You are on page 1of 72

CURRENCY TRADING

Final Report Prepared Under the


Sponsorship Of

1| Page
CURRENCY
TRADING

Final Report Prepared Under the


Sponsorship Of

2| Page
Table of Contents

Declaration.......................................................................................................7

Acknowledgements…………………………………………………………………………8

Abstract………………………………………………………………………………………9

Learning Experience……………………………………………………………………….10

Introduction…………………………………………………………………………………11

Project Proposed………………………………………………………........................11

Objective of the project…………………………………………………………………..11

Methodology……………………………………………………………........................11

Limitations of the study…………………………………………………………………..12

Synopsis of the project…………………………………………………………………..13

Forex currency trading…………………………………………………………………….14

Forex currency trading system…………………………………………………………..14

Hedging in currency trading………………………………………………………………14

Currency trading online……………………………………………………………………15

Currency exchange………………………………………………………………………..15

3| Page
Factors deciding currency fluctuation………………………………………………….16

Market participants………………………………………………………………………..18

Company profile…………………………………………………………......................19

The study…………………………………………………………………......................20

Rationale for the study……………………………………………………………….20

Study aims and objectives…………………………………………………..20

Offerings……………………………………………………………………………………21

Our schemes……………………………………………………………………………..22

Currency futures………………………………………………………………………….25

Research………………………………………………………………………………….25

Chapter1 currency trading………………………………………………………………26

What is currency trading…………………………………………………………..26

Speculating as an enterprise……………………………………………………..26

Currency as a trading vehicle…………………………………………………….26

What effects currency rates……………………………………………………..27

Fundamentals drive the currency market………………………………………28

Finding your trading style………………………………………………………..29

Planning the trade…………………………………………………………………29

Executing the trade plan from starting to finish………………………………29

Chapter2 What is forex market………………………………………………………..30

Trading for spot………………………………………………………………...31

Speculating in currency market……………………………………………….31

Around the world in a trading day…………………………………………….32

The opening of the trading stock……………………………………...........33

Trading in Asia-pacific region…………………………………………………33

Trading in European-London session……………………………………….33

Key daily times and events…………………………………………………..34

4| Page
The U.S. dollar index…………………………………………………...........35

Currencies and other financial markets…………………………………….35

Getting started with trading account……………………………………….37

Chapter 3 Who trade currencies…………………………………………………….37

Meet the players…….………………………………………………….........37

The interbank market is the market…………………………………………37

Trading in interbank market…………………………………………………38

Steeping onto a currency trading floor……………………………………39

Hedgers and financial investors…………………………………………..40

Global investment flows……………………………………………………41

Hedge funds…………………………………………………………………42

Bank for international settlements………………………………………..43

The group of 7………………………………………………………………43

Chapter4 the mechanics of currency trading……………………………………...44

Currency comes in pairs………………………………………………….44

Major currency pairs………………………………………………………44

Major cross currency pairs……………………………………………....45

Profit and loss……………………………………………………………..45

Unrealized and realized profit and loss…………………………………46

Currency is money, after all………………………………………………46

Understanding currency rates…………………………………………….47

Trading online………………………………………………………………48

Phone trading……………………………………………………………..49

Orders………………………………………………………………………49

Types of orders……………………………………………………………50

Chapter5 Getting to know the major currency pairs……………………………….52

The big dollar EUR/USD………………………………………………….52

5| Page
Trading fundamentals of EUR/USD……………………………………52

Trading EUR/USD by the members……………………………………53

Trading behaviour of EUR/USD………………………………………..54

Trading USD/JPY by the members……………………………………54

Important Japanese data reports………………………………………55

Trading fundamentals of GBP/USD…………………………………...55

Chapter6 minor currency pairs and cross-currency trading……………………….56

Trading USD/CAD by the numbers…………………………………….56

Trading NZD.USD by the numbers……………………………………57

Cross currency pairs………………………………………………………57

Why trade the crosses……………………………………………………57

Chapter7 currency futures………………………………………………………………..58

Definition of currency futures………………………………………………58

Future terminology…………………………………………………………...59

Rationale for introducing currency futures………………………………..60

Conclusion………………………………………………………………………………….62

Recommendations to the company…………………………………………………….63

Bibliography………………………………………………………………………………..64

References………………………………………………………………………………….65

6| Page
.

Declaration

I hereby declare that this project work titled “Currency trading”


conducted at Religare Securities Ltd., New Delhi has been prepared by
me during the academic year 2008-09 under the guidance of my faculty
guide Prof. Bijay Bhujabal (faculty-Marketing, IBS Dehradun), and
my Company guide Mr. Anand Sagar (Manager, Religare Securities
ltd).

I also declare that this project is the result of my effort and has not
been submitted to any other University or Institution for the award of any
degree, or personal favour whatsoever. All the details and analysis
provided in the report hold true to the best of my knowledge.

7| Page
ACKNOWLEDGEMENT

As a part of the MBA curriculum at ICFAI Business School, the ‘Summer


Internship Program’ enables the students to enhance their skills, expand
their craniums by applying various theories, concepts and laws to real life
scenario which would further prepare them to face in the near future.

Summer internship is the part of curriculum of ICFAI BUSINESS SCHOOL


which helps in overall development of the student and gives him or her
platform to understand the corporate environment as well as to
implement the theoretical knowledge.

I would like to thank my company guide Mr. Anand Sagar, Branch


Manager, Religare Securities Ltd, Delhi for allowing me to work in
such a great organization.

I would like to thank my faculty guide Dr. Bijay Bhujabal for his valuable
guidance and support during my summer internship.

8| Page
I would also like to thanks Prof. Love raj Takru (Dean IBS, Dehradun)
for giving me the opportunity to work in such a great organization and
carry the college’s name forward.

Abstract

In today’s world of highly competitiveness and changing atmosphere, it is not so easy to


carve a niche for oneself and stand on your own feet. As per the rule of the nature ‘Survival
of the fittest’, this SIP has taught me many important things that one needs to inculcate
within himself to face the cut-throat competition. In my opinion the internship program of
this curriculum is very practical and important for learning the necessary skills for a bright
future of a student and it will surely be helpful in the value addition to the knowledge base.

The study demonstrates how exchanges are versatile institutions, working across a variety of
developing country contexts, addressing a diverse range of challenges - some rooted in a
country's historical legacy, other arising with the globalization of the world currency
economy. Whilst the featured exchanges are operated by the private sector, the role of
government - establishing an appropriate enabling framework and providing ongoing
regulatory oversight - has been crucial in each country.

9| Page
It was found that exchange risk management instruments - such as futures and options
contracts can be made accessible to and useable by small clients to reduce exposure to price
and, potentially, production risks.

The responsibility which I have got in the form of this project by the company, I have
completed the project in the best manner which I could do. I am enjoying working with
company also. Without any doubt in mind I can say that this opportunity of my life will
necessarily be beneficial for me and will add a value in terms of skills and knowledge that is
going to help me in near future.

Learning Experience:

The project has been a great learning experience. It has provided me with
learning opportunities about currency market and various currency
exchanges. The project involved gaining information about various
currency exchanges and getting awareness about various terminologies
associated with them.

After I began to use to use the personal network of my friends and asked
them to speak to their acquaintances- personal and official and check if
they know anything about currency markets.

The currency market trends, the rising currency prices giving rise to
inflation, how some currency linked are to linked with an economy also
helped me a lot to gain more knowledge about currency market.

By handling the project under the guidance of company guide and faculty
guide has given me exposure of organizational culture and environment.
On the whole, I understood the psyche of prospective and current trends
of the market.

10 | P a g e
In the beginning of the project I was a bit uncomfortable as I did not knew
anything about currency market, but the project has made me realize
that to reach heights of success and position you have to start from the
scratch.

Introduction

Project Proposed: Currency trading


Objective of the project:
• To study currency trading.
• To study about the usage and utility, hedging and arbitrage in
currency trading.
• To study about the factors deciding currency fluctuation.
• To study about currency trading in India.
• What are the instruments to protect any losses from currency
fluctuation?
• To study about the initiatives taken by Indian government for
currency trading.
• What are the major participants in currency trading?
• To study about currency exchange and currency exchange rates
• To study about hedging in currency trading.

11 | P a g e
• As company has started dealing in currency trading with NSE six
months ago, so it will help company in explaining to their clients
regarding currency trading.

Methodology

1) Primary Data Sources:-

The methodology used is to study currency trading and its usage and
utility, hedging and arbitrage in currency trading. To study about factors
deciding currency fluctuation. What are the instruments to protect losses
from currency fluctuation? How currency trading is done. Currency
trading in India. What are the initiatives taken by Indian government for
currency trading? Who are major participants in currency trading?

2) Secondary Data Sources: -

To keep pace with the existing market I seek to consult various


existing data also in the related company products so that a
comparative study is formulated. The sources to be used includes
internet, friends working in other companies, faculty members, books.

Limitations of The Study

• Study is limited to currency trading and its usage and utility.


• Study is limited to currency exchange and factors deciding currency
fluctuations.
• Study is limited to forex exchange and how forex trading is done.
• Study is limited to forex brokers.
• Study is limited to currency trading in India.
• Owing to the dynamic nature of the global economy in particular, the findings of the
report will not be applicable after a point of time.
• No practical access to global market exchanges.
• Time constraint.

12 | P a g e
SYNOPSIS OF THE PROJECT:
This project is about currency trading, its usage and utility, what are
hedging and arbitrage in currency trading. How is currency trading done?
What are its operations? What is pricing in currency trading. What are
factors deciding currency fluctuations. What are instruments to protect
any losses from currency fluctuation? How trading is done. What are
initiatives taken by Indian government for currency trading? Who are
major participants in currency trading? What is currency trading system?
How hedging is done in currency trading. What are currency trading
platforms? How is currency trading done online? How is currency trading
done online? What is forex trading and forex trading in India?

13 | P a g e
CURRENCY TRADING
Currency trading means to exchange one currency for another currency is
termed as currency trading. This industry is one of the largest in the world
with regards to trading volume. Foreign currency is the ratio of one
currency in consideration with another. How this process takes place. For
example if we take an interbank currency trade for instance, there are
two banks A and B. Then bank A will call bank B and will ask for the quote
of the currency. For example rupee against the dollar. Then bank B will
reply to bank A with the rate of his bank. If the rate seems attractive to
bank A then they will enter a deal. All the basic information like price,
amount, and purchased amount will be entered in their systems. When
the actual settlement takes place bank A will depart with the specified
rupee amount and bank B will follow suit by turning in the dollar amount.
If the rupee rises against the dollar then bank A will gain the difference as
profit.

When traders enter into currency trading they give a two- way quote. One
of them is the rate of purchase and other is the price of sale. The two
prices are mainly separated by a hyphen. On the left is the price at which
the trader will purchase and on the right is the price at which is the price
at which the trader will sell. The difference between the purchase rate
and sale is called the bid-ask spread. The trader expects the slight
variations on the sale and purchase rate. He will also trade in the similar
amounts of what he had purchased. There will not be any drastic
differences. The margin thus earned by the trader is the difference of the
bid-ask spread.

