1. FOREIGN EXCHANGE MARKETSPROF. PARVEEN SULTANA KANTHEMAIL ID: parveen.kanth@gmail.com

2. FOREIGN EXCHANGE MARKET Foreign Exchange Market:-Foreign exchangearises out of international trade .Foreign exchange isthe system or process of converting one nationalcurrency into another, & transferring money from onecountry to another Paul Einzing The foreign exchange market is the market in whichindividuals firms & banks buy & sell foreigncurrencies or foreign exchange. 3. FOREX A global market where people trade money amongthe major financial centers FOREX= WORLD WIDE MARKET , where anyonecan participate largest most liquid market with $5.9trillion per day traded.It trading in currency trading & spot forex. 4. The foreign exchange market is uniquebecause of the following characteristics: its huge trading volume representing the largestasset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day exceptweekends, i.e., trading from 22:00 GMT onSunday (Sydney) until 22:00 GMT Friday (NewYork); the variety of factors that affect exchange rates; the low margins of relative profit compared withother markets of fixed income; and the use of leverage to enhance profit and lossmargins and with respect to account size. 5. Benefits in Forex markets Commission free trading 24 hours market liquidity The ability to choose your own trading hours. Being able to find profitable trades in both risingand falling markets execution quality & speed better leverage 6. How will trade in forex market White colored workers Blue colored workers Executives House wife students etc 7. Forex levels First levels are tourists, importers, exporters,investors etc, second level are the commercial banks which actas clearing houses between users & earners offoreign exchange . Third level are foreign exchange brokers. Thefinal level is central bank ,acts as seller or buyerof last resort. Four levels of transistors or participants can beidentified in foreign exchange markets. 8. According to the Bank for International Settlements thepreliminary global results from the 2013 Triennial Central BankSurvey of Foreign Exchange and OTC Derivatives MarketsActivity show that trading in foreign exchange markets averaged$5.3 trillion per day in April 2013. This is up from $4.0 trillion inApril 2010 and $3.3 trillion in April 2007. Foreign exchangeswaps were the most actively traded instruments in April 2013,at $2.2 trillion per day, followed by spot trading at $2.0 trillion. According to the Bank for International Settlements, as of April2010, average daily turnover in global foreign exchange marketsis estimated at $3.98 trillion, a growth of approximately 20%over the $3.21 trillion daily volume as of April 2007. Some firmsspecializing on foreign exchange market had put the averagedaily turnover in excess of US$4 trillion. The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products 9. Basic terminology in forex marketLIQUIDITYBIDASKSTOPLOSSSHORTLONGPIP LOTTAKEPROFITCURRENCYPAIRLEVERAGETRADINGSTRATEGYEXPERTADVISORINDICATORTRADINGPLATFORM 10. LIQUIDITY The degree of an asset's ability to be converted to cash at itsfair market price For an asset, its liquidity is its ability to be bought or soldwithout any discount or premium. Liquidity thus reflects theamount and frequency the asset and traded. The moresomething is bought and sold, an individual's ability to chargepremium or look for discounts lowers. However the less liquidsomething is, the harder it will be for it to be bought or sold. A market that is liquid means it has many trades and iscomposed of many traders. The Forex market is extremelyliquid because hundreds of banks and millions of individualstrade currencies everyday. In fact, nearly $4 trillion isexchanged daily and this number is increasing as interest byretail traders are expanding. Consequently, traders can tradequickly with a click or two. On the other end of the spectrum, real estate development isan extremely illiquid market because it requires a lot of capitaland investments are made into