Project on Forex, Finance Specialization

7/30/2019 Project on Forex, Finance Specialization

1/69

A STUDY IN FOREX RISK MANAGEMENT

PROJECT REPORT SUBMITTED IN PARTIAL FULFILLMENT

OF

THE REQUIREMENT FOR THE DEGREE OF

BACHELORS IN BUSINESS MANAGEMENT

OF

BANGALORE UNIVERSITY

Submitted By :

Karni pratap singh gaur

Reg no.092AC18052

Under the guidance

Prof. Abhay chebbi

Faculty

Alliance school of management

Alliance school of management

Bangalore-560 076

Batch -2009-2012


2/69

DECLARATION

I hereby declare that this project title A Study in forex risk

management for Greenback Forex Services (p) Ltd. At Bangalore is an

original Work done by me under the guidance of Mr .Ganesh srinivasan ,

sr vice president of greenback forex services (p) ltd. And Prof . Abhay

chebbi . faculty of Alliance school of management

The project report has been submitted to Banglore university through

Alliance school of management,Banglore in partial fulfillment of the

academic requirement for the award of the degree of the bachelors in

business management

I also declare that this project has neither been submitted to any university

nor done by any other student earlier for the award of the degree,

diploma,associateship, or any other similar side .


Reg no092AC18052

Date :

Place


3/69

ACKNOWLEDGEMENT

I would like to express my profound gratitude to all those who have been

instrumental in the preparation of this project report. I wish to place my

record in deep gratitude to prof. abhay chebbi., a highly esteemed and

distinguished guide, for his expert advice and help. I would also like to

thank Mr. sudhir G. Angur (President, Alliance School of Management)and Prof. Arunabhas Bose, (H.O.D BBM Dept)

I am deeply grateful to Mr. ganesh srinivasan, sr-vice president

,Greenback forex services (p) ltd for the immense level of co-operation,

constant support and ideas given bt him which helped me worked towards

the project.

I also owe my special thanks to all the members of greenback forex

services (P) ltd , Bangalore for constantly providing me the valuableinputs and supporting me in the collection of the data of the report.

Lastly, I would like to thank to my family, without whose help and

support nothing can really take shape.


(Reg. N0. :092AC18052)


4/69

CONTENTS

CHAPTER

NO.

LIST OF CHAPTERS PAGES

NO.

1 INTRODUCTIONa) Introduction to Forex

2 Company profilea) Greenback forex services pvt ltd.

3 Design of the studya)title of the studyb)statement of the problemc)scope of the studyd)objectives of the studye) methodology

Type of study

Type of data

Sources of data

Tools for data collectionf) Limitations of studies

4

5 FINDINGS SUGGESTIONS&

CONCLUSION

6 BIBLIOGRAPHY


5/69

CHAPTER1

IntroducTION


6/69

INTRODUCTIONTOFOREX

FOREX, an acronym for Foreign Exchange, is the largest financialmarket in the world. With an estimated $1.5 trillion in currencies traded

daily, Forex provides income to millions of traders and large banksworldwide. The market is so large in volume that it would take the NewYork Stock Exchange, with a daily average of under $20 billion, almostthree months to reach the amount traded in one day on the ForeignExchange Market.

Forex, unlike other financial markets, is not tied to an actual stockexchange. Forex is an over-the-counter (OTC) or off-exchange marketWhether or not you are aware of it, you already play a role in currencytrading. The simple fact that you have money in your pocket makes you

an investor in a nation's currency. By holding US Dollars, for example,you have elected not to hold the currencies of other nations. When acurrency is traded, the transaction is carried out on the Foreign Exchangemarket (also referred to as the Forex or FX market). The Forex market isthe largest financial market in the world, with over $1.9 trillion changinghands every day!

Unlike other financial markets that operate at a centralized location (i.e.,the stock exchange), the worldwide Forex market does not have a central

location. It is a global electronic network of banks, financial institutionsand individual Forex traders, all involved in the buying and selling ofnational currencies. A major feature of the Forex market is that it operatescontinuously six days a week from its opening session on Sundayafternoon (Eastern Time) to Friday afternoon (Eastern Time). Throughoutthis period, in any location, there are buyers and sellers, making the Forexmarket the most liquid market in the world

FX-FOREX MEANS

The market in which currencies are traded. The forex market is thelargest, most liquid market in the world with an average traded value thatexceeds $1.9 trillion per day and includes all of the currencies in theworld.

There is no central marketplace for currency exchange; trade is conducted

over the counter. The forex market is open 24 hours a day, five days a

week and currencies are traded worldwide among the major financial

centers of London, New York, Tokyo, Zrich, Frankfurt, Hong

Kong, Singapore, Paris and Sydney.


7/69

The forex is the largest market in the world in terms of the total cash

value traded, and any person, firm or country may participate in this

market

'Foreign Exchange Market'

The market in which participants are able to buy, sell, exchange and

speculate on currencies. Foreign exchange markets are made up of banks,

commercial companies, central banks, investment management firms,

hedge funds, and retail forex brokers and investors. The forex market is

considered to be the largest financial market in the world.Here is the

explanatio. It is important to realize that the foreign exchange market is

not a single exchange, but is constructed of a global network of computers

that connects participants from all parts of the world

The foreign exchange market (forex, FX, or currency market) is a

global, worldwide-decentralized financial market for trading currencies.

Financial centers around the world function as anchors of trading between

a wide range of different types of buyers and sellers around the clock,

with the exception of weekends. The foreign exchange market determines

the relative values of different currenciescThe foreign exchange market is

unique because of following reasons -

its huge trading volume representing the largest asset class in theworld leading to high liquidity

its geographical dispersion;

its continuous operation: 24 hours a day except weekends, i.e. tradingfrom 20:15 GMT on Sunday until 22:00 GMT Friday;

the variety of factors that affect exchange rates

the low margins of relative profit compared with other markets offixed income; and

the use of leverage to enhance profit and loss margins and with respectto account size.


8/69

FOREX MARKET HISTORY

From the days of the gold exchange ,through the The Breetton Woods

Agreement until present day .here is an overview of historical roots ofthe international currency trade to its current setting today

The foreign exchange market (fx or forex) as we know it today originatedin 1973. However, money has been around in one form or another since

the time of Pharaohs. The Babylonians are credited with the first use ofpaper bills and receipts, but Middle Eastern moneychangers were the firstcurrency traders who exchanged coins from one culture to another.During the middle ages, the need for another form of currency besidescoins emerged as the method of choice. These paper bills representedtransferable third-party payments of funds, making foreign currencyexchange trading much easier for merchants and traders and causing theseregional economies to flourish.From the infantile stages of forex duringthe Middle Ages to WWI, the forex markets were relatively stable and

without much speculative activity. After WWI, the forex markets becamevery volatile and speculative activity increased tenfold. Speculation in theforex market was not looked on as favorable by most institutions and thepublic in general. The Great Depression and the removal of the goldstandard in 1931 created a serious lull in forex market activity. From 1931until 1973, the forex market went through a series of changes. Thesechanges greatly affected the global economies at the time and speculationin the forex markets during these times was little

.the Bretton Woods AccordThe first major transformation, the Bretton Woods Accord, occurredtoward the end of World War II. The United States, GreatBritain andFrance met at the United Nations Monetary and FinancialConference in Bretton Woods, N.H. to design a new global economicorder. The location was chosen because, at the time, the U.S. was the onlycountry unscathed by war. Most of the major European countries were inshambles. Up until WWII, Great Britain's currency, the Great British

Pound, was the major currency by which most currencies were compared.This changed when the Nazi campaign against Britain included a major


9/69

counterfeiting effort against its currency. In fact, WWII vaulted the U.S.dollar from a failed currency after the stock market crash of 1929 tobenchmark currency by which most other international currencies werecompared. The Bretton Woods Accord was established to create a stable

environment by which global economies could restore themselves. TheBretton Woods Accord established the pegging of currencies andthe International Monetary Fund (IMF) in hope of stabilizing the globaleconomic situation.

Now, major currencies were pegged to the U.S. dollar. Thesecurrencies were allowed to fluctuate by one percent on either sideof the set standard. When a currency's exchange rate wouldapproach the limit on either side of this standard the respectivecentral bank would intervene to bring the exchange rate back into

the accepted range. At the same time, the US dollar was pegged togold at a price of $35 per ounce further bringing stability to othercurrencies and world forex situation.

