Currency Options

Forex option is a contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform.
Simply stated, a buyer of a currency option acquires the right - but not the obligation - to buy (a “call”) or sell (a “put”) a specific amount of one currency for another at a predetermined price and date in the future. The cost of the option is called a ‘premium’ and is paid by the buyer to the seller. The seller determines the price of the premium at which they are willing to grant the option, based on current rates, nominated delivery and expiry dates, the nominated strike rate and option style.
It is entirely up to the buyer whether or not to exercise that right; only the seller of the option is

obligated to perform.

Call Option:

Call Option - an option to BUY an underlying asset (stock or currency) at an agreed upon price (Strike Price or Exercise Price) on or before the expiration date. Since this option has economic value, you have to pay a price, called the Premium.
Example: Microsoft (MSFT) was recently selling at $29.50/share, and there were 4 different options. For example, for $1.00 (premium) you could buy one call option that would allow you to buy a share of MSFT for $30 (strike P) on or before January 16, 2005. You will exercise the option if P > $30, and you will make money if the P > $31.00 ($30 + $1.00). If P = $30, you will not exercise the option, it will expire worthless and you will lose the premium ($1.50).
Next example shows two ways to calculate profit from call option:
You have paid a premium of $187.50 in July that gives you the right to buy SF @ $0.67 on or before September 10. If the SF sells at $.7025 on expiration, you can exercise your right to buy @$0.67 and then sell at $0.7025, for proceeds of $2,031.25. Subtracting the cost of your option premium of $187.50, you have a net profit of $1,843.75 ($2,031.25 - $187.50). The writer (seller) of the call option would lose $1,843.75.

1. Profit = S - (Exercise Price + Premium) x SF62,500
Profit = $.7025 - ($0.670 + $0.003) = $0.0295/SF x SF62,500 = $1,843.75

2. Profit = (S - Exercise Price) x SF62,500 - PREMIUM
Profit = ($0.7025 - $0.67) x SF62,500 = $2,031.25 - $187.50 = $1,843.75

ROI:

Your return on investment (ROI) would be $1843.75 / $187.50 (Profit / Investment) = 983% for 2 months! Illustrates leverage. You control about $42,000 worth of SFs (SF62,500 x $.67/SF) with only $187.50, or less than 1% of the underlying value of the currency.
If spot rate at expiration is only $.6607/SF (or any rate < $.67/SF), the option expires worthless, you lose the premium of $187.50, which would be the gain to the writer (seller) of the call.
Note: If the spot rate was between $.67 and $.673, you would exercise, but lose money. For example, if S = $0.671, you would lose ($.671 - .673) x SF62,500 = -$125 by exercising, vs. -$187.50 without exercising.
Like futures trading, option trading is a zero-sum game. The buyer of the option purchases it from the seller or the person who "writes" the call. Options are traded in units of 100 shares.

Put Option:

Put Option - gives the owner the right, but not the obligation to sell an underlying asset at a stated price on or before the expiration date.
Example: MSFT $30 January 2005 puts were selling for $2 (premium). You will make money if the P < $28. You will exercise if P < $30, exercise but lose money if P $28-30. If P > $30, put will expire worthless.
The option extends only until the expiration date. The rate at which one currency can be purchased or sold is one of the terms of the option and is called the exercise price or strike price. The total description of a currency option includes the underlying currencies, the contract size, the expiration date, the exercise price and another important detail: that is whether the option is an option to purchase the underlying currency - a call - or an option to sell the underlying currency - a put.
A Currency Option is a bilateral contract between two counterparties, and therefore each party is responsible for assessing the credit standing and capacity of the other party, before entering into a transaction.

There are two types of option expirations -

American-style

European-style

American-style options can be exercised on any business day prior to the expiration date. European-style options can be exercised at expiration only.
Currency options give the holder the right, but not the obligation, to buy or sell a fixed amount of foreign currency at a specified price. 'American' options are exercisable at any time prior to the expiration date, while 'European' options are exercisable only on the expiration date. Most currency options have 'American' exercise features. Call options give the holder the right to buy foreign currency, while put options give the holder the right to sell foreign currency.
Call options make money when the exchange rate rises above the exercise price (allowing the holder to buy foreign currency at a lower rate), while put options make money when the exchange rate falls below the exercise price (allowing the holder to sell foreign currency at a higher rate). If the exchange rate doesn't reach a level at which the option makes money prior to expiration, it expires worthless – unlike forwards and futures, the holder of an option does not have an obligation to buy or sell if it is not advantageous to do so.
Other types of currency options:

Average Rate Option

Unlike a conventional option, which is settled by comparing the strike with the spot rate at expiration, an average rate option is settled by comparing the strike with the average of the spot rate over the option period. This hedges against price movements without locking in a fixed price or rate upfront. The average can be geometric or arithmetic and can begin at any point during the option period. The sampling process frequency and interval of underlying price observations can be tailored to suit the user.
Unlike a straight American or European-style option, an average rate option can be settled more than once over its life. So for example, the holder of a one-year average rate option can choose to settle the option monthly versus the average price or rate of the underlying the previous month. Average rate options are cheaper than conventional options because the averaging process smooths out the underlying price movements thereby reducing volatility and hence the premium of the option. Typically the volatility of an average rate option is about half the volatility of a conventional option. Also known as an Average Price or Asian option. Averaging has been applied to a wide range of swaps and options.

