financial markets

1. FOREIGN EXCHANGE MARKETS
PROF. PARVEEN SULTANA KANTH
EMAIL ID: parveen.kanth@gmail.com

2. FOREIGN EXCHANGE MARKET
 Foreign Exchange Market:-Foreign exchange
arises out of international trade .Foreign exchange is
the system or process of converting one national
currency into another, & transferring money from one
country to another” Paul Einzing
 The foreign exchange market is the market in which
individuals firms & banks buy & sell foreign
currencies or foreign exchange.

3. FOREX
 A global market where people trade money among
the major financial centers
 FOREX= WORLD WIDE MARKET , where anyone
can participate largest most liquid market with $5.9
trillion per day traded.
It trading in currency trading & spot forex.

4. The foreign exchange market is unique
because of the following characteristics:
 its huge trading volume representing the largest
asset class in the world leading to high liquidity;
 its geographical dispersion;
 its continuous operation: 24 hours a day except
weekends, i.e., trading from 22:00 GMT on
Sunday (Sydney) until 22:00 GMT Friday (New
York);
 the variety of factors that affect exchange rates;
 the low margins of relative profit compared with
other markets of fixed income; and
 the use of leverage to enhance profit and loss
margins 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 rising
and 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 act
as clearing houses between users & earners of
foreign exchange .
 Third level are foreign exchange brokers. The
final level is central bank ,acts as seller or buyer
of last resort.
 Four levels of transistors or participants can be
identified in foreign exchange markets.

8.  According to the Bank for International Settlements the
preliminary global results from the 2013 Triennial Central Bank
Survey of Foreign Exchange and OTC Derivatives Markets
Activity show that trading in foreign exchange markets averaged
$5.3 trillion per day in April 2013. This is up from $4.0 trillion in
April 2010 and $3.3 trillion in April 2007. Foreign exchange
swaps 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 April
2010, average daily turnover in global foreign exchange markets
is estimated at $3.98 trillion, a growth of approximately 20%
over the $3.21 trillion daily volume as of April 2007. Some firms
specializing on foreign exchange market had put the average
daily 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 market
LIQUIDITY
BID
ASK
STOP
LOSS
SHORT
LONG
PIP LOT
TAKE
PROFIT
CURRENCY
PAIR
LEVERAGE
TRADING
STRATEGY
EXPERT
ADVISOR
INDICATOR
TRADING
PLATFORM

10. LIQUIDITY
 The degree of an asset's ability to be converted to cash at its
fair market price
 For an asset, its liquidity is its ability to be bought or sold
without any discount or premium. Liquidity thus reflects the
amount and frequency the asset and traded. The more
something is bought and sold, an individual's ability to charge
premium or look for discounts lowers. However the less liquid
something is, the harder it will be for it to be bought or sold.
 A market that is liquid means it has many trades and is
composed of many traders. The Forex market is extremely
liquid because hundreds of banks and millions of individuals
trade currencies everyday. In fact, nearly $4 trillion is
exchanged daily and this number is increasing as interest by
retail traders are expanding. Consequently, traders can trade
quickly with a click or two.
 On the other end of the spectrum, real estate development is
an extremely illiquid market because it requires a lot of capital
and investments are made into physical form such as
buildings.
 As a result you will find a bigger range of price offered for

11. BID PRICE
 A two-way price quotation that indicates the best
price at which a security can be sold and bought
at a given point in time.
 The bid price represents the maximum price that
a 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 that
a seller or sellers are willing to receive for the
security.
 A trade or transaction occurs when the buyer and
seller agree on a price for the security.
 THE PRICE YOU CAN BUY CURRECNCY PAIR
FROM THE DEALER
 The difference between the bid and asked prices,
or the spread, is a key indicator of the liquidity of
the asset - generally speaking, the smaller the
spread, the better the liquidity.

13. PIP: percentage in points
 Currency code means 5 digit number in currency.
 PIP:- Smallest price change for a currency
exchange rate & the 5th significant digit in the
code . It is smallest unit that a price can change
 Most change can happen in 4 decimal places
some happens in 2, 3, or 5 decimal places
trading

14. pip
 Your forex broker should let you know how many
decimal places for each currency pair.
 Ex:- USD/CAD (Canadian dollars) based on 4
decimal places (0.0001).
 USD/CAD moved from 1.0000 to 1.0001 : it has
moved 1 pip.
 USD/CAD moved from 1.0001 to 1.0004 : it has
moved 3 pips

15. What is the difference between the
top pink line & the bottom line in
pips?
6
5
4
3
2
1
0
Series 1
Series 2
Series 3
0.97834
0.97805
0.97765

16. 69 pips

17. Long
 In financial trading, a position is a binding
commitment to buy or sell a given amount
of financial instruments, such as securities,
currencies or commodities, for a given price.
 Long position :-The buying of a security such as a
stock, commodity or currency, with the
expectation that the asset will rise in value.
In the context of options, the buying of an
currency pairs.