The Bretton Woods Accord lasted until 1971. Ultimately, it failed,but did accomplish what its charter set out to do, which was to re-establish economic stability in Europe and Japan.

The Beginning of the free-floating system

After the Bretton Woods Accord came theSmithsonian Agreement in

December of 1971. This agreement was similar to the Bretton WoodsAccord, but allowed for a greater fluctuation band for the currencies. In

1972, the European community tried to move away from its dependency

on the dollar. The European Joint Float was established by West

Germany, France,Italy, the Netherlands, Belgium and Luxemburg. The

agreement was similar to the Bretton Woods Accord, but allowed a

greater range of fluctuation in the currency values.

Both agreements made mistakes similar to the Bretton WoodsAccord and in 1973 collapsed. The collapse of the Smithsonianagreement and the European Joint Float in 1973 signified theofficial switch to the free-floating system. This occurred by defaultas there were no new agreements to take their place. Governmentswere now free to peg their currencies, semi-peg or allow them tofreely float. In 1978, the free-floating system was officiallymandated.

In a final effort to gain independence from the

dollar, Europe created the European Monetary System in July of1978. Like all of the previous agreements, it failed in 1993.


10/69

The major currencies today move independently from othercurrencies. The currencies are traded by anyone who wishes. Thishas caused a recent influx of speculation by banks, hedge funds,brokerage houses and individuals. Central banks intervene onoccasion to move or attempt to move currencies to their desiredlevels. The underlying factor that drives today's forex markets,however, is supply and demand. The free-floating system is idealfor today's forex markets. It will be interesting to see if in the futureour planet endures another war similar to those of the early 20thcentury. If so, how will the forex markets be affected? Will thedollar be the safe haven it has been for so many years? Only timewill

TIMELINE OF FOREIGN EXCHANGE

1944 Bretton Woods Accord is established to help stabilize the globaleconomy after World War II.

1971 Smithsonian Agreement established to allow for greater fluctuation

band for currencies.

1972 European Joint Float established as the European community triedto move away from its dependency on the U.S. dollar.

1973 Smithsonian Agreement and European Joint Float failed andsignified the official switch to a free-floating system.

1978 The European Monetary System was introduced so other countriescould try to gain independence from the U.S. dollar.

1978 Free-floating system officially mandated by the IMF.

1993 European Monetary System fails making way for a world-wide free-

floating system.


11/69

Forex Dynamics

The breadth, depth, and liquidity of the market are truly impressive. It hasbeen estimated that the world's most active exchange rates like EURUSD

and USDJPY can change up to 18,000 times during a single day.

Somewhere on the planet, financial centers are open for business, andbanks and other institutions are trading the dollar and other currencies,every hour of the day and night, aside from possible minor gaps onweekends. In financial centers around the world, business hours overlap;as some centers close, others open and begin to trade.

The foreign exchange market follows the sun around the earth. Eachbusiness day arrives first in the Asia-Pacific financial centers; first

Wellington, New Zealand, then Sydney, Australia, followed by Tokyo,Hong Kong, and Singapore. A few hours later, while markets remainactive in those Asian centers, trading begins in Bahrain and elsewhere inthe Middle East. Later still, when it is late in the business day in Tokyo,markets in Europe open for business. Subsequently, when it is earlyafternoon in Europe, trading in New York and other U.S. centers starts.Finally, completing the circle, when it is middle or late afternoon in theUnited States, the next day has arrived in the Asia-Pacific area, the firstmarkets there have opened, and the process begins again.

Spot rate

A spot transaction is a straightforward (or outright) exchange of onecurrency for another. The spot rate is the current market price or 'cash'rate. Spot transactions do not require immediate settlement, or payment'on the spot'. By convention, the settlement date, or value date, is thesecond business day after the deal date on which the transaction is madeby the two parties.


12/69

Bid and Ask

In the foreign exchange market (and essentially in all markets) there is abuying and selling price. It is important to perceive these prices as a

reflection of market condition. A market maker is expected to quotesimultaneously for his customers both a price at which he is willing tobuy (the bid) and a price at which he is willing to sell (the ask) standardamounts of any currency for which he is making a market.

Generally speaking the difference between the bid and ask rates reflectthe level of liquidity in a certain instrument. On a normal trading day, themajor currency pairs EURUSD, USDJPY, USDCHF and GBPUSD aretraded by a multitude of market participant every few seconds. Highliquidity means that there is always a seller for your buy and a buyer for

your sell at actual prices.

Base currency and Counter currency

Every foreign exchange transaction involves two currencies. It isimportant to keep straight which is the base currency and which is thecounter currency. The counter currency is the numerator and the basecurrency is the denominator. When the counter currency increases, thebase currency strengthens and becomes more expensive. When the

counter currency decreases, the base currency weakens and becomescheaper. In telephone trading communications, the base currency isalways stated first. For example, a quotation for USDJPY means the USdollar is the base and the yen is the counter currency. In the case ofGBPUSD (usually called 'cable') the British pound is the base and the USdollar is the counter currency.

Quotes in terms of Base currency

Traders always think in terms of how much it costs to buy or sell the basecurrency. When a quote of 0.9150 / 53 is given that means that a tradercan buy EUR against USD at 0.9153. If he is buying EURUSD for1'000'000 at that rate he would have USD 915'300 in exchange for hismillion Euro. Of course traders are not actually interested in exchanginglarge amounts of different currency, their main focus is to buy at a lowrate and sell at higher one.


13/69

Basis points orPips

For most currencies, bid and offer quotes are carried down to the fourthdecimal place. That represents one-hundredth of one percent, or

1/10,000th of the counter currency unit, usually called a 'pip'. However,for a few currency units that are relatively small in absolute value, such asthe Japanese yen, quotes may be carried down to two decimal places anda 'pip' is 1/100th of the terms currency unit. In foreign exchange, a 'pip' isthe smallest amount by which a price may fluctuate in that market.

Euro cross & cross rates

Euro cross rates are currency pairs that involve the Euro currency versusanother currency. Examples of Euro crosses are EURJPY, EURCHF andGBPEUR. Currency pairs that involve neither the Euro nor the US dollarare called cross rates. Examples of cross rates are GBPJPY and CHFJPY.Of course hundreds of cross rates exist involving exotic currency pairs butthey are often plagued by low liquidity. Ever since the Euro the numberof liquid cross rates have decreased and have been replaced (to a certainextent) by Euro crosses.

MOST TRADED CURRENCIES BY VALUE

Although the foreign exchange market is often billed as a banker's game,currencies can sometimes be great diversification for a portfolio thatmight have hit a bit of a rut. It's a market that can also offer tremendousopportunity when other global forums enter the doldrums. As a result,knowing a little bit about forex, and the fundamentals behind it, can makesignificant additions to any trader, investor or portfolio manager's arsenal.Let's take a look at eight currencies every trader or investor should know,along with the central banks of their respective nations. (Absolutebeginners should check out our Forex Walkthrough for more information.

1. U.S. Dollar (USD)

The almighty dollar created in 1913 by the Federal Reserve Act, theFederal Reserve System (also called the Fed) is the central banking bodyof the U.S. The system is itself headed by a chairman and board ofgovernors, with most of the focus being placed on the branch known asthe Federal Open Market Committee (FOMC). The FOMC supervisesopen market operations as well as monetary policy or interest rates.

The current committee is comprised of five of the 12 current FederalReserve Bank presidents and seven members of the Federal Reserve


14/69

Board, with the Federal Reserve Bank of New York always serving on thecommittee. Even though there are 12 voting members, non-members(including additional Fed Bank presidents) are invited to share their viewson the current economic situation when the committee meets every six

weeks.

Sometimes referred to as the greenback, the U.S. dollar (USD) is thehome denomination of the world's largest economy, the United States. Aswith any currency, the dollar is supported by economic fundamentals,including gross domestic product, and manufacturing and employmentreports. However, the U.S. dollar is also widely influenced by the centralbank and any announcements about interest rate policy. The U.S. dollar isa benchmark that trades against other major currencies, especially theeuro, Japanese yen and British pound.