The profit gained depends on the variation in the exchange rate and the
size of the position. Speculating over a period of time can be dangerous
and hence every government has the strict rules laid down which have to
be adhered to, to prevent the chaos.

FOREX CURRENCY TRADING


Currency trading is done in Paris. They follow the International standards
organization (ISO), which has built a code abbreviation. For instance

14 | P a g e
EUR/USD- EURO AND US DOLLAR. Similarly we have USD/CHF, GBP/USD
etc. Thus foreign exchange is the trading of one currency for another. It is
the ratio of one currency as valued for another. While trading the first
currency is known as the base currency and the other is known as the
counter of quote currency. Counter currency is purchased on one unit of
the base currency. While selling we are told how much the counter or
quote currency we will receive for every base currency unit.

For simplifying foreign currency trade one monetary unit is considered


equal to the base currency. So if we are talking of the base currency i.e.
Rupee, Euro, Dollar, it is 1 Rupee, 1 Euro, and 1 Dollar. As the US Dollar is
mostly traded with any currency paired with the US Dollar is known as the
direct rate. If the currency is not against the US Dollar it is known as the
cross rate. As the quote currency is lower than the base currency it is
converted into smaller units of the base currency. Foreign currency
trading involves many intricacies but once one gain knowledge and
practice it, it soon get easy and attractive.

FOREX CURRENCY TRADING SYSTEM


There are many currencies trading systems.1) Piranha system: this
system depends upon prevailing interest rates. It helps to determine that
whether on should play long or short. Smooth to enter and exit is the core
is the core fund of this system. This system has solid profit ground.

2) Cross bow Swiss trading system: this system is based on entering long
on dips and selling short on rallies, the system is designed to allow online
trading, thus allowing online market information and transactions.

HEDGING IN CURRENCY TRADING


Risk is the factor that is involved everywhere. It is very high in currency
trading. With the currency trading evolving as huge market it is important
to cover the risks involved in case of a huge unexpected downfall.

Hedging is the kind of a transaction where two positions are made to


offset each other in case of price changes. It is the risk covered by those
who are desirous of taking it and who are capable of taking and handling
it.

15 | P a g e
In the currency trading market high amounts are traded with. Hence if
there is sudden decline in prices it can be quite demanding on the
investors and the whole economy per say.

CURRENCY TRADING ONLINE


Trading is always given an impetus because of its ability to
promote an activity beyond its current realms. Be it basic trading
or online currency trading. It gives the individual a different
feeling. More of one to one basis. It eliminates the need of
middlemen and thus reduces cost. Online currency trading is
more dangerous unless you are adapting with its requirements.
Some brokers offer teaching the uses of online trading at a
minimal fee.

Trading currency online gives one the advantage of working from


home. If you are in individual investor you can delineate your
commands to your broker from the comfort of your home.
Receive confirmation and check the transfer of funds in your
account. On the other hand if you are an investor you can trade
in the main market. Buy on dips and sell on rallies or trade on
whatever system. It’s possible from your home. Another
advantage of trading online is that no special software is
required. Connect yourself to internet and get working. You can
get prices 24 hours a day. Through the internet you can access
the latest exchange rates, reports, news and analysis. It is
absolutely commission free. However it depends upon the portal
you are using for online currency trading as the charges differ
from company to company.

CURRENCY EXCHANGE
With Indians going global and dealing in international trade, currency
exchange is very common. Indian rupee is exchange is anywhere in the
world. However it’s still weak to US Dollar, GB Pound and EURO, so the
exchange rate varies according to vagaries of the day to day market. For

16 | P a g e
the common trader or professional who wished to invest in currency
exchange the best way to do is through official channels.

Banks, forex institutions, authorized travel agents are the only ones who
can exchange the rupee to any other currency. When a person goes
abroad for a holiday or for a business, a certain slab is reserved for
exchange. Any amount of currency cannot be exchanged. Since there a
restrictions some people try to smuggle hard cash in suitcases. Which is
an offence, and if caught they can be deported or not allowed to leave
the country, without giving proper explanation.

FACTORS DECIDING CURRENCY FLUCTUATION

1. CURRENCY FLUCTUATION

A market based exchange rate will change whenever the values of either
of the two component currencies change. A currency will tend to become
more valuable whenever demand for it is greater than the available
supply. It will become less valuable whenever demand is less then
available supply (this does not mean people no longer want money, it
just means they prefer holding their wealth in some other form, possibly
another currency).

Increased demand for a currency is due to either an increased transaction demand for
money, or an increased speculative demand for money. The transaction demand for money
is highly correlated to the country's level of business activity, gross domestic product (GDP),
and employment levels. The more people there are out of work, the less the public as a
whole will spend on goods and services. Central banks typically have little difficulty adjusting
the available money supply to accommodate changes in the demand for money due to
business transactions.

The speculative demand for money is much harder for a central bank to accommodate but
they try to do this by adjusting interest rates. An investor may choose to buy a currency if
the return (that is the interest rate) is high enough. The higher a countries interest rates, the
greater the demand for that currency. It has been argued that currency speculation can

17 | P a g e
undermine real economic growth, in particular since large currency speculators may
deliberately create downward pressure on a currency in order to force that central bank to
sell their currency to keep it stable (once this happens, the speculator can buy the currency
back from the bank at a lower price, close out their position, and thereby take a profit).

2. In the absence of government intervention, the main driver of currency fluctuations is the
demand for the currency relative to the demand for other currencies. If many people want to
trade dollars for Indian rupees, the value of the rupee will rise and the dollar will fall. This
happens when there is a greater demand for one country's products, denominated in its
home currency, relative to the demand for another country's products. India, I believe, runs
a large trade surplus with the rest of the world, while the U.S., on the other hand, and runs a
large trade deficit.
There are several factors that can influence this dynamic. A country's central bank can
reduce the money supply by issuing bonds and collecting currency for them. They can
increase the required reserve level that banks must hold, therefore reducing the amount
they can lend.
On the other hand, the central bank can buy back bonds, injecting more money into the
market, or they can simply start printing more money and buy things, thus getting it into
circulation. This last tactic usually leads to runaway inflation, since the government often
winds up issuing more money to keep ahead of individuals' perception of its value.
Other governments can also affect the value of a country's currency, which has happened in
the case of the U.S. Since the U.S. dollar is the world's de facto reserve currency (the one
that most international transactions are done in), it is in the interest of many countries to
keep large stocks of U.S, currency on hand, and to keep the value of the dollar stable. This
allows the U.S. to float more of its debt on world markets without suffering the ill effects of
devaluing its currency.

3. Supply & Demand

Supply: If countries are inflating their currency, there will be more available on
international markets and it will not be as valuable. This will additionally cause lower
interest rates in the domestic market.

Demand: If investment opportunities are poor in the domestic economy, currency


will not be as valuable internationally.

4. Currency fluctuation or rather the value of a currency is determined by various


factors depending upon what time frame, we are looking at. Short term values are
determined by immediate supply and demand you may find during pre election time
the rupee will appreciate because lot of funds from abroad will get converted to
Indian currency .In the medium term it is the country's export /import and capital
flows that will determine the value. In the long term it is the confidence of people in
the country's policies, the stability of the system of government, its credibility etc

18 | P a g e
which determines the value of a currency. Dollar enjoyed the reserve currency
status because of this factor.
5. The value of a local currency is its value in real terms. i.e., its purchasing power in
the international market. For example what you can buy by, say Rs. 100.If you can
buy items worth US $2 then the value of Rupee is 1/50 American Dollar. Similar is
the case with other currencies.

MARKET PARTICIPANTS
According to research data

53% of the forex deals are arranged between dealers or banks;

33% are between a dealer (a bank) and a fund manager or other non- banking
financial institutions;

14% involves a dealer and a non financial company.

BANKS
The largest part of forex market belong to the banks. They cater both to the majority
of commercial turnover and large amounts of speculative trading every day. Daily
turnover of one large bank may reach billions of dollars. And only the small part of

19 | P a g e
trading this trading is undertaken on behalf of customers. The rest trading banks
arrange for their own account.

Today large banks have moved on to electronic systems such as EBS, the Chicago
mercantile exchange, Bloomberg and Trade book(R).

COMMERCIAL COMPANIES
Commercial companies that seek foreign exchange to pay for goods or services are
important part of forex market. Comparing with banks or speculators, commercial
companies trade fairly small amount. Besides there trade usually have little short
term impact on currency’s exchange rates. But sometimes multinational companies
can have unpredictable impact on market rates. Especially when market participants
do not know about very large positions, covered due to little known exposures.

CENTRAL BANKS
National central banks are one of the most important participants of foreign
exchange market. There purpose is to control money supply, inflation and interest
rates. Usually they have official or unofficial target rates for their currencies. Usually
their substantial foreign exchange reserves as a stabilization market tool. One of the
best stabilization strategies, used by central banks, is to buy while the exchange
rate is the loosest and to sell when the rate is high. In such a way central banks may
get a good profit. Nevertheless, central banks are more protected then other market
participants, as they don’t go bankrupt if they make large losses. At the same time
there is no convincing evidence that central banks do not make a profit trading.

INVESTMENT MANGEMENT FIRMS

Their main activity is managing large accounts on behalf of customers such as


pension funds, endowments etc. Investment managers usually use the forex market
to facilitate transactions in foreign securities. Especially if an investment
management firm is specialized in foreign equities, it will need to buy and sell
foreign currencies in the spot market in order to pay for purchases.
However some investment management firms have speculative specialist currency
overlay units. They manage client's currency exposures with the aim of generating
profits as well as limiting risk. But the number of this type of investment
management firms is comparatively small.

20 | P a g e
COMPANY PROFILE
Religare Securities Limited (RSL), a 100% subsidiary of Religare Enterprises
Limited is a leading equity and securities firm in India. The company currently
handles sizeable volumes traded on NSE and in the realm of online trading and
investments; it currently holds a reasonable share of the market. The major activities
and offerings of the company today are Equity Broking, Depository Participant
Services, Portfolio Management Services, International Advisory Fund Management
Services, Institutional Broking and Research Services. To broaden the gamut of
services offered to its investors, the company offers an online investment portal
armed with a host of revolutionary features.

• RSL is a member of the National Stock Exchange of India, Bombay Stock


Exchange of India, Depository Participant with National Securities Depository
Limited and Central Depository Services (I) Limited, and is a SEBI approved
Portfolio Manager.

• Religare has been constantly innovating in terms of product and services and
to offer such incisive services to specific user segments it has also started the
NRI, FII, HNI and Corporate Servicing groups. These groups take all the
portfolio investment decisions depending upon a client’s risk / return
parameter.

• Religare has a very credible Research and Analysis division, which not only
caters to the need of our Institutional clientele, but also gives their valuable
inputs to investment dealers.

The Study
Rationale for Study
It is reasonable to assume that a currency exchange generating high
volumes of trade will in some way deliver tangible benefit to its
stakeholders. After all currency exchange imposes additional costs on
participants- membership fees, transaction fees, compliance costs, etc.
However, what type of benefits does currency exchanges deliver? Who
gains and who loses? How specifically have these institutions functioned in developing
countries? Has there been a notable development impact? The definition of development is
heavily contested and conceptually challenging. There is not scope to provide a full or

21 | P a g e
adequate account here. Whilst definitions vary widely, development approaches typically
pursue some mixture of two broad goals - poverty reduction and economic growth.