18. For example
 Ex: an owner of shares in McDonald's Corp. is
said to be "long McDonald's" or "has a long
position in McDonald's.”

19. Short position
 . The sale of a borrowed security, commodity or
currency with the expectation that the asset will
fall in value. Selling a currency pair
 In the context of currency, it is the sale (also
known as "writing") of an currency pair

20. example,
 For example, an investor who borrows shares of
stock from a broker and sells them on the open
market is said to have a short position in the
stock.
 The investor must eventually return the borrowed
stock by buying it back from the open market. If
the stock falls in price, the investor buys it for less
than he or she sold it, thus making a profit.

21. Take profit
 Take profit (T/P): the number of pips or price from
the currency price point where to close out their
current position for a profit.
 An order used by currency traders specifying the
exact rate or number of pips from the current
price point where to close out their current
position for a profit. The rate deemed to be the
level where the trader wants to take a profit is
sometimes referred to as the "take-profit point".

22.  As the name suggests, take-profit orders are used to
lock in profits in the event the rate moves in a
favorable direction.
 For example, if you are long a currency pair position
and believe the price will rise to a certain level, but
are unsure what it will do beyond that level, placing a
take-profit order at that point will automatically close
out your position allowing you to lock in profit.
 Example: Buy $100 worth of yen at 107.4 yen per
dollar = 100*107.40 = 10,740 yen
Place a take-profit order at 108.80. Price then rises
from 107.40 to 108.80 Take-profit order automatically
executed to sell $100 and buy 10,880 yen
Profit of 140 yen realized.

23. Stop loss
 Sell a security when it reaches a certain price
 used to limit an investor’s loss

24. T/P & S/L when you buy
6
5
4
3
2
1
0
Series 1
Series 2
Series 3
1.04885 T/P
1.04631 C/P
1.04275 S/P

25. T/p & S/P when you sell
6
5
4
3
2
1
0
Series 1
Series 2
Series 3
1.04885 S/P
1.04631 C/P
1.04275 T/P

26. LOT
 Lot means minimum unit of trade.
 A standard trading term referring to an order of
100,000 unit. the standard transaction size in a
forex transaction. Usually this is 10,000 currency
units, 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 of
the base currency while selling / buying the
equivalent number of units of the counter currency.
 What is a mini-lot = 1/10 (10%) of the standard lot
size.
 One pip of a currency pair based on USD= $1 when
trading a mini lot; $10 for a standard lot trade.
 To calculate standard lot trade you multiple
0.0001/100 which equal to $10.

28. example
 For example, if you open a long position of one
lot for EUR/USD for the ask price of 1.4000, you
are purchasing 100,000 Euro while, selling
140,000 USD.
 A standard contract (one Lot) in which the USD is
the counter currency one pip will equal $10 ($1
for a mini lot). For all other pairs exact pip values
are slightly different and range from $8 to $10.
Use our Pip Calculator to see the current pip
value for all currency pairs.

29. Currency pair
 GBP/USD = currency pair
 Currency pair- quote and price structure for
currency traded in the forex market.
 First currency = base currency
 Second currency = quote currency or counter
currency.

30. How much quote currency is needed
to buy /unit of base currency
 Ex: quoted USD/GBP=1.5
 Purchase the pair , for every 1.5 British pounds
that you sell you purchase (receive)Us$1.
 Sold the currency pair you would receive 1.5
British pounds for every US$1 you sell.
 Ex: quoted Euro/USD=0.667
 Purchase the price for every $0.677 dollars that
you sell ;you purchase 1Euro.
 Sold the currency pair you would receive 1euro
for every Us$ 0.667 you sell

31. Currency rate
 Ex: travelling to US to Swiss you have to
exchange .USD/CHF
 Two rate shown one is the bid /ask
USD/CHF= 1.1569 ; 1.1571
bid ask
Means 1$= 1.1571CHF

32. LEVERAGE
 LEVERAGE allows you to open trades that are
larger than the capital you trading account.
 Ex:- $ 10,00,000 have been purchased through a
long USD?JPY position with a $ 50,000 a/c.
leverage balance is 20:1 .
 Trading on margin can both positively and
negative affect your trading experience as both
profits and losses can be dramatically amplified.