2. European Euro (EUR)

The Dollars Nemesis Headquartered in Frankfurt, Germany, the

European Central Bank is the central bank of the 17 member countries ofthe eurozone. In similar fashion to the United States' FOMC, the ECB hasa main body responsible for making monetary policy decisions, theExecutive Council, which is composed of five members and headed by apresident. The remaining policy heads are chosen with consideration that

four of the remaining seats are reserved for the four largest economies inthe system, which include Germany, France, Italy and Spain. This is toensure that the largest economies are always represented in the case of achange in administration. The council meets approximately 10 times ayear. In addition to having jurisdiction over monetary policy, the ECBalso holds the right to issue banknotes as it sees fit. Similarly to theFederal Reserve, policy makers can interject at times of bank or systemfailures. The ECB differs from the Fed in an important area: instead ofmaximizing employment and maintaining stability of long-term interest

rates, the ECB works towards a prime principle of price stability, withsecondary commitments to general economic policies. As a result,policymakers will turn their focus to consumer inflation in making keyinterest rate decisions. Although the monetary body is somewhatcomplex, the currency is not. Against the U.S. dollar, the euro (EUR)tends to be a slower currency compared to its colleagues (i.e., the Britishpound or Australian dollar). On an average day, the base currency cantrade between 30-40 pips, with more volatile swings averaging slightlymore, at 60 pips wide per day. Another trading consideration is time.Trading in the euro-based pairs can be seen during the London and U.S.sessions (which occur from 2am through 11am EST).


15/69

3. Japanese Yen (JPY)

Technically complex fundamentally simple Established as far back as1882, the Bank of Japan serves as the central bank to the world's second

largest economy. It governs monetary policy as well as currency issuance,money market operations and data/economic analysis. The mainMonetary Policy Board tends to work toward economic stability,constantly exchanging views with the reigning administration, whilesimultaneously working toward its own independence and transparency.Meeting 12-14 times a year, the governor leads a team of nine policymembers, including two appointed deputy governors. The Japanese yen(JPY) tends to trade under the identity of a carry trade component.Offering a low interest rate, the currency is pitted against higher-yieldingcurrencies, especially the New Zealand and Australian dollars and theBritish pound. As a result, the underlying tends to be very erratic, pushingtraders to take technical perspectives on a longer-term basis. Averagedaily ranges are in the region of 30-40 pips, with extremes as high as 150pips. To trade this currency with a little bit of a bite, focus on thecrossover of London and U.S. hours (6am - 11am EST).

4. British Pound(GBP)

The Queens currency As the main governing body in the United

Kingdom, the Bank of England serves as the monetary equivalent of theFederal Reserve System. In the same fashion, the governing bodyestablishes a committee headed by the governor of the bank. Made up ofnine members, the committee includes four external participants(appointed by the Chancellor of Exchequer), a chief economist, directorof market operations, committee chief economist and two deputygovernors. Meeting every month of the year, the Monetary PolicyCommittee (MPC) decides on interest rates and broader monetary policy,with primary considerations of total price stability in the economy. As

such, the MPC also has a benchmark of consumer price inflation set at2%. If this benchmark is compromised, the governor has theresponsibility to notify the Chancellor of Exchequer through a letter, oneof which came in 2007 as theU.K. CPI rose sharply to 3.1%. The releaseof this letter tends to be a harbinger to markets, as it increases theprobability of contractionary monetary policy. A little bit more volatilethan the euro, the British pound (GBP, also sometimes referred to as"pound sterling" or "cable") tends to trade a wider range through the day.With swings that can encompass 100-150 pips, it isn't unusual to see the

pound trade as narrowly as 20 pips. Swings in notable cross currenciestend to give this major a volatile nature, with traders focusing on pairs


16/69

like the British pound/Japanese yen and the British pound/Swiss franc. Asa result, the currency can be seen as most volatile through both Londonand U.S. sessions, with minimal movements during Asian hours (5pm -1am EST A little bit more volatile than the euro, the British pound (GBP,

also sometimes referred to as "pound sterling" or "cable") tends to trade awider range through the day. With swings that can encompass 100-150pips, it isn't unusual to see the pound trade as narrowly as 20 pips. Swingsin notable cross currencies tend to give this major a volatile nature, withtraders focusing on pairs like the British pound/Japanese yen and theBritish pound/Swiss franc. As a result, the currency can be seen as mostvolatile through both London and U.S. sessions, with minimal movementsduring Asian hours (5pm - 1am EST).

5. Swiss Franc (CHF)

A Bankers currency different from all other major central banks, the

Swiss National Bank is viewed as a governing body with private andpublic ownership. This belief stems from the fact that the Swiss NationalBank is technically a corporation under special regulation. As a result, alittle over half of the governing body is owned by the sovereign states ofSwitzerland. It is this arrangement that emphasizes the economic andfinancial stability policies dictated by the governing board of the SNB.Smaller than most govefrom all other major central banks, the Swiss

National Bank is viewed as a governing body with private and publicownership. This belief stems from the fact that the Swiss National Bank istechnically a corporation under special regulation. As a result, a little overhalf of the governing body is owned by the sovereign states ofSwitzerland. It is this arrangement that emphasizes the economic andfinancial stability policies dictated by the governing board of the SNB.Smaller than most governing bodies, monetary policy decisions arecreated by three major bank heads who meet on a quarterly basisrningbodies, monetary policy decisions are created by three major bank heads

who meet on a quarterly basis. The governing board creates the band(plus or minus 25 basis points) of where the interest rate will reside.Similar to the euro, the Swiss franc (CHF) hardly makes significantmoves in the any of the individual sessions. As a result, look for thisparticular currency to trade in the average daily range of 35 pips per day.High-frequency volume for this currency is usually pitted for the Londonsession (2am - 8am EST).


17/69

6. Candian Dollar (CAD)

The Loonie Established by the Bank of Canada Act of 1934, the Bank ofCanada serves as the central bank called upon to "focus on the goals of

low and stable inflation, a safe and secure currency, financial stability andthe efficient management of government funds and public debt." Actingindependently, Canada's central bank draws similarities with the SwissNational Bank because it is sometimes treated as a corporation, with theMinistry of Finance directly holding shares. Despite the proximity of thegovernment's interests, it is the responsibility of the governor to promoteprice stability at an arm's length from the current administration, whilesimultaneously considering the government's concerns. With aninflationary benchmark of 2-3%, the BoC has tended to remain a shademore hawkish rather than accommodative when it comes to anydeviations in prices. Keeping in touch with major currencies, theCanadian dollar (CAD) tends to trade in similar daily ranges of 30-40pips. However, one unique aspect about the currency is its relationshipwith crude oil, as the country remains a major exporter of the commodity.As a result, plenty of traders and investors use this currency as either ahedge against current commodity positions or pure speculation, tracingsignals from the oil market.

7. Australian/New-Zealand Dollars (AUD/NZD)

Always a carry favorite offering one of the higher interest rates in themajor global markets, the Reserve Bank of Australia has always upheldprice stability and economic strength as cornerstones of its long-termplan. Headed by the governor, the bank's board is made up of sixmembers-at-large, in addition to a deputy governor and a secretary of theTreasury. Together, they work toward to target inflation between 2-3%,

while meeting nine times throughout the year. In similar fashion, theReserve Bank of New Zealand looks to promote inflation targeting,hoping to maintain a foundation for prices. Both currencies have been thefocus of carry traders, as the Australian and New Zealand dollars (AUDand NZD) offer the highest yields of the seven major currencies availableon most platforms. As a result, volatility can be experienced in these pairsif a deleveraging effect takes place. Otherwise, the currencies tend totrade in similar averages of 30-40 pips, like other majors. Both currenciesalso maintain relationships with commodities, most notably silver andgold.


18/69

8. South African Rand (ZAR)

Previously modeled on the United Kingdom's Bank of England, the SouthAfrican Reserve Bank stands as the monetary authority when it comes to

South Africa. Taking on major responsibilities similar to those of othercentral banks, the SARB is also known as a creditor in certain situations,a clearing bank and major custodian of gold. Above all else, the centralbank is in charge of "the achievement and maintenance of price stability".This also includes intervention in the foreign exchange markets when thesituation arises. Interestingly enough, the South African Reserve Bankremains a wholly owned private entity with more than 600 shareholdersthat are regulated by owning less than 1% of the total number ofoutstanding shares. This is to ensure that the interests of the economyprecede those of any private individual. To maintain this policy, thegovernor and 14-member board head the bank's activities and worktoward monetary goals. The board meets six times a year. Seen asrelatively volatile, the average daily range of the South African rand(ZAR) can be as high as 1,000 pips. But don't let the wide daily range foolyou. When translated into dollar pips, the movements are equivalent to anaverage day in the British pound, making the currency a great pair to tradeagainst the U.S. dollar (especially when taking into consideration thecarry potential). Traders also consider the currency's relationship to goldand platinum. With the economy being a world leader when it comes to

exports of both metals, it is only natural to see a correlation similar to thatbetween the CAD and crude oil. As a result, consider the commoditiesmarkets in creating opportunities when economic data is scant.