Study Aims and Objectives


Aim: To identify, analyze and assess the impacts made by currency futures exchanges in
developing countries on development.

Objectives:
Awareness-raising: to build awareness of the solutions that currency exchanges provide, and
the extent of their track record in doing so, among key national, regional and international
stakeholders – including governments, regulators, the private sector, civil society and the
media.

Knowledge accumulation: to produce a high-quality report that adds to the existing


knowledge base - it will seek to establish within a coherent framework the enduring social
and economic impacts that currency exchanges have made in key markets over time.

Worldwide applicability: to demonstrate the extent to which exchange success in upgrading


currency sectors and fostering development is part of a worldwide phenomenon.

Exchange of information: to share information, experience and perspectives from across the
major developing country regions.

OFFERINGS

1. EQUITY AND DERIVATIVES

Trading in Equities with Religare truly empowers you for your investment needs. We
ensure you have a superlative trading experience through –

22 | P a g e
• A highly process driven, diligent approach.
• Powerful Research & Analytics and
• One of the “best-in-class” dealing rooms.

Further, Religare also has one of the largest retail networks, with its presence
in more than 1800* locations across more than 490* cities and towns. This
means, you can walk into any of these branches and connect to our highly
skilled and dedicated relationship managers to get the best services.

The Religare edge

• Pan India footprint.


• Powerful research and analytics supported by a pool of highly skilled
research analysts.
• Ethical business practices.
• Offline/Online delivery models.
• Single window for all investment needs through your unique CRN.

2. DEPOSITORY

RSL provides depository services to investors as a Depository Participant with


NSDL and CDSL.

The Depository system in India links issuers, Depository Participants, Depositories


National Securities Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL) and clearing houses / clearing Corporation of Stock
Exchanges. These facilitate holding of securities in dematerialized form and
securities transactions are processed by means of account transfers.

Our customer centric account schemes have been designed keeping in mind the
investment psychology. With a competent team of skilled professionals, we manage
over 380,000 accounts and have a dedicated customer care centre, exclusively
trained to handle queries from our customers. With our country wide network of
branches, you are never far from Religare depository services.

Religare’s depository service offers you a secure, convenient, paperless and cost
effective way to keep track of your investment in shares and other instruments over
a period of time, without the hassle of handling physical documents. Your DP
account with us takes care of your depository needs like dematerialization,
dematerialisation, transfer and pledging of shares, stock lending and borrowing.

23 | P a g e
Your demat account is safe and absolutely secure in our hands, every debit
instruction is executed only after its authenticity is established. Our hi-tech in-house
capabilities cater to the needs of software maintenance, database administration,
network maintenance, backups and disaster recovery. This extra cover of security
has gained the trust of our clients.

3. PORTFOLIO MANAGEMENT SERVICES

Religare offers PMS to address varying investment preferences. As a focused


service, PMS pays attention to details, and portfolios are customized to suit the
unique requirements of investors.

Religare PMS currently extends six portfolio management schemes, viz Monarque,
Panther, Tortoise, Elephant, Caterpillar and Leo. Each scheme is designed keeping
in mind the varying tastes, objectives and risk tolerance of our investors.

OUR SCHEMES

Monarque

At Religare, we understand ‘those who reign’ have truly inimitable needs and
objectives and deserve an equivalently matchless partner to provide your wealth the
care it deserves to grow and be preserved. Monarque is a portfolio structured to
provide higher returns by taking aggressive positions across sectors and market
capitalizations. Monarque is ideally suitable for investors with "High Risk High
Return" appetite.

24 | P a g e
Panther

The Panther portfolio aims to achieve higher returns by taking aggressive positions
across sectors and market capitalizations. It is suitable for the “High Risk High
Return” investor with a strategy to invest across sectors and take advantage of
various market conditions.

Tortoise

The Tortoise portfolio aims to achieve growth in the portfolio value over a period of
time by way of careful and judicious investment in fundamentally sound companies
having good prospects. The scheme is suitable for the “Medium Risk Medium
Return” investor with a strategy to invest in companies which have consistency in
earnings, growth and financial performance.

Elephant

The Elephant portfolio aims to generate steady returns over a longer period by
investing in Securities selected only from BSE 100 and NSE 100 index. This plan is
suitable for the “Low Risk Low Return” investor with a strategy to invest in blue chip
companies, as these companies have steady performance and reduce liquidity risk
in the market.

Caterpillar

The Caterpillar portfolio aims to achieve capital appreciation over a long period of
time by investing in a diversified portfolio. This scheme is suitable for investors with
a high risk appetite. The investment strategy would be to invest in scrip’s which are
poised to get a re-rating either because of change in business, potential fancy for a
particular sector in the coming years/months, business diversification leading to a
better operating performance, stocks in their early stages of an upturn or for those
which are in sectors currently ignored by the market.

Leo

Leo is aimed at retail customers and structured to provide medium to long-term


capital appreciation by investing in stocks across the market capitalization range.
This scheme is a mix of moderate and aggressive investment strategies. Its aim is to

25 | P a g e
have a balanced portfolio comprising selected investments from both Tortoise and
Panther. Exposure to Derivatives is taken within permissible regulatory limits.

The Religare Edge

We serve you with a diligent, transparent & process driven approach and ensure
that your money gets the care it deserves.

No experts, only expertise. PMS brought to you by Religare with its solid
reputation of an ethical and scientific approach to financial management. While we
offer you the services of a dedicated Relationship Manager who is at your service
24x7, we do not depend on individual expertise alone. For you, this means lower
risk, higher dependability and unhindered continuity. Moreover, you are not limited
by a particular individual’s investment style.

No hidden profits. We ensure that a part of the broking at Religare Portfolio


Management Services is through external broking houses. This means that your
portfolio is not churned needlessly. Using more broking firms gives us access to a
larger number of reports and analysis, enabling us to make better, more informed
decisions. Furthermore, your portfolio is customized to suit your investment
objectives.

Daily disclosures. Religare Portfolio Management Services gives you daily updates
on your investment. You can pinpoint where your money is being invested, 24x7,
instead of waiting till the end of the month to keep track.

No charge till you profit*.So sure are we of our approach to Portfolio Management
that we do not charge you for our services, until your investments start showing
profit. With customized investment options Religare Portfolio Management Services
invites you to invest across five broad portfolios to suit your investment needs.

26 | P a g e
CURRENCY FUTURES

Benefits of Currency Futures


• High Liquidity.
• Extended trading hours - 9 am to 5 pm.
• Opportunities to reap benefits owing to a highly dynamic market.
• Small lot size of only US $1000 with low exchange specified margins.

Currency Futures is best suited for-

• SMEs / Individuals involved in Imports/Exports.


• Corporate/ Institutions involved in Imports/Exports and anybody else who has
foreign currency exposure

RESEARCH
We at Religare believe in providing independent research for clients to make
investment decisions, with strict emphasis on self-regulation, avoiding possible
conflict of interest in objectivity.

Our Research Products

• Fundamental Research

• Technical Research

• Daily Reports

• Intraday trading tech calls

• Intraday Derivative call

• Directional F&O calls

27 | P a g e
CHAPTER 1

CURRENCY TRADING

WHAT IS CURRENCY TRADING?


Trading is about speculating on the value of one currency versus another.
The key words in the last sentence are speculating and currency. We
think that looking at currency trading from two angles- or two dimensions.
On the other hand, it’s speculation, pure and simple, just like buying an
individual stock, or any other financial security, in hope that it will make a
profitable return. On the other hand, the securities you are speculating
with are the currencies of various countries. Viewed separately, that
means that currency trading is both about dynamics of market
speculation, or trading, and the factors that affect the value of currencies.
If we put them together we can get the largest, most dynamic and
exciting financial market in the world.

SPECULATING AS AN ENTERPRISE
Speculating is all about taking on financial risk in the hope of making a
profit. But it’s not gambling and it’s not investing. Gambling is about
playing with money even when you know the odds are stacked against
you. Investing is about minimizing risk and maximizing return, usually
over a long time period. Speculating, or active trading, is about taking
calculated financial risks to attempt to realize a profitable return, usually
over a very short time horizon.

To be a successful trader in any market requires

• Dedication ( in terms of both time and energy)


• Resources ( technological and financial)
• Decisiveness
• Perseverance
• Knowledge

CURRENCY AS THE TRADING VEHICLE


28 | P a g e
The forex market is the largest financial market in the world, at least in
terms of daily trading volumes. The forex market is unique in many
respects. The volumes are indeed, huge, which means that liquidity is
ever present. It also operates around the clock six days a week, giving
traders access to market any time they need it.

Few trading restrictions exist- no trading limits up or down, no restrictions


on position sizes, and no requirements on selling a currency pair short.
Selling a currency pair short means you are expecting the price to
decline. Because of the way currencies are quoted and because currency
rates move up and down all the time, going short is as common as being
long.

Most of the action takes place in the major currency pairs, which pit the
US dollar (USD) against the currencies of the EUROZONE (the European
countries that have adopted the euro as their currency), Japan, Great
Britain, and Switzerland. There’s also plenty of trading opportunities in
the minor pairs, which see the U.S. dollar traded against the Canadian,
Australian, and New Zealand dollars. On the top of that, there’s cross-
currency trading, which directly pits two non- USD currencies, against
each other, such as the Swiss franc against the Japanese yen. Altogether,
there are anywhere from 15 to 20 different currency pairs, depending on
which forex brokerage you deal with.

Most individual traders trade currencies via the internet through a


brokerage firm. Online currency trading is typically done on a margin
basis, which allows individual traders to trade in larger amounts by
leveraging the amount of margin on deposit.

The leverage, or margin trading ratios, can be very high, sometimes as


much as 200:1 or greater, meaning a margin deposit of $ 1,000 could
control a position size of $ 200,000. But trading on margin carries its own
rules and requirements and is backdrop against which all your trading will
take place. Leverage is a two- edged sword, amplifying gains and losses
equally, which makes risk management the key to any successful trading
strategy.

Before you ever start trading, in any market, make sure you are only
risking money that you can afford to lose, what’s commonly called risk
capital. Risk management is the key to any successful trading plan.
Without a risk- aware strategy, margin trading can be an extremely short-

29 | P a g e
lived endeavour. With a proper risk plan in place, you stand a much better
chance of surviving losing trades and making winning ones.

WHAT AFFECTS CURRENCY RATES?


In a word- information. Information is what drives every financial market,
but the forex market has its own unique roster of information inputs.
Many different cross- currencies are at play in the currency market at any
given movement. After all, the forex market is setting the value of one
currency relative to another, so at the minimum, you are looking at the
themes affecting two major international economies.

FUNDAMENTALS DRIVE THE CURRENCY MARKET


Fundamentals are the broad grouping of news and information that
reflects the macroeconomic and political fortunes of the countries whose
currencies are traded. Most of the time when you hear someone talking
about the fundamentals of a currency, he’s referring to the economic
fundamentals. Economic fundamentals are based on:

• Economic data reports


• Interest rate levels
• Monetary policy
• International trade flows
• International investment flows

There are also political and geopolitical fundamentals. An essential


element of any currency’s value is the faith or confidence that the market
places in the value of the currency. If political events, such as an election
or scandal, are seen to be undermining the confidence in a nation’s
leadership, the value of its currency may be negatively reflected.