Average Strike Option

An Average strike option is similar to a standard option except that the strike price is taken to be the arithmetic average of the price of the underlying asset during the life of the option.
Currency options were originally traded OTC (dealer network), not on organized exchanges. Currency traders were intl. banks, investment banks, brokerage houses.
Options in OTC can be customized for the traders - maturity, contract size, exercise price, usually in large amounts of $1m, the size of most currency trades in the spot market.
Since 1982, currency options have been traded on the Philadelphia Stock Exchange, see Exhibit 9.6 on p. 210 for contracts. Option contract sizes are half of the futures contracts, e.g., £31,250 instead of £62,500, approx $56,000. Contracts are traded on a March, June, Sept, Dec cycle with original maturities of 3, 6, 9, 12 months. In addition, one and two month contracts are also traded so that there are always 1, 2 and 3 month contracts. Also, long term option contracts are traded for 18, 24, 30, 36 months.
OTC trading dominates currency options trading on the Philadelphia exchange, $60B/day OTC vs. $1.5B/day for exchange-traded contracts. See WSJ story on p. 211. Big currency traders (banks) prefer OTC market, it operates 24 hours/day (necessary now in global market - time zone differences in Asia, Europe/currency crises), contract size is much bigger ($1m vs. $45,000 avg. PHLX), more efficient, lower transactions cost. PHLX limits traders to 100,000 max contracts. Also, trading is thin in exchange-traded currency derivative markets (3% of worldwide total), so prices tend to be less reliable, more volatile. For a $100m trade, it would be cheaper OTC vs. exchange trade.

Currency swaps

Currency swap is the type of forex derivative. It is an agreement between two parties to buy or sell currency at spot rates, which reverts at the end of an agreed period for a specified price (the forward rate). The forward rate is calculated from the spot rate, forward points (premium on the spot rate based on the interest rate differential between the currencies) and length of the agreement in days.
In a currency swap, the holder of an unwanted currency exchanges that currency for an equivalent amount of another currency to improve the market liquidity of a currency owned or to obtain bank financing at a lower rate. For example, company ONE obtains five-year below market financing from a German bank, and swaps deutschmarks for dollars with company TWO, which has more U.S. Dollars than it needs. At maturity, the swap is reversed. A cross-currency swap involves the exchange of a fixed rate obligation in one currency for a floating rate obligation in another. swaps are technically borrowings, but unlike bank loans they are not ordinarily disclosed on the balance sheet.
Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by United States accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract.
Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency.
Interest Rate swaps is a financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixed-to-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure.
In other words, a currency swap involves two principal amounts, one for each currency. There is an exchange of the principal amounts and the rate generally used to determine the two principal amounts is the then prevailing spot rate. Alternatively, the parties to the swap transaction can also enter into delayed/forward start swaps by agreeing to use the forward rate.
A currency swap is similar to a series of foreign exchange forward contracts, which are agreements to exchange two streams of cash flows in different currencies. Like all forward contracts, the currency swap exposes the user to foreign exchange risk. The swap leg the party agrees to pay is a liability in one currency and the swap leg the party agrees to receive is an asset in the other currency.
The first mentioned swap is generally the preferred swap. In the stated case, the customer enters into the swap with the bank to receive floating interest rate (USD Libor) payments and USD principal and simultaneously pays INR fixed interest rate and equivalent INR principal amount arrived at based on the spot rate prevailing on the transaction date.

FOREX Types ( All Types with full detail )

FOREX Types ( All Types with full detail )