19/69

CONCLUSION

Forex exchange market and its functions. The foreign exchange market,also known as the forex, FX, or currency market, involves the trading of

one currency for another. Prior to 1996 the market was confined to largecorporate banks and international corporations. However it has sinceopened up to include all traders and speculators. Today, the average dailyturnover in forex markets is US$1.9 trillion, according to the Bank ofInternational Settlements Triennial Survey. The market is growingrapidly as investors gain more information and develop more interest. Intrading foreign market, investors bet that one currency will appreciateover another; they profit when they bet correctly and collect the profit inthe form of an interest reate spread when they return to the originalcurrency. The profit margins are low compared with other fixed-incomemarkets. Large trading volumes can, however result, in very high profits.Most forex trading takes place in London, New York, and Tokyo, withmost trading activity in London, which dominates the market at 30% ofall transactions. New Yorks market share is 16%, and Tokyos has fallen

to 10% due to the growing prominence of Singapore and Hong Kong.Singapore has become the fourth largest exchange market globally, andHong Kong is the fifth, having overtaken Switzerland. The variousplayers in theforeign exchange market include bank dealers, 16% ofwhich are international investors and speculators. Banks account for

almost two-thirds of forex transactions; of the rest, about 20% is mainlyattributable to securities firms that operate in the international debt andequity markets.

As financial markets continue to evolve and grow globally, foreignexchange and currencies will play an increasingly large role in day-to-daytransactions. Notional volumes for the market sector are alreadyaveraging approximately $3 trillion per day. As a result, whether aconversion for physical trade or a simple portfolio diversification play,

currencies continue to offer more opportunities to both the retail andinstitutional investor. Forex exchange market and its function. Theforeign exchange market, also known as the forex, FX, or currencymarket, involves the trading of one currency to another. Prior to 1996 themarket was confined to large corporate banks and internationalcorporations. However it has since opened up to all traders andspeculators. Today, the average daily turnover in forex markets is US$1.9trillion, according to the Bank of International Settlements TriennialSurvey. The market is growing rapidly as investors gain more information

and develop more interest


20/69

In trading foreign market, investors bet that one currency will appreciateover another; they profit when they bet correctly and collect the profit inthe form of an interest reate spread when they return to the originalcurrency. The profit margins are low compared with other fixed-income

markets. Large trading volumes can, however result, in very high profits.Most forex trading takes place in London, New York, and Tokyo, withmost trading activity in London, which dominates the market at 30% ofall transactions. New Yorks market share is 16%, and Tokyos has fallen

to 10% due to the growing prominence of Singapore and Hong Kong.Singapore has become the fourth largest exchange market globally, andHong Kong is the fifth, having overtaken Switzerland. The variousplayers in theforeign exchange market include bank dealers, 16% ofwhich are international investors and speculators. Banks account foralmost two-thirds of forex transactions; of the rest, about 20% is mainlyattributable to securities firms that operate in the international debt andequity markets.

Most traded currencies by valueCurrency distribution of global foreign exchange market turnover

[3]

Rank CurrencyISO 4217 code

(Symbol)

% daily share

(April 2011)

1 United States dollar USD ($) 84.9%

2 Euro EUR () 39.1%

3 Japanese yen JPY () 19.0%

4 Pound sterling GBP () 12.9%

5 Australian dollar AUD ($) 7.6%

6 Swiss franc CHF (Fr) 6.4%
http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2http://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2


21/69

7 Canadian dollar CAD ($) 5.3%

8 Hong Kong dollar HKD ($) 2.4%

9 Swedish krona SEK (kr) 2.2%

10 New Zealand dollar NZD ($) 1.6%

11 South Korean won KRW () 1.5%

12 Singapore dollar SGD ($) 1.4%

13 Norwegian krone NOK (kr) 1.3%

14 Mexican peso MXN ($) 1.3%

15 Indian rupee INR ( ) 0.9%

Other 12.2%

Total[15] 200%

There are many official currencies that are used all over the world,

but there only a handful of currencies that are traded actively inthe forex market. In currency trading, only the most

economically/politically stable and liquid currencies are demanded in

sufficient quantities. For example, due to the size and strength of the

United States economy, the American dollar is the world's most actively

traded currency.

In general, the eight most traded currencies (in no specific order) are theU.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the
http://en.wikipedia.org/wiki/Canadian_dollarhttp://en.wikipedia.org/wiki/Canadian_dollarhttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/New_Zealand_dollarhttp://en.wikipedia.org/wiki/New_Zealand_dollarhttp://en.wikipedia.org/wiki/South_Korean_wonhttp://en.wikipedia.org/wiki/South_Korean_wonhttp://en.wikipedia.org/wiki/Singapore_dollarhttp://en.wikipedia.org/wiki/Singapore_dollarhttp://en.wikipedia.org/wiki/Norwegian_kronehttp://en.wikipedia.org/wiki/Norwegian_kronehttp://en.wikipedia.org/wiki/Mexican_pesohttp://en.wikipedia.org/wiki/Mexican_pesohttp://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-14http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-14http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-14http://www.investopedia.com/terms/c/currency.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/u/usd.asphttp://www.investopedia.com/terms/c/cad.asphttp://www.investopedia.com/terms/e/euro.asphttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Mexicohttp://en.wikipedia.org/wiki/Norwayhttp://en.wikipedia.org/wiki/Singaporehttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/New_Zealandhttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://www.investopedia.com/terms/e/euro.asphttp://www.investopedia.com/terms/c/cad.asphttp://www.investopedia.com/terms/u/usd.asphttp://www.investopedia.com/terms/f/forex.asphttp://www.investopedia.com/terms/c/currency.asphttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-14http://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/Mexican_pesohttp://en.wikipedia.org/wiki/Norwegian_kronehttp://en.wikipedia.org/wiki/Singapore_dollarhttp://en.wikipedia.org/wiki/South_Korean_wonhttp://en.wikipedia.org/wiki/New_Zealand_dollarhttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Canadian_dollar


22/69

British pound (GBP), the Swiss franc (CHF), the New Zealand dollar

(NZD), the Australian dollar (AUD) and the Japanese yen (JPY).

Currencies must be traded in pairs. Mathematically, there are 27

different currency pairs that can be derived from those eight currencies

alone. However, there are about 18 currency pairs that are conventionally

quoted by forex market makers as a result of their overall liquidity. These

pairs are:

USD/CAD EUR/JPY

EUR/USD EUR/CHF

USD/CHF EUR/GBP

GBP/USD AUD/CAD

NZD/USD GBP/CHF

AUD/USD GBP/JPY

USD/JPY CHF/JPY

EUR/CADAUD/JPY

EUR/AUDAUD/NZD

THE TOTAL AMOUNT OF CURRENCY TRADING INVOLVING THESE 18 PAIRS

REPRESENTSTHE MAJORITY OF THE TRADING VOLUME IN THE FX

MARKET. THISMANAGEABLENUMBER OFCHOICES MAKES TRADINGA

LOT LESS COMPLICATEDCOMPARED TO DEALINGWITH EQUITIES, WHICH

HAS THOUSANDS OF POSSIBLE CHOICES TO CHOOSE FROM.