Gathering and interpreting all this information is just part of a currency


trader’s daily routine, which is one reason why we put dedication at the
top of our list of successful trader attributes.

30 | P a g e
UNLESS IT’S THE TECHNICALS THAT ARE DRIVING THE
CURRENCY MARKET
The term technical’s refers to technical analysis, a form of market
analysis most commonly involving chart analysis, trend- line analysis, and
mathematical studies of price behaviour, such as momentum or moving
averages.

We don’t know of too many traders who don’t follow some form of
technical analysis in their trading. Even the stereotypical seat-of- the-
pants, trade-your-gut-traders are likely to at least be aware of technical
price levels identified by others. If you have been an active trader in other
financial markets, chances are, you have been engaged in some technical
analysis or at least heard of it.

Technical analysis is especially important in the forex market because of


the amount of fundamental information hitting the market at any given
time. Currency traders regularly apply various forms of technical analysis
to define and refine their trading strategies, with many people trading on
technical indicators alone.

FINDING YOUR TRADING STYLE


What do you mean by trading style? Basically it boils down to how you
approach currency trading in terms of

• Trade timeframe: how long you hold a position? Are you looking at
short- term trade opportunities (day trading), trying to capture
more significant shifts in currency prices over days or weeks, or
something in between?

• Currency pair election: are you interested in trading in all the


different currency pairs, or are you inclined to specialize in only one
or two?

31 | P a g e
• Trade rationale: are you fundamentally or technically inclined? Are
you considering creating a systematic trading model? Are you a
trend follower or a breakout trader?

• Risk appetite: how much are you prepared to risk and what are your
return expectations?

PLANNING THE TRADE


Whatever trading style, you ultimately choose to follow, you won’t get
very far if you don’t establish a concrete trading plan and stick to it.
Trading plans are what keep small bad trades from becoming big bad
trades and what can turn small winners. More than anything, though, they
are your road map, helping you to navigate the market after the
adrenaline and emotions start pumping, no matter what the market
throws your way.

We are not telling you that trading is any easier than any other financial
market speculation. But we can tell you that trading with a plan will
greatly improve your chances of being a successful in the forex market
over time. Most important, we want to caution you that trading without
plan is a surf ire recipe for disaster.

EXECUTING THE TRADE PLAN FROM START TO FINISH


The start of ant trade comes when you step into the market and open up
a position. How you enter your position, how you execute the first step of
your trading plan, can be as important as the trade opportunity itself.
After all, if you never enter the position, the trade opportunity will never
be exploited. And probably nothing is more frustrating as a trader than
having pinpointed a trade opportunity, having it go the way you
expected, but having nothing to show for it because you never put the
trade on.

The effort and resources you invest in researching, monitoring, and


analyzing the market come to a concrete result when you open a trade.
You are now exposed to price fluctuations and your trading account will
register a profit or loss as a result. But that’s just the beginning of it.

32 | P a g e
Active trade management is also critical to keeping more of what you
make in the market. In our experience, making money in the forex market
is not necessarily the hard part. More often than not, keeping what you
have made is the really hard part.

Exiting each trade is the culmination of the entire process and you are
either going to be pleased with a profit or disappointed with a loss. Every
trade ends in either a profit or a loss (unless you get out at the entry
price); it’s just the way the market works. While you trade is still active,
however, you are still in control and you can choose to exit at any time.

Chapter 2

WHAT IS FOREX MARKET?


The forex market is the crossroads for international capital, the
intersection through which global commercial and investment flows have
to move. International trade flows, such as when a Swiss electronics
company purchases Japanese- made components, were the original basis
for the development of the forex markets.

Today, however, global financial and investment flows dominate trade as


the primary non speculative source of forex market volume. Whether it’s
an Australian pension fund in U.S. Treasury bonds, or a British insurer
allocating assets to the Japanese equity market, or a German
conglomerate purchasing a Canadian manufacturing facility, each cross-
border transaction passes through the forex market at some stage.

More than anything else, the forex market is a trader’s market without
equal. It’s a market that’s open around the clock six days a week,
enabling traders to act on news and events as they happen. It’s a market
where half-billion- dollar trades can be executed in a matter of seconds
and may not even move prices noticeably. Try buying or selling a half-
billion of anything in another market and see how prices react.

GETTING INSIDE THE NUMBERS

33 | P a g e
Average daily currency trading volumes exceed $2 trillion per day. It’s
about 10 to 15 times the size of daily trading volume on the entire world’s
stock market combined. That $2- trillion-a- day number, which you may
have seen in the financial press or other books on currency trading,
actually overstates the size of what the forex market is all about- spot
currency trading.

TRADING FOR SPOT


Spot refers to the price where you can buy or sell currencies now, as in
“on the spot”. If you are familiar with stock trading, the price you can
trade at is essentially a spot price. Technically, the term refers to the
nearest settlement date on which a transaction can be made and is
primarily meant to differentiate spot, or cash, trading from futures
trading, or trading for some future delivery date. The spot currency
market is normally traded for settlement in two business days.

The bank for international settlements (BIS), the international supervisory


body for banks around the world, surveys forex market volumes every
three years. The 2004 BIS survey (the most recent available) revealed a
daily spot-trading volume of about $620 billion, with another $100+
billion in estimated gaps due to reporting. The rest of the volume that
makes up the $2 trillion figure is comprised of swap and outright forward
currency trading (trades made for settlement dates other than spot).

SPECULATING IN CURRENCY MARKET


While commercial and financial transactions in the currency markets
represent huge nominal sums, they still pale in comparison to amounts
based on speculation. By far the vast majority of currency trading volume
is based on speculation- traders buying and selling for short- term gains
based on minute-to-minute, hour-to-hour, and day-to-day price
fluctuations.

Estimates are that upwards of 90 percent of daily trading volume is


derived from speculation (meaning, commercial or investment-based FX
trades account for less than 10 percent of daily trading volume). The
depth and breadth of the speculative market means that the liquidity of
the overall forex market is unparalleled among global financial markets.

34 | P a g e
The bulk of spot currency trading, about 75 percent by volume, takes
place in the so-called “major currencies”, which represent the world’s
largest and most developed economies. Trading in the major currencies is
largely free from government regulation and takes place outside the
authority of any national or international body.

GETTING LIQUID WITHOUT GETTING SOAKED

Liquidity refers to the level of market interest- the level of buying and
selling volume- available at any given movement for a particular asset or
security. The higher the liquidity, or the deeper the market, the faster and
easier it is to buy or sell a security.

From a trading perspective, liquidity is a critical consideration because it


determines how quickly prices move between trades and over time. A
highly liquid market like forex can see large trading volumes transacted
with relatively minor price changes. An illiquid, or thin market will tend to
see prices move more rapidly on relatively lower trading volumes. a
market that only trades during certain hours( futures contracts, for
example) also represents a less liquid, thinner market.

AROUND THE WORLD IN A TRADING DAY


The forex market is open and active 24 hours a day from the start of
business hours on Monday morning in the Asia Pacific Time zone straight
through to the Friday close of business hours in New York. At any given
movement, depending on the time zone, dozens of global financial
centres- such as Sydney, Tokyo, or London- are open, and currency
trading desks in those financial centres are active in the market.

In addition to the major global financial centres, many financial


institutions operate 24-hour-a-day currency trading desks, providing an
ever-present source of market interest. It may be a U.S. hedge fund in
Boston that needs to monitor currencies around the clock, or it may be a
major international bank with a concentrated global trading operation in
one financial sector.

Currency trading doesn’t even stop for holidays when other financial
markets, like stocks or futures exchanges, may be closed. Even though
it’s a holiday in Japan, for example, Sydney, Singapore, and Hong Kong

35 | P a g e
may still be open. It might be the fourth of July in the United States, but if
it’s a business day, Tokyo, London, Toronto, and other financial centres
will still be trading currencies.

THE OPENING OF THE TRADING STOCK

There is no officially designated starting time to the trading day or week,


but for all intents the market action kicks off when Wellington, New
Zealand, the first financial centre west of the international dateline, opens
on Monday morning local time. Depending on whether daylight saving
time is in effect in your own time zone, it roughly corresponds to early
Sunday afternoon in North America, Sunday evening in Europe, and very
early morning in Asia.

The Sunday open represents the starting point where currency markets
resume trading after the Friday close of trading in North America( 5 p.m.
eastern time). This is the first chance for the forex market to react to
news and events that may have happened over the weekend. Prices may
have closed New York trading at one level, but depending on the
circumstances, they may start trading at different levels at the Sunday
open.

As a trading consideration, individual traders need to be aware of the


weekend gap risk and know what events are scheduled over the
weekend. There’s no fixed set of potential events and there’s never any
way of ruling out what may transpire, such as a terror attack, a
geopolitical conflict, or a natural disaster.

TRADING IN ASIA-PACIFIC SESSION

Currency trading volumes in the Asia- pacific session account for about 21
percent of total daily volume, according to the 2004 BIS survey. The
principal financial trading centers are Wellington, New Zealand, Sydney,
Australia, Tokyo, Japan, Hong Kong and Singapore.

The overall trading direction for the NZD, AUD, and JPY can be set for the
entire session depending on what news and data reports are released and
what they indicate.

36 | P a g e
In addition news from China, such as interest rate changes and official
comments or currency policy adjustments, may also be released.
Occasionally as well, late speakers from the United States, such as
Federal Reserve officials speaking on the West Coast of the United States,
may offer remarks on the U.S. economy or the direction of U.S. interest
rates that affect the value of the U.S. dollar against major currencies.

For individual traders, overall liquidity in the major currency pairs is more
than sufficient, with generally orderly price movements. In some most
liquid, non- regional currencies, like GBP/USD or USD/CAD, price
movements may be more erratic or nonexistent, depending on the
environment.

TRADING IN THE EUROPEAN/ LONDON SESSION


About midway through the Asian trading day, European financial centers
begin to open up and the market gets into its full swing. European
financial centers and London account for over 50 percent of total daily
global trading volume, according to the 2004 BIS survey.

The European session overlaps with half of the Asian trading day and half
of the North American trading session, which means that market interest
and liquidity is at its absolute peak during this session. Asian trading
centers begin to wind down in the late- morning hours of the European
session and North American financial centers come in a few hours later,
around 7 a.m.

KEY DAILY TIMES AND EVENTS


• Expiry options
Currency options are typically set to expire either at the Tokyo
expiry (3 p.m. Tokyo time) or the New York expiry (10 a.m.). The
New York option expiry is the most significant one, because it tends
to capture both European and North American option market
interest. When an option expires, the underlying option ceases to
exist. Any hedging in the spot market that was done based on the
option being alive suddenly needs to be unwound, which can trigger

37 | P a g e
significant price changes in the hours leading up to and just after
the option expiry time.
The amount and variety of currency option interest is just too large
to suggest any single way that spot prices will always react around
the expiry ( there may not even be any significant option interest
expiring on many days), but you should be aware that option-
related interest is most in evidence around the daily expiries.