physical form such asbuildings. As a result you will find a bigger range of price offered for 11. BID PRICE A two-way price quotation that indicates the bestprice at which a security can be sold and boughtat a given point in time. The bid price represents the maximum price thata buyer or buyers are willing to pay for a security. The Price You Can Sell Currency To The Dealer 12. ASK PRICE The ask price represents the minimum price thata seller or sellers are willing to receive for thesecurity. A trade or transaction occurs when the buyer andseller agree on a price for the security. THE PRICE YOU CAN BUY CURRECNCY PAIRFROM THE DEALER The difference between the bid and asked prices,or the spread, is a key indicator of the liquidity ofthe asset - generally speaking, the smaller thespread, the better the liquidity. 13. PIP: percentage in points Currency code means 5 digit number in currency. PIP:- Smallest price change for a currencyexchange rate & the 5th significant digit in thecode . It is smallest unit that a price can change Most change can happen in 4 decimal placessome happens in 2, 3, or 5 decimal placestrading 14. pip Your forex broker should let you know how manydecimal places for each currency pair. Ex:- USD/CAD (Canadian dollars) based on 4decimal places (0.0001). USD/CAD moved from 1.0000 to 1.0001 : it hasmoved 1 pip. USD/CAD moved from 1.0001 to 1.0004 : it hasmoved 3 pips 15. What is the difference between thetop pink line & the bottom line inpips?6543210Series 1Series 2Series 30.978340.978050.97765 16. 69 pips 17. Long In financial trading, a position is a bindingcommitment to buy or sell a given amountof financial instruments, such as securities,currencies or commodities, for a given price. Long position :-The buying of a security such as astock, commodity or currency, with theexpectation that the asset will rise in value.In the context of options, the buying of ancurrency pairs. 18. For example Ex: an owner of shares in McDonald's Corp. issaid to be "long McDonald's" or "has a longposition in McDonald's. 19. Short position . The sale of a borrowed security, commodity orcurrency with the expectation that the asset willfall in value. Selling a currency pair In the context of currency, it is the sale (alsoknown as "writing") of an currency pair 20. example, For example, an investor who borrows shares ofstock from a broker and sells them on the openmarket is said to have a short position in thestock. The investor must eventually return the borrowedstock by buying it back from the open market. Ifthe stock falls in price, the investor buys it for lessthan he or she sold it, thus making a profit. 21. Take profit Take profit (T/P): the number of pips or price fromthe currency price point where to close out theircurrent position for a profit. An order used by currency traders specifying theexact rate or number of pips from the currentprice point where to close out their currentposition for a profit. The rate deemed to be thelevel where the trader wants to take a profit issometimes referred to as the "take-profit point". 22. As the name suggests, take-profit orders are used tolock in profits in the event the rate moves in afavorable direction. For example, if you are long a currency pair positionand believe the price will rise to a certain level, butare unsure what it will do beyond that level, placing atake-profit order at that point will automatically closeout your position allowing you to lock in profit. Example: Buy $100 worth of yen at 107.4 yen perdollar = 100*107.40 = 10,740 yenPlace a take-profit order at 108.80. Price then risesfrom 107.40 to 108.80 Take-profit order automaticallyexecuted to sell $100 and buy 10,880 yenProfit of 140 yen realized. 