WHAT DETERMINES THE PRICE OF A CURRENCY?
http://www.investopedia.com/terms/g/gbp.asphttp://www.investopedia.com/terms/c/chf.asphttp://www.investopedia.com/terms/n/nzd.asphttp://www.investopedia.com/terms/a/aud.asphttp://www.investopedia.com/terms/j/jpy.asphttp://www.investopedia.com/terms/c/currencypair.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/l/liquidity.asphttp://www.investopedia.com/terms/c/currencypair.asphttp://www.investopedia.com/terms/j/jpy.asphttp://www.investopedia.com/terms/a/aud.asphttp://www.investopedia.com/terms/n/nzd.asphttp://www.investopedia.com/terms/c/chf.asphttp://www.investopedia.com/terms/g/gbp.asp


23/69

A number of political and economic factors, mainly inflation, interestrates, and political stability affect currencies. Sometimes governmentthemselves enter the forex market to modify the value of their currencies.To do this, they either flood the market with the currency in order to try

and lower price, or they buy as much currency as possible hoping to raisethe price. They usually implement such policies through central banks.Although these factors, along with large market orders may causevolatility in currency prices, the size of the market makes it impossiblefor anyone to corner it.

Forex exchange market and its functions. The foreign exchange market,also known as the forex, FX, or currency market, involves the trading ofone currency for another. Prior to 1996 the market was confined to largecorporate banks and international corporations. However it has since

opened up to include all traders and speculators. Today, the average dailyturnover in forex markets is US$1.9 trillion, according to the Bank ofInternational Settlements Triennial Survey. The market is growing

rapidly as investors gain more information and develop more interest

In trading foreign market, investors bet that one currency will appreciateover another; they profit when they bet correctly and collect the profit inthe form of an interest reate spread when they return to the originalcurrency. The profit margins are low compared with other fixed-income

markets. Large trading volumes can, however result, in very high profits.Most forex trading takes place in London, New York, and Tokyo, withmost trading activity in London, which dominates the market at 30% ofall transactions. New Yorks market share is 16%, and Tokyos has fallen

to 10% due to the growing prominence of Singapore and Hong Kong.Singapore has become the fourth largest exchange market globally, andHong Kong is the fifth, having overtaken Switzerland. The variousplayers in theforeign exchange market include bank dealers, 16% ofwhich are international investors and speculators. Banks account for

almost two-thirds of forex transactions; of the rest, about 20% is mainlyattributable to securities firms that operate in the international debt andequity markets.

The functions of forex market serves two main functions: convertingcurrencies and reducing risk. There are four major reasons firms need toconvert currencies.First, the payments firms receive from exports, foreigninvestments, foreign profits, or licensing agreements may all be ina foreign currency. In order to use these funds in its home country, an

international firm has to convert funds from foreign to domesticcurrencies.
http://www.cataloggue.com/forex-trading-for-maximum-profithttp://www.cataloggue.com/currency-trading-basicshttp://www.cataloggue.com/currency-trading-basicshttp://www.cataloggue.com/forex-trading-for-maximum-profit


24/69

Second, a firm may purchase supplies from firms in foreign countries, andpay these suppliers in their domestic currency.

Third, a firm may want to invest in a different country from that in whichit currently holds underused funds.

Fourth, a firm may want to speculate on exchange rate movements, andearn profits on the changes it expects. If it expects a foreign currency toappreciate relative to its domestic currency, it will convert its domesticfunds into the foreign currency. Alternately stated, it expects its domesticcurrency to depreciate relative to the foreign currency. An examplesimilar to the one in the book can help illustrate how money can be madeon exchange rate speculation. The management focus on George Sorosshows how one fund has benefited from currency speculation.Exchange rates change on a daily basis. The price at any given time iscalled the spot rate, and is the rate for currency exchanges at thatparticular time. One can obtain the current exchange rates from anewspaper or online.The basic and primaryfunctions of forex marketare to transferpurchasing power between countries. The transfer function is performedthrough T.T, M.T, Draft, Bill of exchange, Letters of credit, etc. the bill ofexchange is the most important and effective method of transferringpurchasing power between two parties located in different countries.Anothers importantfunctions of forex marketare to provide credit to the

importer debtor. The exporters draw the bill of exchange on importers ontheir bankers. On acceptance of the bills by the importer or their bankers,the exporter will get the money realized on the maturity of the bills. Incase the exporters are anxious to receive the payment earlier, the bills canbe discounted from their bankers, or foreign exchange banks or discounthouses.

Factors affecting exchang rate

Exchange rates change by the second. Understand the dynamics thataffect them.

Currency changes affect you, whether you are actively trading in theforeign exchange market, planning your next vacation, shopping onlinefor goods from another countryor just buying food and staples importedfrom abroad.

Like any commodity, the value of a currency rises and falls in response tothe forces of supply and demand. Everyone needs to spend, and consumer

spending directly affects the money supply (and vice versa). The supplyand demand of a countrys money is reflected in its foreign exchange rate.
http://www.cataloggue.com/currency-trading-platformshttp://www.cataloggue.com/forex-exchange-rateshttp://www.cataloggue.com/functions-of-foreign-exchange-markethttp://www.cataloggue.com/functions-of-foreign-exchange-markethttp://www.cataloggue.com/functions-of-foreign-exchange-markethttp://www.forexcycle.com/http://www.forexcycle.com/http://www.forexcycle.com/http://www.cataloggue.com/make-money-with-forexhttp://www.cataloggue.com/make-money-with-forexhttp://www.forexcycle.com/http://www.cataloggue.com/functions-of-foreign-exchange-markethttp://www.cataloggue.com/forex-exchange-rateshttp://www.cataloggue.com/currency-trading-platforms


25/69

When a countrys economy falters, consumer spending declines andtrading sentiment for its currency turns sour, leading to a decline in thatcountrys currency against other currencies with stronger economies. On

the other hand, a booming economy will lift the value of its currency, if

there is no government intervention to restrain it.Consumer spending is influenced by a number of factors: the price ofgoods and services (inflation), employment, interest rates, governmentinitiatives, and so on. Here are some economic factors you can follow toidentify economic trends and their effect on currencies.

1.Differentials in Inflation

As a general rule, a country with a consistently lower inflation rate

exhibits a rising currency value, as its purchasing power increases relative

to other currencies. During the last half of the twentieth century, the

countries with low inflation included Japan, Germany and Switzerland,

while the U.S. and Canada achieved low inflation only later. Those

countries with higher inflation typically see depreciation in their currency

in relation to the currencies of their trading partners. This is also usually

accompanied by higher interest rates.

2.Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. By

manipulating interest rates, central banks exert influence over both

inflation and exchange rates, and changing interest rates impact inflation

and currency values. Higher interest rates offer lenders in an economy a

higher return relative to other countries. Therefore, higher interest rates

attract foreign capital and cause the exchange rate to rise. The impact of

higher interest rates is mitigated, however, if inflation in the country is

much higher than in others, or if additional factors serve to drive the

currency down. The opposite relationship exists for decreasing interest

rates - that is, lower interest rates tend to decrease exchange rates.
http://www.investopedia.com/terms/c/centralbank.asphttp://www.investopedia.com/terms/c/centralbank.asp


26/69

3.Current-Account Deficits

The current-account is the balance of trade between a country and its

trading partners, reflecting all payments between countries for goods,

services, interest and dividends. A deficit in the current account shows the

country is spending more on foreign trade than it is earning, and that it is

borrowing capital from foreign sources to make up the deficit. In other

words, the country requires more foreign currency than it receives

through sales of exports, and it supplies more of its own currency than

foreigners demand for its products. The excess demand for foreign

currency lowers the country's exchange rate until domestic goods and

services are cheap enough for foreigners, and foreign assets are too

expensive to generate sales for domestic interests.

4.Public DebCountries will engage in large-scale deficit financing to pay for publicsector projects and governmental funding. While such activity stimulates

the domestic economy, nations with large public deficits and debts are

less attractive to foreign investors. The reason? A large debt encourages

inflation, and if inflation is high, the debt will be serviced and ultimately

paid off with cheaper real dollars in the future.

In the worst case scenario, a government may print money to pay part of a

large debt, but increasing the money supply inevitably causes inflation.Moreover, if a government is not able to service its deficit through

domestic means (selling domestic bonds, increasing the money supply),

then it must increase the supply of securities for sale to foreigners,

thereby lowering their prices. Finally, a large debt may prove worrisome

to foreigners if they believe the country risks defaulting on its obligations.