Currency futures

Futures Contract is a legally binding agreement to buy or sell a commodity or financial instrument at a later date. Futures contracts are standardized according to the quality, quantity and delivery time and location for each commodity. Futures contracts have secondary markets, can be traded many times during life of contract, like a bond (vs. bank loan).
A futures contract is a standardized commitment that describes the key features of a transaction:
The quantity and quality of the commodity being exchanged
The date on which the exchange is to take place
The method of delivery
The price at which the commodity will be purchased
Examples: Yen contracts: ¥12.5m (approx $116,000), Pound: £62,500 (approx. $112,500), Euro: 125,000 (approx $160,000), SF: 125,000 (approx $104,000), etc. Expiration dates: March, June, Sept, Dec. on the 3rd Wednesday.
Currency futures started trading in 1972 at the Chicago Mercantile Exchange (CME), which opened in 1898 (largest futures exchange in U.S., 4 product areas: stock indexes, interest rates, currency, commodities) Why then? Actually, trading in many derivative markets started to explode in the 70s. Why?
Fixed exchanges rates until 1973 meant no currency risk.
Interest rates were fixed by federal law for savings accounts (Reg. Q) and checking accounts (i = 0%), and some mortgages (led to "points").
Inflation was low and stable, 2-3% in the 50s, 60s and early 70s.
Interest rates on T-bills were low and stable 1-2%.
Price of oil was low and stable stable.
Economic and financial volatility increased dramatically in the 1970s. Fixed ex-rates were abandoned, started to float. Req Q was eventually repealed. Inflation and int. rates rose and became volatile in the 1970s. Oil prices doubled and tripled in the two oil shocks of the 1970s (74-75 and 79-80). Led to an explosion in the derivative markets for futures contracts.
Unlike the purchase or sale of a security, no price is paid or received upon the purchase or sale of a futures contract. Initially, the Account will be required to deposit in a custodial account an amount of cash, United States Treasury securities, or other permissible assets equal to approximately 5% of the contract amount. This amount is known as “initial margin.” The nature of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract, which is returned to the Account upon termination of the futures contract assuming all contractual obligations have been satisfied.
The initial investment required to establish a futures position, usually 3-5% of the contract value. To buy one U.K. pound contract, you would have to put up about $4500 ($112,500 x 4%). You would also have to keep a "maintenance margin" usually about 75% of the initial margin. In this case, you could never let your account go below $3375 (75% of $4500). If you can't make margin call, your contract is liquidated by broker.
There are two types of futures contracts, those that provide for physical delivery of a particular commodity and those that call for an even tual cash settlement. The commodity itself is specifically defined, as is the month when delivery or settlement is to occur. A July futures contract, for example, provides for delivery or settlement in July.
It should be noted that even in the case of delivery-type futures contracts, very few actually result in delivery. Not many speculators want to take or make delivery of 5,000 bushels of grain or 40,000 pounds of pork. Rather, the vast majority of both speculators and hedgers choose to realize their gains or losses by buying or selling an offsetting futures contract prior to the delivery date.
Selling a contract that was previously pur chased liquidates a futures position in exactly the same way that selling 100 shares of IBM stock liquidates an earlier purchase of 100 shares of IBM stock. Similarly, a futures contract that was initially sold can be liquidated by making an offsetting purchase. In either case, profit or loss is the difference between the buying price and the selling price, less transaction expenses.
Cash settlement futures contracts are precisely that, contracts that are settled in cash rather than by delivery at the time the contract expires. Stock index futures contracts, for example, are settled in cash on the basis of the index number at the close of the final day of trading.
Participants of currency futures market
Speculators - pure speculative bet/investment, with no business interest in the underlying commodity/currency.
Hedgers - someone with a business/personal interest in the underlying currency, and is using futures trading to minimize, eliminate or control currency risk, e.g., MNCs, banks, exporters, importers, etc.
If a hedger is short (long) and a speculator is long (short), the hedger is "selling" their risk to the speculator.

Hedgers

The details of hedging can be somewhat complex but the principle is simple. By buying or selling in the futures market now, individuals and firms are able to establish a known price level for something they intend to buy or sell later in the cash market. Buyers are thus able to protect themselves against—that is, hedge against—higher prices and sellers are able to hedge against lower prices. Hedgers can also use futures to lock in an acceptable margin between their purchase cost and their selling price.
A jewelry manufacturer will need to buy additional gold from its supplier in six months to produce jewelry that it is already offering in its catalog at a published price. An increase in the cost of gold could reduce or wipe out any profit margin. To minimize this risk, the manufacturer buys futures contracts for delivery of gold in six months at a price of $300 an ounce.
If, six months later, the cash market price of gold has risen to $320, the manufacturer will have to pay that amount to its supplier to acquire gold. But the $20 an ounce price increase will be offset by a $20 an ounce profit if the futures contract bought at a price of $300 is sold for $320.
The hedge, in affect, provided protection against an increase in the cost of gold. It locked in a cost of $300, regardless of what happened to the cash market price. Had the price of gold declined, the hedger would have incurred a loss on the futures position but this would have been offset by the lower cost of acquiring gold in the cash market.
Whatever the hedging strategy, the common denominator is that hedgers are willing to give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.

Risk Minimizing Hedge strategy

As stated earlier, the objective of hedging is to minimize risk, not to maximize profits from currency speculation. Using futures contracts, this is typically accomplished by taking a short position in the futures market to offset any gains or losses in the spot market. From a portfolio perspective, the hedger would have a portfolio consisting of a long position in the cash market, and a short position in the futures market. The return on the portfolio is equal to the return on the spot position (denoted S) plus the return on the futures position (denoted F):
Return = S + hFwhereh - denotes the number of futures contracts held in the portfolio, or the 'hedge ratio'. In most instances, h will be negative, depicting a short position. The optimal value for h is the one that minimizes the variance of the portfolio:Var(S + hF) = Var(S) + h2Var(F) + 2hCov(S,F)Taking the first derivative with respect to h and setting it equal to zero yields the hedge ratio that minimizes the portfolio variance:2hVar(F) + 2Cov(S,F) = 0h* = -2Cov(S,F)/Var(F)whereh* - is the variance-minimizing hedge ratio. Because spot prices and futures prices are highly correlated, h* should be fairly close to –1.
The hedge ratio is calculated using historical returns in the cash and futures market. Since exchange rate levels exhibit non-stationarity (i.e. they can deviate from their long-term mean level for prolonged periods of time), means and variances are not meaningful unless returns are used. The covariance between cash returns and futures returns is assumed to be relatively stable over the hedging horizon, although hedge ratios can be dynamically updated over the hedging horizon if one wants a more precise hedge.