33. Trading strategy
 A trading strategy helps to determine when to get
into and get out a trade.
FX trading strategies:
1. Fundamental trading strategy
2. Technical trading strategy

34. Fundamental & Technical trading strategies
 Fundamental trading strategy uses financial news to
predict the movement in currency bear like economic
indicator like GDP inflation etc
 Technical trading strategy focus to strategic and
probability index helps to predict the future trends of
the currency with the movement of the currency bear
like moving average etc

35. Trading platform
 Trading platform is a soft ware provided by broker
to trader.

36. Indicator
 For a technical analyst: an indicator is a
mathematical calculation based on the currency
price and volume. The result is used to predict the
future prices.
 For a fundamental analyst : an indicator could be
a measure which can be used to predict future
economic trends'. Common general economic
indicators are the unemployment rate , new
housing scheme by Govt WPI, CPI INDEX etc

37. INDICATOR TYPES
 TRENDS
 MOMENTUM
 VOLUME
 VOLATILITY

38. Trend indicators
 Trend indicators: by looking into the movement of
the trends you can decide on the level at which
can start trading , moving average parabolic SAR
and MACD are few examples. Usually trends are
done by charts.

39. Momentum indicator
 These are considered to be the oscillating
indicators and are most clear cut in pin pointing
the over bought as well as the oversold position
.similarly they show the signals for any new trend.
 RSI( relative strength index) CCI () are few
example.

40. Volume indicator
 Price movement is very much dependent on the
volume of the traders. Generally the price
movement which is rooted from a high volume
gather a fairly stronger signer compared to one
which is inspired by the low volume.
 Ex: force index, money flow index ease of
movement chikin money flow etc….

41. Volatility indicator
 They normally look into the ranges that defines
the volume that lies beneath the movements and
the price behavior ex: average true range,
bollinger bands and envelopes.

42. Expect advisor
 Trading software to help the currency trader with
Forex trading analysis and the execution of
trades.

43. Foreign exchange market

44. The Spot Market
 The spot market involves the immediate purchase
or sale of foreign exchange
 Cash settlement occurs 1-2 days after the
transaction
 Currencies are quoted against the US dollar
 Interbank FX traders buy currency for their
inventory at the bid price
 Interbank FX traders sell currency for their
inventory 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 the
numerator (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 – Indirect
Quotes
 Foreign currency price of $1—$ are in the denominator (US
dollar 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 the
dollar 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 is
appreciating
 Costs less to buy 1 unit of foreign currency