Foreigners will be less willing to own securities denominated in that

currency if the risk of default is great. For this reason, the country's debt

rating (as determined by Moody's or Standard & Poor's, for example) is acrucial determinant of its exchange rate.
http://www.investopedia.com/terms/c/currentaccount.asphttp://www.investopedia.com/terms/d/deficit.asphttp://www.investopedia.com/terms/b/bond.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/s/sp.asphttp://www.investopedia.com/terms/s/sp.asphttp://www.investopedia.com/terms/d/default2.asphttp://www.investopedia.com/terms/b/bond.asphttp://www.investopedia.com/terms/d/deficit.asphttp://www.investopedia.com/terms/c/currentaccount.asp


27/69

5.Terms of Trade

A ratio comparing export prices to import prices, the terms of trade is

related to current accounts and the balance of payments. If the price of a

country's exports rises by a greater rate than that of its imports, its terms

of trade have favorably improved. Increasing terms of trade shows greater

demand for the country's exports. This, in turn, results in rising revenues

from exports, which provides increased demand for the country's currency

(and an increase in the currency's value). If the price of exports rises by a

smaller rate than that of its imports, the currency's value will decrease inrelation on its trading partners.

6.Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong

economic performance in which to invest their capital. A country with

such positive attributes will draw investment funds away from othercountries perceived to have more political and economic risk. Political

turmoil, for example, can cause a loss of confidence in a currency and a

movement of capital to the currencies of more stable countries.

ConclusionThe exchange rate of the currency in which a portfolio holds the bulk of

its investments determines that portfolio's real return. A declining

exchange rate obviously decreases the purchasing power of incomeand capital gains derived from any returns. Moreover, the exchange rate

influences other income factors such as interest rates, inflation and even

capital gains from domestic securities. While exchange rates are

determined by numerous complex factors that often leave even the most

experienced economists flummoxed, investors should still have some

understanding of how currency values and exchange rates play an

important role in the rate of return on their investments.
http://www.investopedia.com/terms/b/bop.asphttp://www.investopedia.com/terms/c/capitalgain.asphttp://www.investopedia.com/terms/c/capitalgain.asphttp://www.investopedia.com/terms/b/bop.asp


28/69

FACTORS INFLUENCING A CURRENCY PAIR EXCHANGE RATE

IntroductionThe exchange rate refers to the value of the US dollar against the valuesof currencies of other countries. Such a rate helps determine how muchwe pay for imported goods and services and how much we receive forwhat we export, among other things. When the value of the US dollardrops, imports become more expensive, and we tend to reduce the volumeof our imports. Simultaneously, other countries will pay LESS for someof our products and that will tend to boost export sales. If imports andexports are a substantial part of a country's economy, as is the case withCanada, the exchange rate plays a particularly important role in oureconomy. The exchange rate between two countries' currencies isparticularly important if the two countries are heavily involved in trade.

What factors affect an exchange rate?

A country's exchange rate is typically affected by the supply and demandfor that country's currency in international exchange markets. This istypically known as a floating exchange rate. If demand, for say dollars,

exceeds supply, then the value of the dollar will go up. If however, thesupply of dollars exceeds demand, then its value will go down. A hugeamount of money is bought and sold on international exchange marketsfor many different currencies.

Several factors influence the supply of, and demand for, a given country'scurrency.

If INTEREST rates are HIGHER in, say, the US than in other countries,then investors WILL choose to invest in the US, increasing demand forthe dollar, provided that the expected rate of inflation is not higher in theUS than among our trading partners. If INTEREST rates are LOWER inthe US than in other countries, investors will choose NOT to invest in theUS, decreasing demand for the dollar.

If the US INFLATION rate is HIGHER, investors are LESS likely toprefer the US -even with higher interest rates- because of the expectationthat the value of the dollar will be ERODED by inflation. If ourINFLATION rate is LOWER, investors are MORE likely to prefer the

US, because there will be NO expectation that the value of the dollar willerode.


29/69

Trade balance also has an effect on a country's currency. If world pricesfor what a country exports rise in comparison with the cost of thatcountry's imports, that country will be earning more for its exports than itpays for its imports. The more demand there will be for that country's

currency, the better the deal becomes. If investors are confident that theUS economy will be strong, they will be MORE likely to buy Americanassets, pushing UP the dollar's value. If investors are not so confident thatthe economy will be strong, they will be LESS likely to buy the country'sassets, pushing the dollar's value DOWN.

Forex Trading

FOREX TRADING -ADVANTAGES

Although the forex market is by far the largest and most liquid in theworld, day traders have up to now focused on seeking profits in mainlystock and futures markets. This is mainly due to the restrictive nature ofbank-offered forex trading services.

There are many advantages to trading spot foreign exchange as opposedto trading stocks and futures. Below are listed those main advantages.

1. Bid/Ask Spread rates

Spread rates have tightened dramatically in the last years. Most onlineforex brokers offer a spread of 5 pips on EURUSD which is the mostwidely traded and liquid currency pair.

In the futures market spreads can vary anywhere between 5 and 9 pipsand can become even larger under illiquid market conditions (which tendsto happen substantially more often in futures currencies).

2. Margins requirements

Usually a foreign exchange trading with a 1% margin is available. Inlayman's terms that means a trader can control a position of a value ofUSD 1'000'000 with a mere USD 10'000 in his account. By comparison,

futures margins are not only constantly changing but are also often quite
http://www.eagletraders.com/forex_trading/forex_trading.htmhttp://www.eagletraders.com/forex_trading/forex_trading.htm


30/69

sizeable. Stocks are generally traded on a non-margined basis and whenthey are, it can be as restrictive as 50% or so.

3. 24 hour market

Foreign exchange market trading occurs over a 24 hour period picking upin Asia around 24:00 CET Sunday evening and coming to an end in theUnited States on Friday around 23:00 CET. Although ECNs (electroniccommunications networks) exist for stock markets and futures markets(like Globex) that supply after hours trading, liquidity is often low andprices offered can often be uncompetitive.

4. No Limit up / limit down

Futures markets contain certain constraints that limit the number and typeof transactions a trader can make under certain price conditions. When theprice of a certain currency rises or falls beyond a certain pre-determineddaily level traders are restricted from initiating new positions and arelimited only to liquidating existing positions if they so desire. Thismechanism is meant to control daily price volatility but in effect since thefutures currency market follows the spot market anyway, the followingday the futures market may undergo what is called a 'gap' or in otherwords the futures price will re-adjust to the spot price the next day. In the

OTC market no such trading constraints exist permitting the trader totruly implement his trading strategy to the fullest extent. Since a tradercan protect his position from large unexpected price movements withstop-loss orders the high volatility in the spot market can be fullycontrolled.

5. Sell before you buy

Equity brokers offer very restrictive short-selling margin requirements to

customers. This means that a customer doe

T s not possess the liquidity to be able to sell stock before he buys it.Margin wise, a trader has exactly the same capacity when initiating aselling or buying position in the spot market. In spot trading when you'reselling one currency, you're necessarily buying another.


31/69

Types of trading system

A trading system is a set of parameters that predicts the price movementof a currency. Most experienced traders will use a trading system because

it helps to determine when to enter a trade, how long to hold it, and whento sell and take a profit or accept a loss. These are decisions that tradersmake every day in every trade. Using a good trading system will notprotect against a losing trade. However, it will help to keep losses to aminimum. It can also maximize the profits on each trade. In short, atrading system takes much of the guesswork out of trading.

Many beginning traders reject using a trading system because theybelieve that trading systems are too restrictive or that they will miss outon good trades because they didnt fit into the parameters of the system.

But experienced traders know that trading systems will discover goodquality trades. Of course, no trading system will find every profitableprice movement. But it will make the most of their trading funds.

Choosing a trading system is not an easy task. When selecting a system,the basic question to determine is what kind of trader you are. Are youatechnical trader or a fundamental trader? Do you rely on charts andtechnical indicators or do you rely on economic data and reports? Theanswers to these questions are critical because it will help you todetermine what type of trading system to adopt.

TWO TYPES OF TRADING SYSTEMS

Like traders, there are basically two types of trading systems: Technicaland Fundamental. There is another group emerging called the Intermarkettrading system, but this type is not yet fully developed or employed byany definable group of traders. Back to the basics, the two types oftrading systems are technical systems and fundamental systems. Letsbriefly review each type.