Speculators

Were you to speculate in futures contracts by buying to profit from a price increase or selling to profit from a price decrease, the party taking the opposite side of your trade on any given occasion could possibly be a hedger or it might be another speculator, someone whose opinion about the probable direction and timing of prices differs from your own.
Buying futures contracts with the hope of later being able to sell them at a higher price is known as "going long." Conversely, selling futures contracts with the hope of being able to buy back identical and offsetting futures contracts at a lower price is known as "going short." An attraction of futures trading is that it is equally as easy to profit from declining prices (by selling) as it is to profit from rising prices (by buying).
The difference between the price of a commodity in the cash (or 'spot') market and the currency futures market is called the 'basis', and is determined by relative interest rates for financial futures. The price is established by an arbitrage argument which asserts that the payoff from converting a unit of domestic currency at the spot rate, lending in another currency and converting the proceeds in the forward market should yield the same profit as lending the unit of domestic currency at home – provided he or she can borrow and lend at the risk-free rate. Using S as the spot rate, F as the forward rate – both in terms of domestic currency per unit of foreign currency – r as the domestic effective interest rate and rf as the foreign effective interest rate, the above equality produces the identity:

(1+r) = (1/S)*(1+rf)*F, orF = S*(1+r)/(1+rf)

If this condition does not hold, then arbitrageurs would take advantage of the opportunity by borrowing unlimited amounts in the country with low interest rate, investing in the country with the high interest rate and converting at the forward rate for a risk-free profit. This would lead to an adjustment in the exchange rate until the opportunity was no longer profitable. This relationship is more commonly known as 'interest rate parity'. Slight deviations from parity may be apparent in the market due to transaction costs.

Currency forwards:

Forward (Cash) Contract is a cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized.
Many market participants want to exchange currencies at a time other than two days in advance but would like to know the rate of exchange now. Forward foreign exchange contracts are generally used by importers, exporters and investors who seek to lock in exchange rates for a future date in order to hedge their foreign currency cash flows.
For example, if a company had contracted to purchase equipment for the price of GBP 1 million payable in 3 months time but was concerned that the GBP would rise against the Australian dollar in the interim, the company could agree today to buy the USD for delivery in 3 months time. In other words, the company could negotiate a rate at which it could buy GBP at some time in the future, setting the amount of GBP needed, the date needed etc. and hence be sure of the Australian Dollar purchasing price now.
There are two components to the price in forward transaction and they are the spot price and the forward rate adjustment.
The spot rate is simply the current market rate as determined by supply and demand. The forward rate adjustment is a slightly more complicated calculation that involves the applicable interest rates of the currencies involved.
Forward Exchange Contracts, both Buying and Selling, may be either fixed or optional term contracts.

Fixed Term Contracts:

With a Fixed Term Contract the customer specifies the date on which delivery of the overseas currency is to take place. An earlier delivery can be arranged but it may involve a marginal adjustment to the Forward Contract Rate.

Optional Term Contracts:

Optional Term Contracts can be entered into for a specific period, and the customer states the period within which delivery is to be made (normally for periods not more than one month) eg. a contract may be entered into for a six month period with the customer having the option of delivery at anytime during the last week.
In each case there is a firm contract to effect delivery by both the Bank and the customer. An optional delivery contract does not give the customer an option to not deliver the Forward Exchange Contract. It is only the period during which delivery may occur that is optional.
Forward rates are quoted for transactions where settlement is to take place more than two business days after the transaction date. Forward Contract rates consist of the Spot rate for the currency concerned adjusted by the relative Forward Margin.
Forward Margins are a reflection of the interest rate differentials between currencies, and not necessarily a forecast of what the spot rate will be at the future date.
The Forward rate may be expressed as being at parity (par), or at a Premium (dearer) or at a Discount (cheaper), when related to the spot rate. It follows therefore that premiums are deducted from the spot rate and discounts are added to the spot rate.
Forward Rates incorporating a 'Premium' are more favourable to exporters and less favourable to importers than the relative spot rates on which they are based. Similarly, Forward rates incorporating a 'Discount' are more favourable to importers and less favourable to exporters that the relative spot rates on which they are based.
The general rule in determining whether a currency will be quoted at a premium or a discount is as follows:
The currency with the higher interest rate will be at a discount on a forward basis against the currency with the lower interest rate.
The currency with the lower interest rate will be at a premium on a forward basis against the currency with the high interest rate.
As the interest differential between the currencies widens then the premium or discount margin increases (i.e. moves farther from parity) and similarly as the interest differential narrows then the premium or discount margin decreases (ie moves towards parity).

Differences/similarities between futures and forward contracts:
Similarities:

1. Both are derivative securities for future delivery/receipt. Agree on P and Q today for future settlement or delivery in 1 week to 10 years.
2. Both are used to hedge currency risk, interest rate risk or commodity price risk.
3. In principal they are very similar, used to accomplish the same goal of risk management.

