely and transparently disseminated and
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future futures s market markets s that that are well-c well-corr orrela elated ted with with spot spot market markets s to enable enable effective price risk management. Only two positive impacts were opposed on the basis of experience in the featured markets to date- that a currency exchange can enable hedging against inflation and quality improvements generated by the exchange can reduce dependence on imports.
The paramet parameters ers that that decide decide the price price of curren currency cy in differ different ent exchanges are: • • •
Volume of currency being traded. Demand and supply forces. Worldwide demand and supply of a given currency.
The area of facilitating currency is perhaps the area where there is greatest scope for exchanges to learn from each other's experience. These are the main aspects which could be concluded from the responses. On the basis of these observations some recommendations could be provided to the companies about which I will be discussing in the next part.
During my training period the work which I have done, has helped me a lot. I understood understood to reach any heights you have to start from the scratch. I understand that if you want to be best in any organization then you have to do your work with full dedication and sincerity.
‘
Recommendations to the Company After such observations and some conclusions made on the basis of that I would like to recommend some important points, upon which company should focus and try to grow its business by tapping the market through making new customers. In this recommendation part of this project work I am suggesting these points. First thing which I would like to suggest is the company should focus on its promotional 69 | P a g e
forces, so that it would be able to convey the product features to the common people. Once the features will be exposed then only it can make new customers. Through the survey responses we knew that advertisements are the most affective medium of creating awareness. So to differentiate our product and to expose our exclusive benefits we need to take it out in front of the people. To create awareness about the product we can take several steps such as: •
Arranging various kinds of activities at public gathering.
•
Placing the customer facilitating desks at various places.
•
Approach to the various offices to get new leads or customer contacts.
Bibliography 1. 2.
http://www.bseindia.com http://www.nseindia.com
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3. 4. 5.
http://investopedia.com http://www.google.com http://www.currencytradingweb.com
References •
Books Referred for the study:
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Currency Trading for Dummies by Mark Galant and Brian Dolan Ncfm Currency Future Module
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