• Setting the rate at currency fixings


There are several daily currency fixings in various financial centres,
but the two most important are the 8:55 a.m. Tokyo time and the 4
p.m. London time fixings. A currency fixing is a set time each day
where the prices of currencies for commercial transactions are set,
or fixed.
From a trading standpoint, these fixings may see a flurry of trading
in a particular currency pair in the run-up (generally 15 to 30
minutes) to the fixing time that abruptly ends exactly at the fixing
time. A sharp rally in a specific currency pair on fixing-related
buying, for example, may suddenly come to an end at the fixing
time and see the price quickly drop back to where it was before.

• Squaring up the currency future markets


The Chicago mercantile exchange (CME), one of the largest future
markets in the world, offers currency futures through its
international Monetary Market (IMM) subsidiary exchange. Daily
currency futures trading close each day on the IMM at 2 p.m.
central time (CT), which is 3 p.m.ET. Many futures traders like to
square up or close any open positions at the end of each trading
session to limit their overnight exposure or for margin
requirements.

The 30 to 45 minutes leading up to the IMM closing occasionally


generates a flurry of activity that spills over into the spot market.
Because the amount of liquidity in the spot currency market is at its
lowest in the New York afternoon, sharp movements in the futures
markets can drive the spot market around this time. There’s no
reliable way to tell if or how the IMM close will trigger a move in the
New York afternoon spot market, so you just need to be aware of it
and know that it can distort prices in the short term.

38 | P a g e
THE U.S. DOLLAR INDIEX
The U.S. dollar index is a futures contract listed on the New York
Board of Trade (NYBOT) and Dublin- based financial instruments
exchange (FINEX) futures exchanges. The dollar index is an average
of the value of the U.S. dollar against a basket of six other major
currencies, but it’s heavily weighted toward European currencies.

The exact weightings of other currencies in the U.S. dollar index are
• Euro: 57.6 percent
• Japanese yen: 13.6 percent
• British pound: 11.9 percent
• Canadian dollar: 9.1 percent
• Swedish krona: 4.2 percent
• Swiss franc: 3.6 percent

The European currency share of the basket- Euro zone, United


Kingdom, Sweden, and Switzerland- totals 77.3 percent.

CURRENCIES AND OTHER FINANCIAL MARKETS


As much as we like to think of the forex market as the be-all and
end-all of financial trading markets, it doesn’t exist in vacuum.
There are some markets like gold, oil, stocks, and bonds.

GOLD
Gold is commonly viewed as a hedge against inflation, an
alternative to the U.S. dollar, and as a store of value in times of
economic or political uncertainty. Over the long term, the
relationship is mostly inverse, with a weaker USD generally
accompanying a higher gold price, and a stronger USD coming with
a lower gold price. However, in the short run, each market has its
own dynamics and liquidity, which makes short-term trading
relationships generally tenuous.
Overall, the gold market is significantly smaller than the forex
market, so if we were gold traders, we would sooner keep an eye on
what’s happening to the dollar, rather than the other way around.

39 | P a g e
With that noted, extreme movement in gold prices tend to attract
currency traders attention and usually influence the dollar in a
mostly inverse fashion.

OIL
A lot of misinformation exists on the internet about the supposed
relationship between oil and the USD or other currencies, such as
CAD or JPY. The idea is that, because some countries are oil
producers, their currencies are positively (or negative) affected by
increases (or decreases) in the price of oil. If the country is an
importer of oil (and which countries aren’t today?)

The best way to look at oil is an inflation input and as a limiting


factor on overall economic growth. The higher the price of oil, the
higher inflation is likely to be and the slower an economy is likely to
grow. The lower the price of oil, the lower inflationary pressures are
likely (but not necessarily) to be.

STOCKS
Stocks are micro economic securities, rising and falling in response
to individual corporate results and prospects, while currencies are
essentially macroeconomic securities, fluctuating in response to
wider- ranging economic and political developments. As such there
is a little intuitive reason that stock markets should be related to
currencies. Long term correlation studies bear this out, with
correlation coefficients of essentially zero between the major USD
pairs and U.S. equity markets over the last five years.
The two markets occasionally intersect, though this is usually only
at the extremes and for very short periods.

BONDS
Fixed income or bond markets have a more intuitive connection to
the forex market because they are both heavily influenced by
interest rate expectations. However, short term market dynamics of
supply and demand interrupt most attempts to establish a viable
link between the two markets on a short term basis. Sometimes the
forex market reacts first and fastest depending on shifts in interest
rate expectations. At other times, the bond market more accurately
reflects changes in interest rate expectations, with the forex market
later playing catch-up

40 | P a g e
(Because it takes longer to turn a bigger ship around).

GETTING STARTED WITH THE TRADING ACCOUNT


For newcomers to currency trading, the best way to get handle on
what currency trading is all about is to open a practice account at
any online forex brokers. Most online brokers offer practice
accounts to allow you to experience the real- life price action of the
forex market. Practice accounts are funded with “virtual money, so
you are able to make trades with no real money at stake and gain
experience in how margin trading works.
Practice accounts give you a great chance to experience the
minute-to-minute price movements of the forex market. You all be
able to see how prices change at different times of the day, as well
as how various currency pairs may differ from each other.
How the forex market really moves, you can
• Start trading in real market conditions without any fear of
losing money.
• Experiment with different trading strategies to see how they
work.
• Gain experience using different orders and managing open
positions.
• Improve your understanding of how margin trading and
leverage work.
• Start analyzing charts and following technical indicators.

Chapter3

Who trades currencies?

Meet the players


The forex market is regularly referred to as the largest financial market in
the world based on trading volumes. But this massive market was
unknown and unavailable to most individual traders and investors until
the start of this decade. That leaves a lot of the people in the dark when it
comes to exactly what the currency market is: how it’s organized, who’s
trading it, and why.

THE INTERBANK MARKET IS “THE MARKET”

41 | P a g e
When people talk about the “currency market”, they are referring to the
interbank market, whether they realize it or not. The interbank market is
where the really big money changes bands. Minimum trade sizes are one
million of the basic currency, such as euro 1 billion of EUR/USD or $ 1
million of USD/JPY. Much large trades of between $10 million and $100
million are routine and can go through the market in a matter of seconds.
Even larger trades and orders are a regular feature of the market. For the
individual trading FX online, the prices you see on your trading platform
are based on the prices being traded in the interbank market. The sheer
size of interbank market is what helps makes it such a great trading
market, because investors of every size are able to act in the market,
usually without significantly affecting prices. It’s one market where we
would say size really doesn’t matter. We have seen spot traders be right
with million-dollar bets, and sophisticated hedge funds be wrong with
half-billion-dollar bets.

GETTING INSIDE THE INTERBANK MARKET


So what is the interbank market and where did it come from? The forex
market originally evolved to facilitate trade and commerce between
nations. The leading international commercial banks, which financed
international trade through letters of credit and bankers acceptances,
were the natural financial institutions to act as the currency exchange
intermediary. They also had the foreign branch network on the ground in
each country to facilitate the currency transfers needed to settle FX
transactions.

Currency futures markets operate alongside the interbank market, but


they are definitely the tail being waged by the dog of the spot market. As
a market currency futures are generally limited by exchange-based
trading hours and lower liquidity than is available in the spot market.

BANK TO BANK AND BEYOND


The interbank market is a network of international banks operating in
financial centers around the world. The banks maintain trading operations
to facilitate speculation for their own accounts, called proprietary trading
or just prop trading in short, and to provide currency trading services for
their customers. Bank’s customers can range from corporations and
government agencies to hedge funds and wealthy private individuals.

42 | P a g e
TRADING IN INTERBANK MARKET
The interbank market is an over-the-counter (OTC) market, which means
that each trade is an agreement between the two counterparties to the
trade. There are no exchanges or guarantors for the trades, just each
bank’s balance sheet and the promise to make payment. The bulk of spot
trading in the interbank market is transacted through electronic matching
services, such as EBS and Reuters Dealing. Electronic matching services
allow traders to enter their bids and offers into the market, hit bids ( sell
at the market), and pay offers ( buy at the market). Price spreads vary by
currency pair and change throughout the day depending on market
interest and volatility.

The matching systems have pre-screened credit limits and a bank will
only see prices available to it from approved counterparties. Pricing is
anonymous before deal, meaning you can’t tell which bank is offering or
bidding, but the counterparties names are made known immediately after
a deal goes through. The rest of the interbank trading is done through
currency brokers, referred to as voice brokers to differentiate them from
the electronic ones. Traders can place bids and offers with these brokers
the same as they do with the electronic matching services. Prior to the
electronic matching services, voice brokers were the primary market
intermediaries between banks.

STEPPING ONTO A CURRENCY TRADING FLOOR


Interbank trading rooms are staffed by a variety of different market
professionals and each has a different role to play. The typical currency
trading room has

• Flow traders: sometimes called execution traders, these are the


market makers, showing two-way prices at which to buy or sell, for
the bank’s customers. If the customer makes a trade, the execution
trader then has to cover the resulting deal in the interbank market,
hopefully at a profit. These traders are also responsible for
watching and executing customer orders in the market. These are

43 | P a g e
the traders who are generating most of the electronic prices and
price action.

• Proprietary traders: these traders are focused on speculative


trading for the bank’s own account. Their strategies can run the
gamut from short term day trading to longer-term macroeconomic
bets.

• Forward traders: are active in the forward currency market,


which refers to trades made beyond the normal spot value date.
The forward market is essentially an interest rate differential
market, where the interest rates of the various currencies are
traded.

• Options traders: they manage the bank portfolio or book of


outstanding currency options. They hedge the portfolio in the spot
market, speculate for the bank’s own account with option
strategies, and provide pricing to the bank’s customers on
requested option strategies.

• Sales staff: The sales staff acts as the intermediary between the
trading desk and the bank’s customers. They advise the bank’s
customers on market flow, as well as who’s buying and selling;
recommend spot and option trading strategies; and execute trades
between the bank and its customers.

HEDGERS AND FINANCIAL INVESTORS


The forex market sits at the crossroads of global trade and
international finance and investing. Whether it’s a U.S.
conglomerate managing its foreign affiliate’s balance sheets or a
German mutual fund launching an international stock fund, they all
have to go through the forex market at some point.

Financial transactors are important to the forex market for several


reasons:

44 | P a g e
• Their transactions can be extremely sizeable, typically
hundreds of millions or billions.
• Their deal is frequently one-time events.
• They are generally not price sensitive or profit maximizing.

HEDGING YOUR BETS


Hedgers come in all shapes and sizes, but don’t confuse them will hedge
funds. Hedging is about eliminating or reducing risk. In financial
markets, hedging refers to a transaction designed to insure against an
adverse price move in some underlying asset. In the forex market,
hedgers are looking to insure themselves against an adverse price
movement in a specific currency rate.

1. Hedging for international trade purposes

Trade related hedging regularly comes into the spot market in two
main forms:
• At several of the daily currency fixings.
• Mostly in USD/JPY, where Japanese exporters typically have
large amounts of USD/ JPY to sell.