Differences:

1. Forward contracts are private, customized contracts between a bank and its clients (MNCs, exporters, importers, etc.) depending on the client's needs. There is no secondary market for forward contracts since it is a private contractual agreement, like most bank loans (vs. bond).
2. Forward contracts are settled at expiration, futures contracts are continually settled, daily settlement.
3. Most (90%) of forward contracts are settled with delivery/receipt of the asset. Most futures contracts (99%) are settled with cash, NOT the commodity/asset.
4. Futures markets have daily price limits.
Forward Exchange Contract is a bilateral contract between two counterparties, and therefore each party is responsible for assessing the credit standing and capacity of the other party, before entering into a transaction.
The deals are totally flexible as to the maturity date, the size of the transaction and the currency involve

Derivatives-Forex Theory and Types ( full Information )

Derivatives

Derivatives play an important and useful role in the economy, but they also pose several dangers to the stability of financial markets and the overall economy. Derivatives are often employed for the useful purpose of hedging and risk management, and this role becomes more important as financial markets grow more volatile. Derivatives are also used to commit fraud and to manipulate markets.
Derivatives are powerful tools that can be used to hedge the risks normally associated with production, commerce and finance. Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks.
Today, derivatives are traded in most parts of the world, and the size of these markets is enormous. Data for 2002 by the Bank of International Settlements puts the amount of outstanding derivatives in excess of $151 trillion and the trading volume on organized derivatives exchanges at $694 trillion. By comparison, the IMF’s figure for worldwide output, or GDP, is $32.1 trillion.
A derivative is a financial contract whose value is linked to the price of an underlying commodity, asset, rate, index or the occurrence or magnitude of an event. The term derivative refers to how the price of these contracts is derived from the price the underlying item. Typical examples of derivatives include futures, forwards, swaps and options, and these can be combined with traditional securities and loans in order to create structured securities which are also known as hybrid instruments.
Forward deals are a form of insurance against the risk that exchange rates will change between now and the delivery date of the contract. A forward is a simple kind of a derivative - a financial instrument whose price is based on another underlying asset. The price in a forward contract is known as the delivery price and allows the investor to lock in the current exchange rate and thus avoid subsequent forex fluctuations.
Futures contracts are like forwards, except that they are highly standardized. The futures contracts traded on most organized exchanges are so standardized that they are fungible - meaning that they are substitutable one for another. This fungibility facilitates trading and results in greater trading volume and greater market liquidity.
While futures and forward contracts are both a contract to trade on a future date, key differences include:
Futures are always traded on an exchange, whereas forwards always trade over-the-counter
Futures are highly standardized, whereas each forward is unique
The price at which the contract is finally settled is different:
Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end)
Forwards are settled at the forward price agreed on the trade date (i.e. at the start)
The credit risk of futures is much lower than that of forwards:
The profit or loss on a futures position is exchanged in cash every day. After this the credit exposure is again zero.
The profit or loss on a forward contract is only realised at the time of settlement, so the credit exposure can keep increasing
In case of physical delivery, the forward contract specifies to whom to make the delivery. The counterparty on a futures contract is chosen randomly by the exchange.
In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls.
Foreign currency swaps can be defined as a financial foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate. It is worth mentioning in this regard that the buyer and seller exchange fixed or floating rate interest payments in there respective swapped currencies over the term of the contract.
According to experts upon the maturity, the principal amount is effectively re-swapped at a predetermined exchange rate so that the parties end up with their original currencies. Foreign currency swaps are more often than not been used by commercials as a foreign currency-hedging vehicle rather than by retail forex traders.
Options allow investors even greater flexibility. Although more expensive than futures contracts, options are valued because they allow investors to choose whether to exercise a futures contract or not. The option-holder is under no obligation to buy or sell the underlying asset. Call options give an investor the right, but not the obligation, to purchase the indicated asset at a specified (strike) price by a certain date.
An investor who buys a call option is hoping, or betting, that the price of the asset will rise above the strike price. Put options give the option-holder the right, but not the obligation, to sell the security by a certain date. The purchaser of a put option is hoping or betting that the price of the asset will fall below the contract’s strike price. An option contract gives the its holder the “option” (or the right) to buy (or sell) the underlying item at a specific price at a specific time period in the future. There are two kinds of options. Buying a call option provides an investor the right to buy an asset while a put option gives the investor the right to sell the asset.

Balance of payments model

Balance of payments model
This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.
Like PPP, the balance of payments model focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Their flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.

Asset market model
The explosion in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as economic growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border-trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services.
The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with other markets, particularly equities.
Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates.

Fluctuations in exchange rates
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 than 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 unemployed, 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 country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can 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).
In choosing what type of asset to is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating).

Exchange Rate ( Full Defination, Notes and Tutorials)

Exchange Rate

In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.
Contents[
1 Quotations
2 Free or pegged
3 Nominal and real exchange rates
4 Bilateral vs effective exchange rate
5 Uncovered interest rate parity
6 Balance of payments model
7 Asset market model
8 Fluctuations in exchange rates
9 See also
10 References
11 External links