48. The New York foreign exchange selling rates below apply to
trading among banks in amounts of $1 million and more, as quoted
at 4 p.m. Eastern time by Dow Jones Telerate Inc. and other sources .
Retail transactions provide fewer units of foreign currency per
dollar.
Special Drawing Rights (SDR) are based on exchange rates for
the U.S., German, British, French, and Japanese currencies. Source:
International Monetary Fund.
European Currency Unit (ECU) is based on a basket of community
currencies.
a-fixing, Moscow Interbank Currency Exchange.
EXCHANGE RATES
Country
Argentina (Peso)
Australia (Dollar)
Austria (Schilling)
Bahrain (Dinar)
Belgium (Franc)
Brazil (Real)
Britain (Pound)
30-Day Forward
90-Day Forward
180-Day Forward
Canada (Dollar)
30-Day Forward
90-Day Forward
180-Day Forward
Chile (Peso)
China (Renminbi)
Colombia (Peso)
Czech. Rep (Krouna)
Commercial rate
Denmark (Krone)
Ecuador (Sucre)
Floating rate
Finland (Markka)
France (Franc)
30-Day Forward
90-Day Forward
180-Day Forward
Germany (Mark)
30-Day Forward
90-Day Forward
180-Day Forward
Greece (Drachma)
Hong Kong (Dollar)
Hungary (Forint)
India (Rupee)
Indonesia (Rupiah)
Ireland (Punt)
Israel (Shekel)
Italy (Lira)
Currency
U.S. $ equiv. per U.S. $
Wed.
1.0012
.7805
.09043
2.6525
.03080
.9607
1.6880
1.6869
1.6843
1.6802
.7399
.7414
.7442
.7479
.002352
.1201
.0009985
....
.03662
.1663
....
.0002766
.2121
.1879
.1882
.1889
.1901
.6352
.6364
.6389
.6430
.004049
.1292
.006139
.02787
.0004233
1.6664
.3079
.0006483
Tues.
1.0012
.7902
.09101
2.6525
.03105
.9615
1.6946
1.6935
1.6910
1.6867
.7370
.7386
.7413
.7450
.002356
.1201
.0009985
....
.03677
.1677
....
.0002787
.2135
.1893
.1896
.1903
.1914
.6394
.6407
.6432
.6472
.004068
.1292
.006164
.02786
.0004233
1.6714
.3085
.0006510
Wed.
.9988
1.2812
11.058
.3770
32.470
1.0409
.5924
.5928
.5937
.5952
1.3516
1.3488
1.3437
1.3370
425.25
8.3272
1001.50
....
27.307
6.0118
....
3615.00
4.7150
5.3220
5.3126
5.2935
5.2617
1.5744
1.5714
1.5652
1.5552
246.98
7.7390
162.89
35.875
2362.15
.6001
3.2474
1542.50
Tues.
.9988
1.2655
10.988
.3770
32.205
1.0401
.5901
.5905
.5914
.5929
1.3568
1.3539
1.3489
1.3422
424.40
8.3276
1001.50
....
27.194
5.9633
....
3587.50
4.6841
5.2838
5.2741
5.2558
5.2243
1.5639
1.5607
1.5547
1.5450
245.80
7.7390
162.23
35.890
2362.63
.5983
3.2412
1536.00
Country
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward
Jordan (Dinar)
Kuwait (Dinar)
Lebanon (Pound)
Malaysia (Ringgit)
Malta (Lira)
Mexico (Peso)
Floating rate
Netherland (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 Forward
90-Day Forward
180-Day Forward
Taiwan (Dollar)
Thailand (Baht)
Turkey (Lira)
United Arab (Dirham)
Uruguay (New Peso)
Financial
Venezuela (Bolivar)
SDR
ECU
Wed.
.008639
.008676
.008750
.008865
1.4075
3.3367
.0006445
.4018
2.7624
....
.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
- - -
1.4315
1.2308
Tues.
.008681
.008718
.008791
.008907
1.4075
3.3389
.0006445
.4002
2.7701
....
.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
.002096
1.4326
1.2404
Wed.
115.75
115.26
114.28
112.80
.7105
.2997
1551.50
2.4885
.3620
....
7.8220
1.7685
1.4140
6.4926
39.540
2.6218
26.318
2.8900
158.55
5595.00
3.7503
1.4053
30.688
4.6705
844.75
132.52
6.9865
1.3635
1.3593
1.3511
1.3386
27.489
25.625
109755.00
3.6720
....
8.7300
476.70
.6986
..........
Tues.
115.20
114.71
113.76
112.28
.7105
.2995
1551.50
2.4990
.3610
....
7.8330
1.7547
1.4073
6.4599
39.540
2.6039
26.300
2.8780
157.02
5594.00
3.7502
1.4037
30.688
4.6690
844.65
131.53
6.9697
1.3537
1.3494
1.3416
1.3293
27.493
25.605
109235.00
3.6720
....
8.7300
477.12
.6980
...........
U.S. $ equiv.
Currency
Wednesday, January 8, 1997 per U.S. $
US dollar price:
S($/£)=1.6880
£1 costs
$1.6880
UK pound price:
S(£/$)=0.5924
$1 costs £0.5924
And note that
1
(£/$)
($ / £)
S
S 

49. Spot market
• The current exchange, S($/€)=1.5000. In 1 month, it is
S(€/$)=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 has
appreciated.
– The % change per month is: = 1.4950- 1.5000/1.50000 = -.33%

50. Cross rate
• The exchange rate between 2 currencies where neither
currency is the US dollar
• We know the dollar rates. What if we want to know other
rates, i.e. S(€/£) ?
– Calculate cross-rates from dollar rates
– S($/€)=1.5000 and S($/£)=2.0000. What is S(€/£), i.e. the € price
of
£?
• =
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 too
high 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 the
future purchase or sale of foreign exchange
 Forward prices are quoted the same way as spot
prices
 Denote the forward price maturing in N days as
FN
 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 largest
financial market in the world.
 Currency traders trade currencies for spot and
forward delivery.
 Exchange rates are by convention quoted against
the U.S. dollar, but cross-rates can easily be
calculated from bilateral rates.
 Triangular arbitrage forces the cross-rates to be
internally consistent.
 The euro has enhanced trade within Europe, and
the currency has the potential of becoming a
major world currency.

54. THE END