1. Hedging for currency options.

GLOBAL INVESTMENT FLOWS


One of the reasons forex market remain as lightly regulated as they are is
that no developed nation wants to impose restrictions on the flow of
global capital. International capital is the lifeblood of the developed
economies and the principal factor behind the rapid rise of developing
economies like China, Brazil, Russia, and India. The forex market is
central to the smooth functioning of international debt and equity

45 | P a g e
markets, allowing investors to easily obtain the currency of the nation
they want to invest in.

Cross brokers with mergers and acquisitions

Mergers and acquisitions activity is becoming increasingly international


and shows no sign of abating. International firms are now involved in a
global race to gain and expand market share and cross- border
acquisitions are frequently the easiest and fastest way to do that. When a
company seeks to buy a foreign business, there can be a substantial
foreign exchange implication from the trade.

SPECULATORS
Speculators are market acquisitions who are involved in the market for
one reason only: to make money. In contrast to hedgers, who have some
form of existing currency market risk, speculators have no currency risk
until they enter the market. Hedgers enter the market to neutralize or
reduce risk. Speculators embrace risk taking as a means of profiting from
long-term or short-term price movements.

Speculators are what really make a market efficient. They add liquidity to
the market by bringing their views and, most important, their capital into
the market. That liquidity is what smoothes out price movements, keeps
trading spreads narrow, and allows a market to expand. In the forex
market, speculators are running the show. Conventional market estimates
are that upwards of 90 percent of daily trading volume is speculative in
nature. If you are trading currencies for your own account, welcome to
the club. If you are trading to hedge a financial risk, you can thank the
specs for giving you a liquid market and reducing your transaction costs.

HEDGE FUNDS

46 | P a g e
Hedge funds are type of leveraged fund, which refers to any number of
different forms of speculative asset management funds that borrow
money for speculation based on real assets under management. For
instance a hedge fund with $100 billion under management can leverage
those assets to give them trading limits of anywhere from $500 million to
$ 2 billion. Hedge funds are subject to the same type of margin
requirements as you or we are, just with whole lots of zeros involved.

The other main type of leveraged fund is known as commodity trading


Advisor (CTA). A CTA is principally active in futures markets. But because
the forex market operates around the clock, CTAs frequently trade spot
FX as well. The major difference between the two types of leveraged
funds comes down to regulation and oversight. CTAs are regulated by the
Commodity Futures Trading Commission (CFTC), the same governmental
body that regulates retail FX firms. As a result, CTAs are subject to raft of
regulatory and reporting requirements. Hedge funds, on the other hand,
remain largely unregulated. What’s important is that they all pursue
similarly aggressive trading strategies in the forex market, treating
currencies as a separate asset class, like stock or commodities.

GOVERNMENTS AND CENTRAL BANKS


National governments are routinely active in forex market, but not for
purposes of attempting to realign or shift the values of the major
currencies. Instead, national governments are active in the forex market
for routine funding of government operations, making transfer payments,
and managing foreign currency reserves. The first two functions have
generally little impact on the day-to-day forex market.

CURRENCY RESERVE MANAGEMENT

It refers to how national governments develop and invest their foreign


currency reserves. Foreign currency reserves are accumulated through
international trade. Countries with large trade surpluses will accumulate
reserves of foreign currency over time. Trade surpluses arise when a
nation exports more than it imports. Because it is receiving more
currency for its exports than it is spending to buy imports, foreign
currency balances accumulate.

The problem is one of perception and also prudent portfolio


management:

47 | P a g e
1. The perception problem stems from the continuing growth of U.S.
deficits, which equates to your continually borrowing money from a
bank.
2. The portfolio-management problem arises from the need to
diversify assets in the name of prudence.

BANK FOR INTERNATIONAL SETTLEMENTS


The bank for international settlements is the central bank for central
banks. Located in Basel, Switzerland, the BIS also acts as the quasi
government regulator of the international banking system. It was BIS that
established the capital adequacy requirements for banks that today
underpin the international banking system. As the bank to national
governments and central banks, the BIS frequently acts as the market
intermediary of those nations seeking to diversify their currency reserves.
By going through the BIS, those countries can remain relatively
anonymous and prevent speculation from driving the market against
them.

THE GROUP OF SEVEN


The group of seven, or G7, is composed of the seven largest developed
economies in the world: Canada, France, Germany, Italy, Japan, the
United Kingdom, and the United States. The G7 is the primary venue for
the major global powers to express their collective will on relative
currency values and the need for any adjustments. For forex markets, the
big guns of the G7 are the hottest game in town. Depending on
circumstances, currency values may be on the agenda for these meetings
and the communiqué, the official statement issued at the end of each
gathering, may contain an explicit indication for a desired shift among the
major currencies. If currencies are not a hot- button topic, the G7 will
include a standard boilerplate statement that currencies should reflect
economic fundamentals and that excessive currency volatility is
undesirable. The power of G7 statements lies in the perception that all
the participants are in agreement with what is contained in the
communiqué. Most important, it is seen as giving the market a green light
to carry out the G7’s expressed wishes. If the G7indicates that a recently

48 | P a g e
weak currency is not reflecting fundamentals, for example, it’s a signal to
the market that the G7 would like to see that currency appreciate.

Chapter 4
The mechanics of currency trading

BUYING AND SELLING SIMULTANEOUSLY


The biggest mental hurdle facing newcomers to currencies,
especially trader’s familiar with other markets, is getting their head
around the idea that each currency trade consists of a simultaneous
purchase and sale. In the stock market, for instance, if you buy 100
shares of Google, it’s pretty clear that you now own 100 shares and
hope to see the price go up. When you want to exit that position,
you simply sell what you bought earlier. But in currencies, the
purchase of one currency involves the simultaneous sale of another
currency. This is the exchange in foreign exchange. To put it
another way, if you are looking for a dollar to go higher, the
question is “higher against what?” the answer has to be the other
currency. In relative terms, if the dollar goes up against another
currency, it also means that the other currency has gone down
against dollar.

CURRENCIES COME IN PAIRS


Forex markets refer to trading currencies by pairs, with names that
combine the two different currencies being traded against each
other, or exchanged for one another. Additionally, forex markets
have given most currency nicknames or abbreviations, which
reference the pair and not necessarily the individual currencies
involved.

49 | P a g e
The U.S. dollar’s central role in the forex markets stems
from a few basic factors:
1. The U.S. economy is the largest national economy in the world.
2. The U.S. dollar is the primary international reserve currency.
3. The U.S. dollar is the medium of exchange for many cross-border
transactions.
4. The United States has largest and most liquid financial markets
in the world.
5. The United States is a global military superpower, with a stable
political system.

MAJOR CURRENCY PAIRS


The major currency pairs all involve the U.S. dollar on one side of
the deal. The designations of the major currencies are expressed
using international standardization organization (ISO) codes for
each currency. Currency names and nicknames can be confusing
when you are following the forex market or reading commentary
and research.

MAJOR CROSS CURRENCY PAIRS


Although the vast majority of currency trading takes place in the
dollar pairs, cross –currency pairs serve as an alternative to
always trading the U.S. dollar. A
Cross- currency pair, or cross or crosses for short, is any
currency pair that does not include the U.S. dollar. Cross rates
are derived from respective USD pairs but are quoted
independently and usually with a narrower spread than you
could get by trading in the dollar pairs directly. Crosses enable
traders to more directly target trades to specific individual
currencies to take advantage of news or events. For example,
your analysis may suggest that the Japanese yen has the worst
prospects of all the major currencies going forward, based on
interest rates or the economic outlook.
Cross trades are especially effective when major cross- border
mergers and acquisitions are announced. If a UK conglomerate is
buying a Canadian utility company, the UK Company is going to

50 | P a g e
need to sell GBP and buy CAD to fund the purchase. The key to
trading on M&A activity is to note the cash portion of the deal. If
the deal is all stock, then you don’t need to exchange currencies
to come up with the foreign cash.
The most actively traded crosses focus on the three major non-
USD currencies (namely EUR, JPY, and GBP) and are referred to
as euro crosses, yen crosses and sterling crosses. The remaining
currencies (CHF, AUD, CAD, and NZD) are also traded in cross
pairs.

PROFIT AND LOSS


Profit and loss (P &L) is how traders measure success and failure.
You don’t want to be looking at the forex market as some
academic or thrill- seeking exercise. Real money is made and
lost every minute of every day. If you are going to trade
currencies actively, you need to get up close and personal with
P&L.
A clear understanding of how P&L works is especially critical to
online margin trading, where your P&L directly affects the
amount of margin you have to work with.

MARGIN BALANCES AND LIQUIDATIONS


When you open an online currency trading account, you will
need to pony up cash as collateral to support the margin
requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the basis
on which all your subsequent trades are collateralized. Unlike
futures markets or margin- based equity trading, online forex
brokerages do not issue margin calls. Instead, they establish
ratios of margin balances to open positions that must be
maintained at all times.

UNREALIZED AND REALIZED PROFIT AND LOSS


Most online forex brokers provide real-time mark-to-market
calculations showing your margin balance. Mark-to-market is the
calculation that shows you unrealized P&L based on where you
could close your open positions in the market at that instant.
Depending on your broker’s trading platform, if you are long the
calculation will typically be based on where you could sell at that

51 | P a g e
movement. If you are short, the price used will be where you can
buy at that movement. Your margin balance is the sum of your
initial margin deposit, your unrealized P&L, and your realized
P&L.
Realized P&L is what you get when you chose out a trade
position, or a position of a trade position. If you close out the full
position and go flat, whatever you made or lost leaves the
unrealized P&L calculation and goes into your margin balance. If
you only close a portion of your open positions, only that part of
trade’s P&L is realized and goes into the trading balance. Your
unrealized P&L will continue to fluctuate based on the remaining
open positions and so will your total margin balance.

UNDERSTANDING ROLLOVERS AND INTERSET


RATES
One market unique to currencies is rollovers. A rollover is a
transaction where an open position from one value date
(settlement date) is rolled over into the nest value date.
Rollovers represent the intersection of interest-rate markets and
forex markets.

CURRENCY IS MONEY, AFTER ALL


Rollover rates are based on the difference in interest rates of the
two currencies in the pair you are reading. That’s because what
you are actually trading is good old-fashioned cash. That’s right:
currency is cold, hard cash with a fancy name. When you are
long a currency (cash), it’s like having a deposit in the bank. If
you are short currency (cash), it’s like having borrowed a loan.
Just as you would expect to earn interest on a bank deposit or
pay interest on a loan, you would expect an interest gain/
expense for holding a currency position over the change in
value.
The catch currency in currency trading is that if you carry over
an open position from one value date to the nest, you have two
bank accounts involved. Think of it as one account with a
positive balance (the currency you are long) and one with a
negative balance (the currency you are short). But because your
accounts are in two different currencies, the two interest rates of
the different countries will apply.

52 | P a g e
The difference between the interest rates in the two countries is
called the interest-rate differential. The larger the interest-rate
differential, the larger the impact from rollovers. The narrower
the interest- rate differential, the smaller the effect from
rollovers. So how do interest rates get turned into currency
rates? After all, interest rates are in percent and currency rates
are, well, not in percent. The answer is that deposit rates yield
actual returns, which are netted, producing a net cash return.
That net cash return is then divided by the net position size,
which gives you the currency pips, which is rollover rate.