23. Stop loss Sell a security when it reaches a certain price used to limit an investors loss 24. T/P & S/L when you buy6543210Series 1Series 2Series 31.04885 T/P1.04631 C/P1.04275 S/P 25. T/p & S/P when you sell6543210Series 1Series 2Series 31.04885 S/P1.04631 C/P1.04275 T/P 26. LOT Lot means minimum unit of trade. A standard trading term referring to an order of100,000 unit. the standard transaction size in aforex transaction. Usually this is 10,000 currencyunits, but may be 1,000 in mini-lots. 27. Currency pairs are usually traded in units of 100,000(standard lots), 10,000 unit (mini lots) or 1,000(micro lots) meaning buying / selling 100,000 ofthe base currency while selling / buying theequivalent number of units of the counter currency. What is a mini-lot = 1/10 (10%) of the standard lotsize. One pip of a currency pair based on USD= $1 whentrading a mini lot; $10 for a standard lot trade. To calculate standard lot trade you multiple0.0001/100 which equal to $10. 28. example For example, if you open a long position of onelot for EUR/USD for the ask price of 1.4000, youare purchasing 100,000 Euro while, selling140,000 USD. A standard contract (one Lot) in which the USD isthe counter currency one pip will equal $10 ($1for a mini lot). For all other pairs exact pip valuesare slightly different and range from $8 to $10.Use our Pip Calculator to see the current pipvalue for all currency pairs. 29. Currency pair GBP/USD = currency pair Currency pair- quote and price structure forcurrency traded in the forex market. First currency = base currency Second currency = quote currency or countercurrency. 30. How much quote currency is neededto buy /unit of base currency Ex: quoted USD/GBP=1.5 Purchase the pair , for every 1.5 British poundsthat you sell you purchase (receive)Us$1. Sold the currency pair you would receive 1.5British pounds for every US$1 you sell. Ex: quoted Euro/USD=0.667 Purchase the price for every $0.677 dollars thatyou sell ;you purchase 1Euro. Sold the currency pair you would receive 1eurofor every Us$ 0.667 you sell 31. Currency rate Ex: travelling to US to Swiss you have toexchange .USD/CHF Two rate shown one is the bid /askUSD/CHF= 1.1569 ; 1.1571bid askMeans 1$= 1.1571CHF 32. LEVERAGE LEVERAGE allows you to open trades that arelarger than the capital you trading account. Ex:- $ 10,00,000 have been purchased through along USD?JPY position with a $ 50,000 a/c.leverage balance is 20:1 . Trading on margin can both positively andnegative affect your trading experience as bothprofits and losses can be dramatically amplified. 33. Trading strategy A trading strategy helps to determine when to getinto and get out a trade.FX trading strategies:1. Fundamental trading strategy2. Technical trading strategy 34. Fundamental & Technical trading strategies Fundamental trading strategy uses financial news topredict the movement in currency bear like economicindicator like GDP inflation etc Technical trading strategy focus to strategic andprobability index helps to predict the future trends ofthe currency with the movement of the currency bearlike moving average etc 35. Trading platform Trading platform is a soft ware provided by brokerto trader. 36. Indicator For a technical analyst: an indicator is amathematical calculation based on the currencyprice and volume. The result is used to predict thefuture prices. For a fundamental analyst : an indicator could bea measure which can be used to predict futureeconomic trends'. Common general economicindicators are the unemployment rate , newhousing scheme by Govt WPI, CPI INDEX etc 37. INDICATOR TYPES TRENDS MOMENTUM VOLUME VOLATILITY 38. Trend indicators Trend indicators: by looking into the movement ofthe trends you can decide on the level at whichcan start trading , moving average parabolic SARand MACD are few examples. Usually trends aredone by charts. 39. Momentum indicator These are considered to be the oscillatingindicators and are most clear cut in pin pointingthe over bought as well as the oversold position.similarly they show the signals for any new trend. RSI( relative strength index) CCI () are fewexample. 