Quotations
An exchange rate quotation is given by stating the number of units of "term currency" or "price currency" that can be bought in terms of 1 unit currency (also called base currency). For example, in a quotation that says the EURUSD exchange rate is 1.3 (1.3 USD per EUR), the term currency is USD and the base currency is EUR.
There is a market convention that determines which is the base currency and which is the term currency. In most parts of the world, the order is:EUR - GBP - AUD - NZD - USD - *** (where *** is any other currency).Thus if you are doing a conversion from EUR into AUD, EUR is the base currency, AUD is the term currency and the exchange rate tells you how many Australian dollars you would pay or receive for 1 euro. Cyprus and Malta which were quoted as the base to the USD and *** were recently removed from this list when they joined the euro. In some areas of Europe and in the non-professional market in the UK, EUR and GBP are reversed so that GBP is quoted as the base currency to the euro. In order to determine which is the base currency where both currencies are not listed (i.e. both are ***), market convention is to use the base currency which gives an exchange rate greater than 1.000. This avoids rounding issues and exchange rates being quoted to more than 4 decimal places. There are some exceptions to this rule e.g. the Japanese often quote their currency as the base to other currencies.
Quotes using a country's home currency as the price currency (e.g., EUR 1.00 = $1.45 in the US) are known as direct quotation or price quotation (from that country's perspective) ([1]) and are used by most countries.
Quotes using a country's home currency as the unit currency (e.g., £0.4762 = $1.00 in the US) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone.
direct quotation: 1 foreign currency unit = x home currency units
indirect quotation: 1 home currency unit = x foreign currency units
Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.
When looking at a currency pair such as EURUSD, the first component (EUR in this case) will be called the base currency. The second is called the term currency. For example : EURUSD = 1.33866, means EUR is the base and USD the term, so 1 EUR = 1.33866 USD.
Currency pairs are often incorrectly quoted with a "/" (forward slash). In fact if the slash is inserted, the order of the currencies should be reversed. This gives the exchange rate. e.g. if EUR1 is worth USD1.35, euro is the base currency and dollar is the term currency so the exchange rate is stated EURUSD or USD/EUR. To get the exchange rate divide the USD amount by the euro amount e.g. 1.35/1.00 = 1.35
Market convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outrights or swaps. (The fourth decimal place is usually referred to as a "pip.") An exception to this was exchange rates with a value of less than 1.000 which were usually quoted to 5 or 6 decimal places. Although there is no fixed rule, exchange rates with a value greater than around 20 were usually quoted to 3 decimal places and currencies with a value greater than 80 were quoted to 2 decimal places. Currencies over 5000 were usually quoted with no decimal places (e.g. the former Turkish Lira). e.g. (GBPOMR : 0.765432 - EURUSD : 1.3386 - GBPBEF : 58.234 - EURJPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.
In 2006 Barclays Capital broke with convention by offering spot exchange rates with 5 or 6 decimal places. The contraction of spreads (the difference between the bid and offer rates) arguably necessitated finer pricing and gave the banks the ability to try and win transaction on multibank trading platforms where all banks may otherwise have been quoting the same price. A number of other banks have now followed this.
Free or pegged
Main article: Exchange rate regime
If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. China was not the only country to do this; from the end of World War II until 1966, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system. [2]

and real exchange rates
The nominal exchange rate e is the price in domestic currency of one unit of a foreign currency.
The real exchange rate (RER) is defined as , where P is the domestic price level and P * the foreign price level. P and P * must have the same arbitrary value in some chosen base year. Hence in the base year, RER = e.
The RER is only a theoretical ideal. In practice, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing power parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also worth mentioning that government-enacted tariffs can affect the actual rate of exchange, helping to reduce price pressures. PPP appears to hold only in the long term (3–5 years) when prices eventually correct towards parity.
More recent approaches in modelling the RER employ a set of macroeconomic variables, such as relative productivity and the real interest rate differential.

Bilateral vs effective exchange rate
Bilateral exchange rate involves a currency pair, while effective exchange rate is weighted average of a basket of foreign currencies, and it can be viewed as an overall measure of the country's external competitiveness. A nominal effective exchange rate (NEER) is weighted with trade weights. a real effective exchange rate (REER) adjust NEER by appropriate foreign price level and deflates by the home country price level. Compared to NEER, a GDP weighted effective exchange rate might be more appropriate considering the global investment phenomenon.

Uncovered interest rate parity
See also: Interest rate parity#Uncovered interest rate parity
Uncovered interest rate parity (UIRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If US interest rates exceed Japanese interest rates then the US dollar should depreciate against the Japanese yen by an amount that prevents arbitrage. The future exchange rate is reflected into the forward exchange rate stated today. In our example, the forward exchange rate of the dollar is said to be at a discount because it buys fewer Japanese yen in the forward rate than it does in the spot rate. The yen is said to be at a premium.
UIRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated on the reward of the containment of inflation and a higher-yielding currency..

What Does Foreign Exchange,Forex Trading mean? and what is investor's goal?

What Does Foreign Exchange mean?
Foreign Exchange" refers to money denominated in the currency of another nation or group of nations. Any person who exchanges money denominated in one nation's currency for money denominated in another nation's currency is conducting foreign exchange. That holds true whether the amount of the transaction is equal to a few dollars or to billions of dollars; whether the person involved is a tourist cashing a traveler's check in a restaurant abroad or an investor exchanging hundreds of millions of dollars to acquire a foreign company. In other words, a foreign exchange transaction is a shift of funds from one country and currency to another.

What is Forex Trading?
The Forex (short for Foreign Exchange) market is the 24 hour cash market where currencies are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based on currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

What is an investor's goal in Forex trading?
The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is done in currency pairs. For example, the exchange rate of EUR/USD on August 26, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1,000 euros on that date, he would have paid 1,085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro increased in relation to the U.S. dollar. Therefore, the investor could now sell the 1,000 euros in order to receive 1,208.30 dollars and make a profit of $122.06. Someone buying and then later selling U.S. dollars would have seen a $122.06 loss

What Is Forex and How to Make Money with It?