UNDERSTANDING CURRENCY PRICES


Now we are getting down to the brass tasks of actually making
trades in the forex market. Before we get ahead of ourselves,
though, it’s critical to understand exactly how currency prices
work and what they mean to you as a trader. Keep in mind that
different online forex brokers use different formats to display
prices on their trading platforms. A thorough picture of what the
prices mean will allow you to navigate different broker’s
platforms and know what you are looking at.

Bids and offers


When you are in the front of your screen and looking at an online
forex broker’s trading platform, you will see two prices for each
company pair. The price on the left-hand side is called the bid
and the price on the right hand side is called the offer (some call
this the ask). Some brokers display the prices above and below
each other, with the bid o the bottom and the offer on the top.
The easy way to tell the difference is that the bid price will
always be lower than the offer price.
The price quotation of each bid and offer you see will have two
components: the big figure and the dealing price.

SPREADS
A spread is the difference between the bid price and the offer
price. Most online brokers utilize spread- based trading platforms
for individual traders. In one sense you can look at the spread as
the commission that the online brokers charge for executing
your trades. So even if they say you are commission free, they

53 | P a g e
may be earning difference when one trader sells at the bid price
and another trader buys at the offer price. Another way to look
at the spread is that it’s the compensation the broker receives
for being the market-maker and providing a regular two-way
market.

EXECUTING A TRADE
There are two main ways of executing trades in the FX market:
live trades and orders. If you are an adrenaline junkie, don’t
focus only on the “ live dealing” section- the orders section gives
you a plenty of juice to keep you going, too.

TRADING ONLINE

Clicking and dealing


Most forex brokers provide live streaming prices that you can
deal on with a simple click of your computer mouse. On these
platforms to execute a trade:
1. Specify the amount of the trade you want to make.
2. Click on the buy or sell button to execute the trade you want.

The forex trading platform will respond back, usually within


second or two, to let you know whether the trade went
through:
• If the trade went through, you will see the trade and
your new position appear in your platform’s list of
trades.
• If the trade failed because of a price change, you need
to start again from the top.
• If the trade failed because the trade was too large
based on your margin, you need to reduce the size f the
trade.

When the trade goes through, you have a position in


the market and you will see your unrealized P&L, begin
updating according to market price fluctuations.

54 | P a g e
Here are the parameters that you
can usually set up in advance:

✔ Present trade amounts


✔ Automatic stop-loss orders at a predetermined
distance from the trade- entry price.
✔ Square buttons

Some online brokers advertise narrower trading


spreads as a way to attract traders. If you click-
and-deal trade attempts frequently fail, and the
platform then asks if you would like to make the
trade at a worse price, you are probably being re-
quoted.

PHONE TRADING
Placing live trades over the phone is available from most online forex
brokers. You need to find from your broker whether it offers this service
and exactly what its procedures are before you can ready to use it.

To place a trade over the phone, you will need to:

1. Call the telephone number at your broker for placing a trade.


2. When you are connected to a representative, identity yourself by
name and give your trading account number.
3. Ask what the current price is for the currency pair you are trading.
4. If you don’t want the price, say, “NO, thank you”.
5. If you want the price, specify exactly what trade you would like to
make.
6. Confirm with your broker exactly what trade you just made.
7. Get the name of the broker’s representative you just made the
trade with in case you have to call back.

ORDERS

55 | P a g e
Currency traders use orders to catch market movements when they are
not in front of their screens. The forex market is open 24hours a day. A
market move is just as likely to happen while you are asleep or in the
shower as it is while you are watching your screen. If you are not a full-
time trader, then you have to probably get a full-time job that requires
your attention when you are at work- at least your boss hopes he has
your attention.

Experienced currency traders also routinely use orders to:

✔ Implement a trade strategy from entry to exit.


✔ Capture sharp, short-term price fluctuations.
✔ Limit risk in volatile or uncertain markets.
✔ Preserve trading capital from unwanted losses.
✔ Maintain trading discipline.
✔ Protect profits and minimize losses.

TYPES OF ORDERS

1. Take –profit orders


An order used by currency traders specifying the exact rate or number of pips from
the current price point where to close out their current position for a profit. The rate
deemed to be the level where the trader wants to take a profit is sometimes referred
to as the "take-profit point".
As the name suggests, take-profit orders are used to lock in profits in the event the
rate moves in a favourable direction. For example, if you are long a currency pair
position and believe the price will rise to a certain level, but are unsure what it will
do beyond that level, placing a take-profit order at that point will automatically close
out your position allowing you to lock in profit.
Place a take-profit order at 108.80. Price then rises from 107.40 to 108.80 Take-
profit order automatically executed to sell $100 and buy 10,880 yen
Profit of 140 yen realized.

2. Limit orders
To avoid buying or selling a stock at a price higher or lower than you wanted, you
need to place a limit order rather than a market order. A limit order is an order to buy
or sell a security at a specific price. A buy limit order can only be executed at the

56 | P a g e
limit price or lower, and a sell limit order can only be executed at the limit price or
higher. When you place a market order, you can't control the price at which your
order will be filled.
For example, if you want to buy the stock of a "hot" IPO that was initially offered at
$9, but don't want to end up paying more than $20 for the stock, you can place a limit
order to buy the stock at any price up to $20. By entering a limit order rather than a
market order, you will not be caught buying the stock at $90 and then suffering
immediate losses if the stock drops later in the day or the weeks ahead.

3. Stop loss orders


What does stop loss order Mean?
An order placed with a broker to sell a security when it reaches a certain price. It is
designed to limit an investor's loss on a security position.

Also known as a "stop order" or "stop-market order".


In other words, setting a stop-loss order for 10% below the price you paid for the
stock would limit your loss to 10%.

It's also a great idea to use a stop order before you leave for holidays or enter a
situation in which you will be unable to watch your stocks for an extended period of
time.

A stop loss is an order to buy (or sell) a security once the price of the security climbed
above (or dropped below) a specified stop price. When the specified stop price is
reached, the stop order is entered as a market order (no limit) or a limit order (fixed or
pre-determined price).

With a stop order, the trader does not have to actively monitor how a stock is
performing. However because the order is triggered automatically when the stop price is
reached, the stop price could be activated by a short-term fluctuation in a security's
price. Once the stop price is reached, the stop order becomes a market order or a limit
order.

4. Trading stop loss orders


A stop loss is an order that is sold automatically if the currency
trading venture you invest in reaches a certain price, preventing
more losses to occur. When you place a stop order, you need to set
an exit point, to happen if the trade losses a specific value. The stop
order is basically what it sounds like, it stops your losses and lowers
your risks, and so even if the trading in foreign currency fails to
make a profit, your investment is relatively safe.

57 | P a g e
Chapter 5
Getting to know the major currency pairs
The vast majority of trading volume in the major currency pairs:
EUR/USD, GBP/USD, and USD/CHF. These currency pairs account for
about two-thirds of daily trading volume in the market and are the
most watched barometers of the overall forex market. When you
hear about the dollar rise and falling, it’s usually referring to the
dollar against these other currencies.
Even though these four pairs are routinely grouped together as the
major currency pairs, each currency pair represents an individual
economic and political relationship. It’s important to understand of
how different pairs rates move. Most currency trading is very short-
term in nature, typically from a few minutes to few days. This
makes understanding a currency pair’s price action a key
component of any trading strategy.

THE BIG DOLLAR: EUR/USD

58 | P a g e
EUR/USD is by far the most actively traded currency pair in the
global forex market. The same goes for the big banks. Every major
desk has at least one, and probably several, EUR/USD traders. This
is in contrast to less liquid currency pairs such as GBP/USD or
AUD/USD, for which trading desks may not have dedicated trader.
All those EUR/USD traders add up to vast amounts of market
interest, which increases overall trading liquidity.

TRADING FUNDAMENTALS OF EUR/USD


EUR/USD is the currency pair that pits the U.S. dollar against the
single currency of Euro zone, the euro. The Euro zone refers to a
grouping of countries in the European Union (EU) that in 1999
retired their own national currencies and adopted a unified single
currency. The move to a single currency was the culmination of
financial unification efforts by the founding members of the
European Union. In adopting the single currency, the nations agreed
to abide by fiscal policy constraints that limited the ratio of national
budget deficits to gross domestic product among other
requirements.

TRADING EUR/USD BY THE MEMBERS


Standard market convention is a quote EUR/USD in terms of the
number of USD per EUR. For example, a WUR/USD rate of 1.3000
means that it takes $1.30 to buy 1 euro. EUR/USD trades inversely
to the overall value of the USD, which means when EUR/USD goes
up, the euro is getting stronger and the dollar weaker. When
EUR/USD goes down, the euro is getting weaker and the dollar
stronger. If you believed the U.S. dollar was going to move higher,
you are looking to sell EUR/USD. If you thought the dollar was going
to weaken, you would be looking to buy EUR/USD.

59 | P a g e
EUR/USD has the euro as the base currency and the U.S. dollar as
the secondary or counter currency. That means
✔ EUR/USD is traded in amounts denominated in Euros.
✔ The pip value, or minimum price fluctuation, is denominated
in USD.
✔ Profit and loss accrue in USD.
✔ Margin calculations in online trading platforms are typically
based in USD.

SWIMMING IN DEEP LIQUIDITY


Liquidity in EUR/USD is based on a variety of fundamental sources, such
as

✔ Global trade and asset allocation.


✔ Central bank credibility.
✔ Enhanced status as a reserve currency.

WATCHING THE DATA REPORTS


✔ European central bank (ECB) interest rate decisions and press
conferences after ECB Central Council meetings.
✔ Speeches by ECB officials and individual European finance
ministers.
✔ EU-harmonized Consumer price index (CPI), as well as national CPI
and Producer Price Index (PPI) reports.
✔ Industrial production.
✔ Retail sales.
✔ Unemployment rates.

TRADING BEHAVIOR OF EUR/USD


The price action behaviour in EUR/USD regularly exhibits a number of
traits that traders should be aware of:

60 | P a g e
✔ Trading tick by tick.
✔ Fewer price jumps and smaller price gaps.
✔ Backing and filling.

TACTICAL TRADING CONSIDERATIONS IN EUR/USD


✔ Deciding whether it’s a U.S. dollar move or a euro move.
✔ Being patient in EUR/USD.
✔ Taking advantage of backing and filling.
✔ Allowing for a margin of error on technical levels.

TRADING USD/JPY BY THE NUMBERS


USD/JPY has the U.S. dollar as the base currency and the JPY as the
secondary or counter currency. This means

✔ USD/JPY is traded in amounts denominated in USD.


✔ The pip value, or minimum price fluctuation, is denominated in JPY.
✔ Profit or loss accrues in JPY.
✔ Margin calculations are typically calculated in USD.

IMPORTANT JAPANESE DATA REPORTS


✔ Industrial production.
✔ Machine orders.
✔ Trade balance and current account.
✔ Retail trade.
✔ Bank lending.
✔ Domestic corporate goods price index (CGPI).
✔ National CPI and Tokyo-area CPI.
✔ All- industry activity index and tertiary industry activity index.