40. Volume indicator Price movement is very much dependent on thevolume of the traders. Generally the pricemovement which is rooted from a high volumegather a fairly stronger signer compared to onewhich is inspired by the low volume. Ex: force index, money flow index ease ofmovement chikin money flow etc. 41. Volatility indicator They normally look into the ranges that definesthe volume that lies beneath the movements andthe price behavior ex: average true range,bollinger bands and envelopes. 42. Expect advisor Trading software to help the currency trader withForex trading analysis and the execution oftrades. 43. Foreign exchange market 44. The Spot Market The spot market involves the immediate purchaseor sale of foreign exchange Cash settlement occurs 1-2 days after thetransaction Currencies are quoted against the US dollar Interbank FX traders buy currency for theirinventory at the bid price Interbank FX traders sell currency for theirinventory at the ask price Bid price is less than the ask price Bid-ask spread is a transaction cost 45. The Spot Market Direct Quotes US dollar price of 1 unit of foreign currency$ are in thenumerator (foreign currency is priced in terms of dollars) $/ = 1.5000 (1 costs $1.5000) $/ = 2.0000 (1 costs $2.0000) Currency changes Suppose that today, $/ = 1.5000 and in 1 month, $/ = 1.5050 The $ has depreciated in value Alternatively, the has appreciated in value Suppose that today, $/ = 2.0000 and in 1 month, $/ = 1.9950 The $ has appreciated in value Alternatively, the has depreciated in value 46. The Spot Market IndirectQuotes Foreign currency price of $1$ are in the denominator (USdollar is priced in terms of foreign currency) /$ = 0.6667 ($1costs 0.6667) /$ = 0.5000 ($1 costs 0.5000) Currency changes Suppose that today, /$ = 0.6667 and in 1 month, /$ = 0.6600 The $ has depreciated in value Alternatively, the has appreciated in value Suppose that today, /$ = 0.5000 and in 1 week, /$ = 0.5050. The $ has appreciated in value Alternatively, the has depreciated in value 47. The Spot Market - Conventions Denote the spot rate as S For most currencies, use 4 decimal places in calculations With exceptions: i.e. S(/$)=109.0750, but S($/)=0.009168 If we are talking about the US, always quote spot rates as thedollar price of the foreign currency i.e. as direct quotes, S($/), S($/C$), S($/), etc Increase in the exchange rate the US dollar is depreciating Costs more to buy 1 unit of foreign currency Decrease in the exchange rate the US dollar isappreciating Costs less to buy 1 unit of foreign currency 48. The New York foreign exchange selling rates below apply totrading among banks in amounts of $1 million and more, as quotedat 4 p.m. Eastern time by Dow Jones Telerate Inc. and other sources .Retail transactions provide fewer units of foreign currency perdollar.Special Drawing Rights (SDR) are based on exchange rates forthe U.S., German, British, French, and Japanese currencies. Source:International Monetary Fund.European Currency Unit (ECU) is based on a basket of communitycurrencies.a-fixing, Moscow Interbank Currency Exchange.EXCHANGE RATESCountryArgentina (Peso)Australia (Dollar)Austria (Schilling)Bahrain (Dinar)Belgium (Franc)Brazil (Real)Britain (Pound)30-Day Forward90-Day Forward180-Day ForwardCanada (Dollar)30-Day Forward90-Day Forward180-Day ForwardChile (Peso)China (Renminbi)Colombia (Peso)Czech. Rep (Krouna)Commercial rateDenmark (Krone)Ecuador (Sucre)Floating rateFinland (Markka)France (Franc)30-Day Forward90-Day Forward180-Day ForwardGermany (Mark)30-Day Forward90-Day Forward180-Day ForwardGreece (Drachma)Hong Kong (Dollar)Hungary (Forint)India (Rupee)Indonesia (Rupiah)Ireland (Punt)Israel (Shekel)Italy (Lira)CurrencyU.S. $ equiv. per U.S. $Wed.1.0012.7805.090432.6525.03080.96071.68801.68691.68431.6802.7399.7414.7442.7479.002352.1201.0009985.....03662.1663.....0002766.2121.1879.1882.1889.1901.6352.6364.6389.6430.004049.1292.006139.02787.00042331.6664.3079.0006483Tues.1.0012.7902.091012.6525.03105.96151.69461.69351.69101.6867.7370.7386.7413.7450.002356.1201.0009985.....03677.1677.....0002787.2135.1893.1896.1903.1914.6394.6407.6432.6472.004068.1292.006164.02786.00042331.6714.3085.0006510Wed..99881.281211.058.377032.4701.0409.5924.5928.5937.59521.35161.34881.34371.3370425.258.32721001.50....27.3076.0118....3615.004.71505.32205.31265.29355.26171.57441.57141.56521.5552246.987.7390162.8935.8752362.15.60013.24741542.50Tues..99881.265510.988.377032.2051.0401.5901.5905.5914.59291.35681.35391.34891.3422424.408.32761001.50....27.1945.9633....3587.504.68415.28385.27415.25585.22431.56391.56071.55471.5450245.807.7390162.2335.8902362.63.59833.24121536.00CountryJapan (Yen)30-Day Forward90-Day Forward180-Day ForwardJordan (Dinar)Kuwait (Dinar)Lebanon (Pound)Malaysia (Ringgit)Malta (Lira)Mexico (Peso)Floating rateNetherland (Guilder)New Zealand (Dollar)Norway (Krone)Pakistan (Rupee)Peru (new Sol)Philippines (Peso)Poland (Zloty)Portugal (Escudo)Russia (Ruble) (a)Saudi Arabia (Riyal)Singapore (Dollar)Slovak Rep. (Koruna)South Africa (Rand)South Korea (Won)Spain (Peseta)Sweden (Krona)Switzerland (Franc)30-Day Forward90-Day Forward180-Day ForwardTaiwan (Dollar)Thailand (Baht)Turkey (Lira)United Arab (Dirham)Uruguay (New Peso)FinancialVenezuela (Bolivar)SDRECUWed..008639.008676.008750.0088651.40753.3367.0006445.40182.7624.....1278.5655.7072.1540.02529.3814.03800.3460.006307.0001787.2666.7116.03259.2141.001184.007546.1431.7334.7357.7401.7470.03638.03902.00000911.2723.....1145.002098- - -1.43151.2308Tues..008681.008718.008791.0089071.40753.3389.0006445.40022.7701.....1277.5699.7106.1548.02529.3840.03802.3475.006369.0001788.2667.7124.03259.2142.001184.007603.1435.7387.7411.7454.7523.03637.03906.00000915.2723.....1145.0020961.43261.2404Wed.115.75115.26114.28112.80.7105.29971551.502.4885.3620....7.82201.76851.41406.492639.5402.621826.3182.8900158.555595.003.75031.405330.6884.6705844.75132.526.98651.36351.35931.35111.338627.48925.625109755.003.6720....8.7300476.70.6986..........Tues.115.20114.71113.76112.28.7105.29951551.502.4990.3610....7.83301.75471.40736.459939.5402.603926.3002.8780157.025594.003.75021.403730.6884.6690844.65131.536.96971.35371.34941.34161.329327.49325.605109235.003.6720....8.7300477.12.6980...........U.S. $ equiv.CurrencyWednesday, January 8, 1997 per U.S. $US dollar price:S($/)=1.68801 costs$1.6880UK pound price:S(/$)=0.5924$1 costs 0.5924And note that1(/$)($ / )SS 49. Spot market The current exchange, S($/)=1.5000. In 1 month, it isS(/$)=0.6689 Has the US dollar appreciated or depreciated? By what % has the exchange rate changed? Convert S(/$)=0.6689 to:1/S(/$)=S($/)=1.4950. Now we see that the exchange rate has decreased US dollar hasappreciated. The % change per month is: = 1.4950- 1.5000/1.50000 = -.33% 50. Cross rate The exchange rate between 2 currencies where neithercurrency is the US dollar We know the dollar rates. What if we want to know otherrates, i.e. S(/) ? Calculate cross-rates from dollar rates S($/)=1.5000 and S($/)=2.0000. What is S(/), i.e. the priceof? =of ? / = / $ x $ / = 1/ 1.5000 x2.0000 =1.3333/1pound = s( / ) =1.3333 51. Cross exchange rate Cross-rates must be internally consistent;otherwise arbitrage profit opportunities exist. Suppose that: / = / $ x $ / A profit opportunity exists. Either S(/) is toohigh or S(/$) or S($/) is too low. How does this work? Sell high and buy low. 52. Forward market Forward market involves contracting today for thefuture purchase or sale of foreign exchange Forward prices are quoted the same way as spotprices Denote the forward price maturing in N days asFN i.e. F30($/), F180($/), F90(/ ), etc The forward dollar price of the euro can be: Same as the spot price Higher than the spot price (euro at a premium) Lower than the spot price (euro at a discount) 53. Wrap -up The foreign exchange market is by far the largestfinancial market in the world. Currency traders trade currencies for spot andforward delivery. Exchange rates are by convention quoted againstthe U.S. dollar, but cross-rates can easily becalculated from bilateral rates. Triangular arbitrage forces the cross-rates to beinternally consistent. The euro has enhanced trade within Europe, andthe currency has the potential of becoming amajor world currency. 54. THE END