What Is Forex and How to Make Money with It?
Forex is the knowledge and business of making money through exchanging foreign currencies. Forex is not a new business and its history is as old as the history of money.
There are people who have been making money through Forex from many years ago. Fortunately, with the help of computer and internet, Forex trading has become much easier. You can sit at your personal computer and trade from home without having to make any phone call or referring to any bank.
How is it possible?
There are broker companies that enable you to buy and sell different currencies through the Internet and some simple softwares. For any trade that you make, you pay a small commission to the broker company that you are trading through it.You need to find a good, reliable and well-known broker company and sign up for an account with it. Then you have to fund your account. You use the money you have in your account to trade. Any profit that you make, will be added to your account and vise versa. Then you can withdraw the money you have made.
What currencies can you trade?
In Forex, you deal with currency pairs. There are four main currency pairs: British Pound and USD (GBP/USD), Euro and USD (EUR/USD), USD and Japanese Yen (USD/JPY), USD and Swiss Frank (USD/CHF).
In each currency pair, the first currency works as the commodity and the second one works as the money. For example when you choose the GBP/USD to trade, if you buy, you buy British Pound against USD and if you sell, you sell British Pound against USD. It doesn’t matter what currency you have in your account. The trading software makes the exchanges automatically.
How can you make money?
Buying cheap and selling expensive or selling expensive and buying cheap is the base of making money in Forex. For example If you buy GBP against USD when each GBP is equal to 1.9554USD and then sell it when it is 2.0235USD, you have made a profit. I don’t want to focus on more details in this article and explain how the profits and the money you make will be calculated. I will talk about these issues in other articles.
But the big question is that how you can know the best time to buy and how you can know that if you buy, the price will go up and you will make a profit. This is the most important question that makes you a successful trader.
There are two methods to know the optimum time to buy and sell: Technical and Fundamental analysis.
In technical analysis, you can predict the direction of the price using the analysis you make on the price chart and also with the help of some special tools that are called Indicators.
GBP/JPY price chart with three indicators: Stochastic, MACD and CCI
Technical Analysis is a science and if you want to start working on Forex, you have to learn it properly especially if you want to work as an intraday trader. It is not too hard to learn the technical analysis. If you are a focused and serious person, you can learn technical analysis in a few months. There are a lot of free resources over the web that you can use to learn. There are some expensive training courses but those who sign up for them are not happy and believe that they have learnt nothing. So don’t waste your money. If you are serious to learn, there are a lot of free resources over the Internet. You can also visit this weblog every now and then or subscribe for my RSS feed. I will try to share my experiences with you.
The other method is the Fundamental Analysis. This method is used to predict the future of currencies prices according to the economic and even political situation of the world and important developed countries like USA, UK, Germany, Japan and ….
Fundamental analysis has a long term usage but good traders can predict the sudden changes that happen after releasing an important news about economic situation of an important country. For example when the news says that economic situation of USA is improved for 5% in comparison to the last month, USD will become stronger and people start buying it. So the value of USD will go up because of the sudden increase of demand. If you know the effect of the news on the price, you can take the proper position and make money. Of course there are two sides in this story which means if you take the wrong position, you will lose.
Good and experienced traders take the advantage of both technical and fundamental analysis whereas 99% of traders are dependent on the technical analysis.
There is another way too. There are some automatic systems and softwares that find and report the buy and sell signals automatically. I have tried many of them and I have to say that most of them are garbage and not only you can not make any profit with them but you will lose a lot. The only software that can be a big help in finding the signals and confirming your analysis results is the software designed and developed by Andreas Kirchberger. Click Here to visit his website.
Some good things about Forex:
1- Forex is an online home based business that doesn’t need referring, recruiting and advertising. You only deal with the currencies through the Internet. So you will not have to reply any email, make any phone call and spend any money on advertising.
2- If you learn the Forex properly, you can make a lot of money. Forex can be your full time job that makes thousands of dollars for you every month. I have to emphasize again that if you start working on Forex before you learn it properly, it can be risky and you will lose your money. It is like the driving. If you drive a car before you know how to drive, you will hurt yourself and others but if you learn it properly first, it will be pleasant and funny.
3- You can make a lot of money by spending a small amount of money. Unlike other investments like stock market that you have to invest a lot of money to make a reasonable profit, you can make a good income through investing small amount of money. For example, with a $5000 account, you can make about $5000 per month. Of course it highly depends on the way that you trade and the strategy that you follow but good and experienced traders can double their money every month.
4- Forex - and of course stock market - are the only businesses that competition has positive effect on them. It is amazing, isn’t it? Competition is the biggest problem in all other businesses but in Forex, it helps the traders to make more money. Why?
Supply and demand are the factors that determine the price in any market. When there are too many buyer and sellers, the price volatility will be much higher and the market will be more dynamic. The price will go up and down more frequently and this is what we need to make money. When the price goes up we buy and when it goes down we sell and make profit.
So if you choose Forex as your business, you will not have to be worried about competition.
Bottom line:
If you are looking for a professional work at home business to make money full time or part time, Forex is the best option. It can make reasonable money for you and on the other hand, you will not have to be worried about the issues like marketing, advertising, referring and recruiting and even you will not have to be worried about competition.

