A Report On Currency Trading 4q2s7

CURRENCY TRADING

Final Report Prepared Under the Sponsorship Of

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CURRENCY TRADING

Final Report Prepared Under the Sponsorship Of

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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

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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

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The U.S. dollar index…………………………………………………...........35 Currencies and other financial markets…………………………………….35 Getting started with trading ……………………………………….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

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Trading fundamentals of EUR/USD……………………………………52 Trading EUR/USD by the ……………………………………53 Trading behaviour of EUR/USD………………………………………..54 Trading USD/JPY by the ……………………………………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

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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 during my summer internship.

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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.

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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 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.

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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.

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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 , books.

Limitations of The Study • • • • • • •

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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.

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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?

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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.

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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 . 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

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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

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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 . 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

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trading this trading is undertaken on behalf of customers. The rest trading banks arrange for their own . 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 s 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.

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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.

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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.

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Religare has been constantly innovating in of product and services and to offer such incisive services to specific 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.

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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- hip 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 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 –

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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 ed 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 transfers. Our customer centric schemes have been designed keeping in mind the investment psychology. With a competent team of skilled professionals, we manage over 380,000 s 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 with us takes care of your depository needs like dematerialization, dematerialisation, transfer and pledging of shares, stock lending and borrowing.

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Your demat 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 istration, 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.

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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.

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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-

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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

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Technical Research

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Daily Reports

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Intraday trading tech calls

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Intraday Derivative call

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Directional F&O calls

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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 of both time and energy) Resources ( technological and financial) Decisiveness Perseverance Knowledge

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The forex market is the largest financial market in the world, at least in 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 crosscurrency 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 short29 | 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.

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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- thepants, 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 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?

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•

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 will 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 crossborder transaction es 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 halfbillion of anything in another market and see how prices react.

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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 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 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.

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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 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

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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 optionrelated 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.

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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 For newcomers to currency trading, the best way to get handle on what currency trading is all about is to open a practice at any online forex brokers. Most online brokers offer practice s to allow you to experience the real- life price action of the forex market. Practice s 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 s 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”

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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 s, 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

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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 . 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 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 ’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:

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• • •

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

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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 , 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.

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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, , , 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 , 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.

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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 nonUSD 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 , you will need to pony up cash as collateral to 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 s involved. Think of it as one with a positive balance (the currency you are long) and one with a negative balance (the currency you are short). But because your s 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.

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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 narrower trading spreads as a way to attract traders. If you clickand-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 requoted.

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 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

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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 fulltime 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 Takeprofit 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 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 shortterm in nature, typically from a few minutes to few days. This makes

understanding

a

currency

component of any trading strategy.

THE BIG DOLLAR: EUR/USD 58 | P a g e

pair’s

price

action

a

key

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 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 Standard market convention is a quote EUR/USD in 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.

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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 (I), as well as national I 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 . ✔ Retail trade. ✔ Bank lending. ✔ Domestic corporate goods price index (CGPI). ✔ National I and Tokyo-area I. ✔ 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.

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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 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 ed 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.

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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

•

Futures price: The price at which the futures contract trades in the

•

Contract cycle: The period over which a contract trades. The currency

•

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

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the case of USDINR, spot value is T + 2.

futures market.

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.

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

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

•

Contract size: the amount of asset that has to be delivered under one

•

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

•

Cost of carry: The relationship between the spot prices and future

•

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

•

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

•

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

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. Also called as a lot size.

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.

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.

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

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

This is set to assure that the balance in the margin never becomes negative. If the balance in the margin falls below the maintenance margin, the investor receives a margin call and is expected to top up margin 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.

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•

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.

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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

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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 ments 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 s.

Bibliography 1. 2.

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

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3. 4. 5.

http://investopedia.com http://www.google.com http://www.currencytradingweb.com

References •

Books Referred for the study:

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Currency Trading for Dummies by Mark Galant and Brian Dolan Ncfm Currency Future Module

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