1. Technical Trading Systems

Technical trading systems rely on technical indicators and chartingtechniques. The parameters for the system are determined solely bycertain price movements on charts and the data from technicalindicators. For example, a technical trading system could employ a

parameter that the currency price must be within five percent of the20-period moving average line. Another example is that a trading
http://forextrading.about.com/od/tradingstrategies/a/tradingsystem_r.htmhttp://forextrading.about.com/od/technicalanalysis/a/tabasics_ro.htmhttp://forextrading.about.com/od/fundamentalanalysis/a/fundamental_ro.htmhttp://forextrading.about.com/od/fundamentalanalysis/a/fundamental_ro.htmhttp://forextrading.about.com/od/technicalanalysis/a/tabasics_ro.htmhttp://forextrading.about.com/od/tradingstrategies/a/tradingsystem_r.htm


32/69

system looking for a strong trending currency could require thatthe ADX level is above 40.Technical trading systems often combine technical indicators todetermine the parameters. For example, a trading system could

require that the currency is moving within the Bollinger Bands andthat the ADX is above 40. Alternatively, a trading system looking foran explosive price movement could require that the Bollinger Bandsare squeezing the currency pair and that the ADX is below ten.Technical trading systems are used by both range traders and trendtraders. There is so much technical data available that the indicatorscan be used for a wide variety of price movements.

Advantages and Disadvantages

There are advantages and disadvantages to using technical tradingsystems. The advantages are that technical trading systems areinexpensive, easy to use, and very reliable. They can be as basic or asdetailed as the trader can manage. Also, they quite precise by clearlyshowing the entry and exit points for a trade.

The limitations of technical trading systems are similar tothe limitations of technical analysis in general. These are basically the

unpredictability of certain events (such as terrorist attacks, wars,natural disasters, etc.) that cause technical analysis to fail.

2. Fundamental Trading Systems

A fundamental trading system relies on the release of economicreports and the data found in those reports as parameters for enteringa trade. This type of system is much more dependent on demandfactors than technical trading systems. The parameters are the

economic reports and their ability to affect the demand for a currency.A fundamental trading system can have the parameters such as therelease of the nonfarm payrolls with the expectation that the payrollsfigure will be high, which would create more demand for the USD.Another parameter could be the release of the FOMC minutes inwhich the Fed makes a decision on interest rates. Any economicreport can affect the demand for a currency and fundamental tradingsystems predict how and when this will happen.

Fundamental trading systems do not usually combine more than onereport at one time, but will use only report and its analysts
http://forextrading.about.com/od/forexglossary/g/adx_ro.htmhttp://forextrading.about.com/od/forexglossary/g/bands_ro.htmhttp://forextrading.about.com/od/tradingmechanics/a/environment_ro.htmhttp://forextrading.about.com/od/tradingmechanics/a/environment_ro.htmhttp://forextrading.about.com/od/technicalanalysis/a/taproblems_ro.htmhttp://forextrading.about.com/od/fundamentalanalysis/a/supplydemand_ro.htmhttp://forextrading.about.com/od/useconomicreports/p/jobreport_ro.htmhttp://forextrading.about.com/od/useconomicreports/p/fomcminutes_ro.htmhttp://forextrading.about.com/od/useconomicreports/p/fomcminutes_ro.htmhttp://forextrading.about.com/od/useconomicreports/p/jobreport_ro.htmhttp://forextrading.about.com/od/fundamentalanalysis/a/supplydemand_ro.htmhttp://forextrading.about.com/od/technicalanalysis/a/taproblems_ro.htmhttp://forextrading.about.com/od/tradingmechanics/a/environment_ro.htmhttp://forextrading.about.com/od/tradingmechanics/a/environment_ro.htmhttp://forextrading.about.com/od/forexglossary/g/bands_ro.htmhttp://forextrading.about.com/od/forexglossary/g/adx_ro.htm


33/69

expectations to determine if demand will be increased or decreased.Charts are not considered or used by fundamental trading systems.

Advantages and Disadvantages

The advantages of using a fundamental trading system are verysimilar to the advantages of using fundamental analysis. Fundamentaltrading systems can be quite useful because they look at the realmoving force behind a currency price movement, namely the demandfor a currency. Their predictive power is quite accurate, particularlywhen they adopt an Intermarket approach.

The main disadvantage of using a fundamental trading system is that

the economic reports can surprise everyone, including the experts.When that happens, the parameters will not be met or will fail,leading to losses. Another disadvantage is that the price change isoften factored into the currency price by the time the economic data isreleased. So, even if the report is consistent with the analysts

expectations, the price might not move or any price movement willnot be strong or reliable.

AN IMPORTANT DECISION

Trading systems are very useful, but they must also be consistent withyour trading style. Choosing a trading system is one of the most importantdecisions that you will make as a trader. Take it seriously and it canimprove your trades and reduce your trading stress.

CASH FOREX ORDER TYPES

The term "order" refers to how you will enter or exit a trade. Here wediscuss the different types of orders that can be placed into the foreignexchange market.

a) Market Order

An order to buy or sell which is to be done at the price immediatelyavailable: the 'spot' rate, the current ratres at which the market is dealing.
http://forextrading.about.com/od/intermarketanalysi1/a/ia_ro.htmhttp://forextrading.about.com/od/personalpreparation/a/stressfree_ro.htmhttp://forextrading.about.com/od/personalpreparation/a/stressfree_ro.htmhttp://forextrading.about.com/od/intermarketanalysi1/a/ia_ro.htm


34/69

b) Limit OrderAn instruction to deal if a market moves to a more favorable level (i.e. aninstruction to buy if a market goes down to a specified level or to sell if a

market goes up to a specified level) is called a Limit Order. A LimitOrder is often used to take profit on an existing position but can also beused to establish a new one.

c) Stop OrderAn instruction nto deal if a market moves to a less favorable level (i.e. aninstruction nto buy if a market goes up to a specified level, or to sell if amarket goes down to a specified level) is called a Stop Order. A StopOrder is often placed to put a cap on the potential loss on an existingposition; which is why Stop Orders are sometimes called Stop-lossOrders. But can be used to entere into a new position if the market breaksa certain level.

d) Once Cancels the Other (OCO)

An 'OCO' (One Cancels the Other) Order is a special type of Order wherea Stop Order and a Limit Order in the same market are linked together.With an OCO Order, the execution of one of the two linked Orders results

in the automatic cancellation of the other Order.

e) IF DONE OrderAn IF DONE Order is a two-legged order in which the execution of thesecond leg can occur only after the conditions of the first leg have beensatisfied. The first leg, either a Stop or a Limit, is created in an active stateand the second, which can be a Stop, a Limit, or an OCO, is created in adormant state. When the desired price is reached for the first leg, it is

executed and the second leg is then activated.


35/69

NATURE OF TRANSACTION IN FOREIGN EXCHANGEMARKET

There are three kinds of players and three kinds of transaction in the

Forex marketThese are;

1.HEDGING

2ARBITRAGE

3 SPECULATION

Hedging

Aforeign exchange hedge (FOREX hedge) is a method used bycompanies to eliminate or hedge foreign exchange riskresulting fromtransactions in foreign currencies (see Foreign exchange derivative). This

is done using either the cash flow or the fair value method. Theaccounting rules for this are addressed by both the International FinancialReporting Standards (IFRS) and by the US Generally AcceptedAccounting Principles (US GAAP).

DEFINITION OF 'FOREX HEDGE'A transaction implemented by a forex trader to protect an existing or

anticipated position from an unwanted move in exchange rates. By using

a forex hedge properly, a trader who is long a foreign currency pair can be

protected from downside risk, while the trader who is short a foreign

currency pair can protect against upside risk.

'FOREX HEDGE'The primary methods of hedging currency trades for the retail forextrader is through spot contracts and foreign currency options. Spotcontracts are the run-of-the-mill trades made by retail forex traders.

Because spot contracts have a very short-term delivery date (two days),they are not the most effective currency hedging vehicle. In fact, regular
http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Foreign_exchange_riskhttp://en.wikipedia.org/wiki/Foreign_exchange_derivativehttp://en.wikipedia.org/wiki/Cash_flow_hedgehttp://en.wikipedia.org/wiki/International_Financial_Reporting_Standardshttp://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles_(United_States)http://en.wikipedia.org/wiki/International_Financial_Reporting_Standardshttp://en.wikipedia.org/wiki/Cash_flow_hedgehttp://en.wikipedia.org/wiki/Foreign_exchange_derivativehttp://en.wikipedia.org/wiki/Foreign_exchange_riskhttp://en.wikipedia.org/wiki/Hedge_(finance)


36/69

spot contracts are usually the reason why a hedge is needed.