TACTICAL TRADING CONSIDERATIONS IN USD/JPY

61 | P a g e
✔ Actively trading trend-line and price-level breakouts.
✔ Jumping on spike reversals.
✔ Monitoring EUR/JPY and other JPY crosses.

TRADING FUNDAMENTALS OF GBP/USD


✔ GBP/USD is traded in amounts denominated in GBP.
✔ The pip value, or minimum price fluctuation, is denominated in USD.
✔ Profit and loss accrue in USD.
✔ Margin calculations are typically calculated in USD in online trading
platforms.

PRICE ACTION BEHAVIOR IN GBP/USD AND USD/CHF

✔ Price action tends to be jumpy, even in normal markets.


✔ Price action tends to see one-way traffic in highly directional
markets.
✔ False breaks of technical levels occur frequently.

TACTICAL TRADING CONSIDERATIONS IN GBP/USD and


USD/CHF
✔ Reducing position size relative to margin.
✔ Allowing to greater margin of error on technical breaks.
✔ Being quick on the trigger.
✔ Picking your spots wisely.

Chapter 6

Minor currency pairs and cross- currency trading

62 | P a g e
TRADING USD/CAD BY THE NUMBERS
USD/CAD has the USD as the primary currency and the CAD as the
counter currency. This means

✔ USD/CAD is traded in amounts denominated in USD.


✔ The pip value, or minimum price fluctuation, is denominated in CAD.
✔ Profit and loss register in CAD.
✔ Margin calculations are typically based in USD, so to see how much
margin is required to hold position in USD/CAD its simple calculation
using leverage ratio.

TRADING AUD/USD BY THE NUMBERS


AUD is the primary currency in the pair, and the USD is the counter
currency, which means

✔ AUD/USD is traded in amounts denominated in AUD.


✔ The pip value is denominated in USD.
✔ Profit or loss accrues in USD.
✔ Margin calculations are typically in USD on online trading platforms.

TRADING NZD/USD BY THE NUMBERS


✔ NZD/USD is traded position sizes denominated in NZD.
✔ The pip value is denominated in USD.
✔ Profit and loss accrues in USD.
✔ Margin calculations are typically based in USD on margin trading
platforms.

CROSS CURRENCY PAIR


A cross currency pair is any currency pair that does not have the U.S.
dollar as one of the currencies in the pairing. For example, one of the

63 | P a g e
most active crosses is EUR/JPY, pitting the two largest currencies outside
the U.S. dollar directly against each other. But the EUR/JPY rate at any
given instant is a function of the current EUR/USD and USD/JPY rates.

The most popular cross pairs involve the most actively traded major
currencies, like EUR/GBP, EUR/GBP, and EUR/CHF. According to the 2004
BIS survey of foreign exchange market activity, direct cross trading
accounted for a relatively small percentage of global daily volume-less
than 10 percent for the major crosses combined.

WHY TRADE THE CROSSES?


Cross pairs represent entirely new sets of routinely fluctuating currency
pairs that offer another universe of trading opportunities beyond the
primary USD pairs. Developments in the currency market are not always
a simple but on what’s happening to the U.S. dollar. Crosses are the other
half of the story, and their significance appears to be increasing
dramatically as a result of electronic trading.

Cross trading offers the following advantages:


✔ You can pinpoint trade opportunities based on news or
fundamentals.
✔ You can take advantage of interest-rate differentials.
✔ You can exploit technical trading opportunities.
✔ You can expand the horizon of trading opportunities.
✔ You can go with the flow.

64 | P a g e
CHAPTER 7

CURRENCY FUTURES

DEFINATION OF CURRENCY FUTURES

A futures contract is a standardized contract, traded on an exchange, to buy or sell a


certain underlying asset or an instrument at a certain date in the future, at a specified
price. When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is
termed a “commodity futures contract”. When the underlying is an exchange rate, the
contract is termed a “currency futures contract”. In other words, it is a contract to
exchange one currency for another currency at a specified date and a specified rate in
the future. Therefore, the buyer and the seller lock themselves into an exchange rate for
a specific value or delivery date. Both parties of the futures contract must fulfil their
obligations on the settlement date.

Currency futures can be cash settled or settled by delivering the respective obligation of
the seller and buyer. All settlements however, unlike in the case of OTC markets, go
through the exchange.

Currency futures are a linear product, and calculating profits or losses on Currency
Futures will be similar to calculating profits or losses on Index futures. In determining
profits and losses in futures trading, it is essential to know both the contract size (the
number of currency units being traded) and also what the tick value is. A tick is the
minimum trading increment or price differential at which traders are able to enter bids
and offers. Tick values differ for different currency pairs and different underlying. For
e.g. in the case of the USD-INR currency futures contract the tick size shall be 0.25paise
or 0.0025 Rupees.

FUTURES TERMINOLOGY
• Spot price: The price at which an asset trades in the spot market. In
the case of USDINR, spot value is T + 2.

• Futures price: The price at which the futures contract trades in the
futures market.

• Contract cycle: The period over which a contract trades. The currency
future contracts on the NSE have one- month, two-month, three-month
upto twelve month expiry cycles. Hence the NSE will have 12 contracts
outstanding at any given point of time.

• Value date/final settlement date: The last business day of the


month will be termed the value date/ final settlement date of each
contract. The last business day would be taken to be the same as that
for inter-bank settlement in Mumbai. The rules for Inter-bank

65 | P a g e
settlements, including those for’ known holidays’ and ‘subsequently
declared holiday’ would be those as laid down by FEDAI(Foreign
Exchange Dealers Association of India).

• Expiry date: It is the date specified in futures contract. This is the last
day on which contract will be traded, at the end of which it ceases to
exist. The last trading day will be two business days prior to the value
date/final settlement date.

• Contract size: the amount of asset that has to be delivered under one
contract. Also called as a lot size.

• Basis: in the context of financial futures, basis can be defined as the


futures price minus the spot price. There will be a different basis for
each delivery month for each contract. In the normal market, basis will
be positive. This reflects that futures prices normally exceed spot prices.

• Cost of carry: The relationship between the spot prices and future
prices can be summarized as the cost of carry. This measures the
storage cost plus the interest that is paid to finance or carry the asset till
delivery less the income earned on the asset. For equity derivatives
carry cost is the rate of interest.

• Initial margin: The amount that must be deposited in the margin


account at the time a futures contract is first entered into is known as
initial margin.

• Marking-to-market: In the futures market, at the end of each


trading day, the margin account is adjusted to reflect the investor’s gain
or loss depending upon the futures closing price. This is called as
marking-to-market.

• Maintenance margin: this is somewhat lower than the initial margin.


This is set to assure that the balance in the margin account never
becomes negative. If the balance in the margin account falls below the
maintenance margin, the investor receives a margin call and is expected
to top up margin account to the initial margin level before trading
commences on the next day.

RATIONALE FOR INTRODUCING CURRENCY FUTURES


Futures markets were designed to solve the problems that exist in forward markets. A
future market is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain place. But unlike forward contracts, the future contracts
are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. A futures contract is
standardized contract with standard underlying instrument, a standard quality and
quality of the underlying instrument that can be delivered, ( or which can be use for
references purposes in the settlement) and a standard timing of such settlement.

The standardized items in a futures contract are:


• Quantity of underlying.

66 | P a g e
• Quality of underlying.

• The date and month of delivery.

• The units of price quotation and minimum price change.

• Location of settlement.

The rationale for introducing currency futures in the Indian context has been outlined in
the Report of the Internal Working Group on Currency Futures (Reserve Bank of India,
April 2008) as follows;
The rationale for establishing the currency futures market is manifold. Both residents
and non-residents purchase domestic currency assets. If the exchange rate remains
unchanged from the time of purchase of the asset to its sale, no gains and losses are
made out of currency exposures.

But if domestic currency depreciates (appreciates) against the foreign currency, the
exposure would result in gain (loss) for residents purchasing foreign assets and loss
(gain) for non residents purchasing domestic assets. In this backdrop, unpredicted
movements in exchange rates expose investors to currency risks. Currency futures
enable them to hedge these risks. Nominal exchange rates are often random walks with
or without drift, while real exchange rates over long run are mean reverting. As such, it

is possible that over a long – run, the incentive to hedge currency risk may not be large.
However, financial planning horizon is much smaller than the long-run, which is typically
inter-generational in the context of exchange rates. As such, there is a strong need to
hedge currency risk and this need has grown manifold with fast growth in cross-border
trade and investments flows. The argument for hedging currency risks appear to be
natural in case of assets, and applies equally to trade in goods and services, which
results in income flows and lags and get converted into different currencies at the
market rates.
Empirically, changes in exchange rate are found to have very low correlations with
foreign equity and bond returns. This in theory should lower portfolio risk. Therefore,
sometimes argument is advanced against the need for hedging currency risks. But there
is strong empirical evidence to suggest that hedging reduces the volatility of returns and
indeed considering the episodic nature of currency returns, there are strong arguments
to use instruments to hedge currency risks.

67 | P a g e
Conclusion

During this project work I have tried my best to touch each and every
aspect which would affect the business process of the company.

All exchanges generate impacts in the core functions of price discovery,


price risk management and as a venue for investment. Each exchange
offers liquid markets, a central counter party to all but eliminate counter
party risk, market data that is freely and transparently disseminated and

68 | P a g e
futures markets that are well-correlated with spot markets to enable
effective price risk management.

Only two positive impacts were opposed on the basis of experience in the
featured markets to date- that a currency exchange can enable hedging
against inflation and quality improvements generated by the exchange
can reduce dependence on imports.

The parameters that decide the price of currency in different


exchanges are:

• Volume of currency being traded.


• Demand and supply forces.
• Worldwide demand and supply of a given currency.

The area of facilitating currency is perhaps the area where there is greatest scope for
exchanges to learn from each other's experience.

These are the main aspects which could be concluded from the responses. On the basis of
these observations some recommendations could be provided to the companies about which I
will be discussing in the next part.

During my training period the work which I have done, has helped me a lot. I understood to
reach any heights you have to start from the scratch. I understand that if you want to be best
in any organization then you have to do your work with full dedication and sincerity.

Recommendations to the Company


After such observations and some conclusions made on the basis of that I
would like to recommend some important points, upon which company
should focus and try to grow its business by tapping the market through
making new customers. In this recommendation part of this project work I
am suggesting these points.

First thing which I would like to suggest is the company should focus on its promotional

69 | P a g e
forces, so that it would be able to convey the product features to the common people. Once
the features will be exposed then only it can make new customers. Through the survey
responses we knew that advertisements are the most affective medium of creating awareness.
So to differentiate our product and to expose our exclusive benefits we need to take it out in
front of the people.

To create awareness about the product we can take several steps such as:

• Arranging various kinds of activities at public gathering.

• Placing the customer facilitating desks at various places.

• Approach to the various offices to get new leads or customer contacts.

Bibliography

1. http://www.bseindia.com
2. http://www.nseindia.com

70 | P a g e
3. http://investopedia.com
4. http://www.google.com
5. http://www.currencytradingweb.com

References
• Books Referred for the study:

71 | P a g e
Currency Trading for Dummies by Mark Galant and Brian
Dolan
Ncfm Currency Future Module

72 | P a g e