FOREIGN EXCHANGE MARKET

Clarisse EvangelistaRegine Mae OnggaBSA2-2

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Topics

FOREIGN EXCHANGE MARKET

1. Definition2. How it works?3. Market Size and liquidity 4. Market Participants 5. Types of exchange rates6. Factors Influencing Exchange Rate 7. Financial Instruments 8. Speculation 9. Risk Aversion10. Carry Trade11. Forex signal

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Types of exchange rates

FOREIGN EXCHANGE MARKET

Fixed and Floating Exchange Rates

-Fixed exchange rate is the official rate set by the monetary authorities of the Governance for one or more currency.

-Under the floating exchange rate, the value of the currency is decided by supply and demand factors.

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Types of exchange rates

FOREIGN EXCHANGE MARKET

Indirect and Direct Exchange rates

-Indirect Method- Under this, a given number of units of foreign currency per unit of local currency is quoted. Indirect quotation is also called foreign currency quotation.

-Direct Method- Under this, a given number of units of local currency per unit of foreign currency is quoted.

LOCAL FOREIGN

LOCALFOREIGN

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Factors Influencing Exchange Rate

As with any market, the forex market is driven by demand and supply:Buyer exceed seller, prices goes up (vice versa)

The following can influence exchange rate:National economic performanceCentral Bank PolicyInterest rateTrade BalancesPolitical FactorsMarket SentimentUnforeseen Events

Despite all these factors, the global forex market is more stable than the stock market, exchange rates change slowly and in small amount.

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Financial Instruments

Spot Forward

Swap Futures

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Financial Instruments

A spot transaction is a two-day delivery transaction as opposed to the futures contracts, which are usually three months.

Characteristics: - “direct exchange” between two currencies, - has the shortest time frame, -involves cash rather than a contract, and - interest is not included in the agreed-upon transaction.

Spot trading is one of the most common types of Forex Trading.

1. Spot

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Financial Instruments

In this transaction, money does not actually change hands until some agreed upon future date.

A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then.

The duration of the trade can be :•one day, a few days, months or years. Then the forward contract is negotiated and agreed upon by both parties.

2. Forward

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Financial Instruments

The most common type of forward transaction is the foreign exchange swap.

In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.

3. Swap

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FOREIGN EXCHANGE MARKET

Financial Instruments

Futures are standardized forward In contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

4. Futures

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FOREIGN EXCHANGE MARKET

Financial Instruments

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but

not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.

The FX options market is the deepest, largest and most liquid market for options of any kind in the world.

5. Option

•Speculator- someone who risks losses for the possibility of considerable gains.

•Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly.

•Currency speculation is considered a highly suspect activity in many countries

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FOREIGN EXCHANGE MARKET

Speculation

Speculation

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FOREIGN EXCHANGE MARKET

Risk Aversion

Risk Aversion

Fig.1 Chart showing MSCI World Index of Equities fell while the US dollar Index rose.

Risk aversion is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.

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FOREIGN EXCHANGE MARKET

Carry Trade

Currency carry trade refers to the act of borrowing one currency that has a low interest rate in order to purchase another with a higher interest rate.

A large difference in rates can be highly profitable for the trader, especially if high leverage is used. However, with all levered investments this is a double edged sword, and large exchange rate price fluctuations can suddenly swing trades into huge.

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FOREIGN EXCHANGE MARKET

Forex Signal

Analysts Team

Delivered via SMS and E-mail

You! (The Trader)

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FOREIGN EXCHANGE MARKET

Forex Signal

Forex signals

Forex trade alerts, often referred to as "forex signals", are trade strategies provided by either experienced traders or market analysts.

This means that users can set their 'Algos' to trade on their behalf, thus reducing the need to sit and monitor the markets continuously, plus it can remove the element of human emotion around executing a trade.

FOREIGN EXCHANGE MARKET

Clarisse EvangelistaRegine Mae OnggaBSA2-2