Foreign currency options are one of the most popular methods of currencyhedging. As with options on other types of securities, foreign currency

options give the purchaser the right, but not the obligation, to buy or sellthe currency pair at a particular exchange rate at some time in the future.Regular options strategies can be employed, such as long straddles, longstrangles, and bull or bear spreads, to limit the loss potential of a giventrade.

Not all retail forex brokers allow for hedging within their platforms. Besure to research the broker you use before beginning to trade.

ArbitrateIt is a legal technique for the resolution ofdisputes outside the courts,where the parties to a dispute refer it to one or more persons (the"arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the"award") they agree to be bound. It is a settlement technique in which athird party reviews the case and imposes a decision that is legally bindingfor both sides.[1]Other forms of ADR includemediation[2](a form ofsettlement negotiation facilitated by a neutral third party) and non-bindingresolution by experts. Arbitration is often used for the resolution

ofcommercial disputes, particularly in the context ofinternationalcommercial transactions. The use of arbitration is also frequentlyemployed in consumer and employment matters, where arbitration maybe mandated by the terms of employment or commercial contracts.

Arbitration can be either voluntary or mandatory (although mandatoryarbitration can only come from a statute or from a contract that isvoluntarily entered into, where the parties agree to hold all disputes toarbitration, without knowing, specifically, what disputes will ever occur)and can be either binding ornon-binding. Non-binding arbitration is, on

the surface, similar to mediation. However, the principal distinction is thatwhereas a mediator will try to help the parties find a middle ground onwhich to compromise, the (non-binding) arbitrator remains totallyremoved from the settlement process and will only give a determinationof liability and, if appropriate, an indication of the quantum of damagespayable.
http://en.wikipedia.org/wiki/Lawhttp://en.wikipedia.org/wiki/Disputehttp://en.wikipedia.org/wiki/Courthttp://en.wikipedia.org/wiki/Arbitral_tribunalhttp://en.wikipedia.org/wiki/Arbitral_awardhttp://en.wikipedia.org/wiki/Arbitration#cite_note-0http://en.wikipedia.org/wiki/Arbitration#cite_note-0http://en.wikipedia.org/wiki/Arbitration#cite_note-0http://en.wikipedia.org/wiki/Mediationhttp://en.wikipedia.org/wiki/Mediationhttp://en.wikipedia.org/wiki/Mediationhttp://en.wikipedia.org/wiki/Commercial_lawhttp://en.wikipedia.org/wiki/International_commercehttp://en.wikipedia.org/wiki/International_commercehttp://en.wikipedia.org/wiki/Non-binding_arbitrationhttp://en.wikipedia.org/wiki/Non-binding_arbitrationhttp://en.wikipedia.org/wiki/International_commercehttp://en.wikipedia.org/wiki/International_commercehttp://en.wikipedia.org/wiki/Commercial_lawhttp://en.wikipedia.org/wiki/Mediationhttp://en.wikipedia.org/wiki/Mediationhttp://en.wikipedia.org/wiki/Arbitration#cite_note-0http://en.wikipedia.org/wiki/Arbitral_awardhttp://en.wikipedia.org/wiki/Arbitral_tribunalhttp://en.wikipedia.org/wiki/Courthttp://en.wikipedia.org/wiki/Disputehttp://en.wikipedia.org/wiki/Law


37/69

SPECULATIONControversy about currency speculators and their effect on currencydevaluations and national economies recurs regularly. Nevertheless,economists including Milton Friedman have argued that speculatorsultimately are a stabilizing influence on the market and perform theimportant function of providing a market for hedgers and transferring riskfrom those people who don't wish to bear it, to those who do.[20]Othereconomists such as Joseph Stiglitz consider this argument to be basedmore on politics and a free market philosophy than on economics.[21]

Large hedge funds and other well capitalized "position traders" are themain professional speculators. According to some economists, individualtraders could act as "noise traders" and have a more destabilizing role

than larger and better informed actors.

[22]

Currency speculation is considered a highly suspect activity in manycountries.[where?] While investment in traditional financial instruments likebonds or stocks often is considered to contribute positively to economicgrowth by providing capital, currency speculation does not; according tothis view, it is simply gambling that often interferes with economicpolicy. For example, in 1992, currency speculation forced the CentralBank of Sweden to raise interest rates for a few days to 500% per annum,and later to devalue the krona.[23]Former Malaysian Prime

Minister Mahathir Mohamad is one well known proponent of this view.He blamed the devaluation of the Malaysian ringgit in 1997 on GeorgeSoros and other speculators.

Gregory J. Millman reports on an opposing view, comparing speculatorsto "vigilantes" who simply help "enforce" international agreements andanticipate the effects of basic economic "laws" in order to profit.[24]

In this view, countries may develop unsustainable financial bubbles orotherwise mishandle their national economies, and foreign exchangespeculators made the inevitable collapse happen sooner. A relatively

quick collapse might even be preferable to continued economicmishandling, followed by an eventual, larger, collapse. MahathirMohamad and other critics of speculation are viewed as trying to deflectthe blame from themselves for having caused the unsustainable economicconditions.
http://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-19http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-19http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-19http://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-20http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-20http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-20http://en.wikipedia.org/wiki/Hedge_fundshttp://en.wikipedia.org/wiki/Noise_traderhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-21http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-21http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-21http://en.wikipedia.org/wiki/Wikipedia:WikiProject_Countering_systemic_biashttp://en.wikipedia.org/wiki/Wikipedia:WikiProject_Countering_systemic_biashttp://en.wikipedia.org/wiki/Wikipedia:WikiProject_Countering_systemic_biashttp://en.wikipedia.org/wiki/Gamblinghttp://en.wikipedia.org/wiki/Sveriges_Riksbankhttp://en.wikipedia.org/wiki/Sveriges_Riksbankhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-22http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-22http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-22http://en.wikipedia.org/wiki/Mahathir_Mohamadhttp://en.wikipedia.org/wiki/Malaysian_ringgithttp://en.wikipedia.org/wiki/George_Soroshttp://en.wikipedia.org/wiki/George_Soroshttp://en.wikipedia.org/wiki/Gregory_J._Millmanhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-23http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-23http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-23http://en.wikipedia.org/wiki/Economic_bubblehttp://en.wikipedia.org/wiki/Economic_bubblehttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-23http://en.wikipedia.org/wiki/Gregory_J._Millmanhttp://en.wikipedia.org/wiki/George_Soroshttp://en.wikipedia.org/wiki/George_Soroshttp://en.wikipedia.org/wiki/Malaysian_ringgithttp://en.wikipedia.org/wiki/Mahathir_Mohamadhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-22http://en.wikipedia.org/wiki/Sveriges_Riksbankhttp://en.wikipedia.org/wiki/Sveriges_Riksbankhttp://en.wikipedia.org/wiki/Gamblinghttp://en.wikipedia.org/wiki/Wikipedia:WikiProject_Countering_systemic_biashttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-21http://en.wikipedia.org/wiki/Noise_traderhttp://en.wikipedia.org/wiki/Hedge_fundshttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-20http://en.wikipedia.org/wiki/Joseph_Stiglitzhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-19http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Milton_Friedmanhttp://en.wikipedia.org/wiki/Speculation


38/69

Types of exposure

There are mainly three types of exposure

1) Translation exposure2) Transaction exposure3) Economic exposure

1) Translation exposureThe risk that a company's equities, assets, liabilities or income will

change in value as a result of exchange rate changes. This occurs when a

firm denominates a portion of its equities, assets, liabilities or income in aforeign currency. Also known as "accounting exposure".

Accountants use various methods to insulate firms from these types ofrisks, such as consolidation techniques for the firm's financial statementsand the use of the most effective cost accounting evaluation procedures.In many cases, this exposure will be recorded in the financial statementsas an exchange rate gain(orloss).

2) Transaction exposure

The risk, faced by companies involved in international trade, that

currency exchange rates will change after the companies have already

entered into financial obligations. Such exposure to fluctuating exchange

rates can lead to major losses for firms.Often, when a company identifies

such exposure to changing exchange rates, it will choose to implement a

hedging strategy, using forward rates to lock in an exchange rate and thus

eliminate the exposure to the risk.

7/30/2019 Project on Forex, F

Documents

Project on Forex, Finance Specialization