Other useful resourses

Other Useful Resourses

It's only natural that, for professional work as an FX trader, a mere wish alone and technical opportunity are not enough. A person may be very gifted, but first he should learn a craft with all its subtleties and peculiarities. It's also clear that our web-site can neither replace a pile of manuals nor present a huge amount of articles, online textbooks and other material, supplied by the Web.
Of course, we do have some auxiliary materials: advice, FAQ, but still it is not enough if you are a newcomer in the FOREX market. That is why we present here a rather extensive list of references supplied other recourses available for reading and copying by the user of the Internet. If you can offer an interesting reference or an article, we'd be pleased to place it in this section.ANALYSIS:
Accurate Forex Trading Signals - Forex Trading Signals/Alerts for Swing Traders.
Foreign Currency Exchange - Make your international payments with North America’s leading foreign exchange services provider including funds transfer, forward contracts, and currency risk management.
AceTrader - trade signals on the majors, updated six times/day. Trade signals with stops and profit objectives, plus in depth technical analysis and wave analysis.
K.B. Advisory Ltd - Daily FX forecasts and trade signals for professional FX traders.
Elliott Wave Analysis by A. Bezrodny - technical analysis using Elliott wave analysis for yen, swiss, and euro.
BBSP - technical analysis, commentary and trade signals for currencies and other sectors.
Dukascopy Analysis - advanced proprietary TA for all markets, emphasis on fx using quantum mechanics.
Forex Market Outlook - elliott wave analysis.
Penny Stocks Guide - Get important information about penny stocks that will help with your investment choices.
Currency Trading USA - Trade currencies online and get free training when you open a forex account. Sign up for a 30-day free trial of our online trading system today. Great for swing trading and day trading.
Forex Day Trading Online - Get free training on our award-winning, online currency trading system. Use our platform to learn how to day trade free for 30 days. Trading currencies requires a lot less money than trading stocks. See how well you do trading the forex market in 30 days.
Stock Market Charts - Get stock market quotes, live charts, news and other financial information at The Financials.
Go Forex - A one-stop forex trading shop. Includes a wide range of information and resources about foreign exchange trading.
The Official Forex Training Site - Free information about the forexmarket, forex news, etc.

MetaTrader 4 Client Terminal

MetaTrader 4 Client Terminal

Client terminal MetaTrader 4 key features:
working with securities of Forex, Futures and CFD markets;
various execution technologies: Instant Execution, Request Execution, Market Execution;
confidentiality of all trading operations;
unlimited charts quantity;
support of various timeframes (from minutes up to months);
large number of technical indicators and line studies;
Experts, Custom Indicators and Scripts;
MultiLanguage program interface;
realtime data export via DDE protocol;
signals of system and trading actions;
getting on-line news from financial markets;
internal e-mail system;
printing charts and completed trading transactions statemets.
Advantages:
MetaTrader 4 is the best solution for broker companies, banks, financial companies, and dealing centers. The main advantages of the system are:
Coverage of financial marketsThe trading platform MetaTrader 4 covers all brokerage and trading activities at Forex, Futures and CFD markets.
Multicurrency basisThe system is designed on a multicurrency basis. It means that any currency can serve as a general currency used in the operation of the whole complex in any country and with any national currency.
Economy and productivityImplemented data transfer and processing protocols are notable for their economy. It makes it possible to support several thousands of traders through a single server with the following configuration: Pentium 4 2 GHz, 512 DDR RAM, 80 GB HDD. New protocols reduce both the demands on datalink and their operational cost.
ReliabilityIn the case of damage to the historical data, the complex has backup and restoration systems. Also, the implemented synchronization allows to restore damaged historical databases within several minutes with the help of another MetaTrader 4 server.
SafetyTo provide safety, all the information exchanged between parts of the complex is cripted by 128-bit keys. Such solution guarantees safekeeping of information transferred and leaves no chance for a third person to use it. A built-in DDoS-attacks guard system raises the stability of operation of the server and the system as a whole.
A new scheme of system working operation was created especially for DDoS-attacks resistance. With its help, you can hide the real IP-address of the server behind a number of access points (Data Centers). Data Centers also have a built-in DoS-attacks protection system; they can recognize and block such attacks. During distributed attacks at the system, only Data Centers are attacked; MetaTrader 4 Server continues its operation in regular mode. Thus, Data Centers increase the system's stability to DoS and DDoS attacks.
The implemented mechanisms of rights sharing make it possible to organize the security system with more effectiveness and to reduce the probability of ill-intentioned actions of company staff.
Multilingual supportMetaTrader 4 supports different languages, and a MultiLanguage Pack program is included into distributive packages. It provides translation of all program interfaces into any language. With the help of MultiLanguage Pack you can easily create any language and integrate it into the program. This feature of the system will bring MetaTrader 4 nearer to end-users in any country of the world.
Application Program InterfacesMetaTrader 4 Server API makes it possible to customize the work of platform to meet your requirements. API can solve a wide range of problems:
creating additional analyzers for finding a trend of monthly increase of traders;
creating applications of integration into other systems;
extending the functionality of the server;
implementing its own system work control mechanisms;
and do much more.
Integration with web-servicesTo provide traders with services of higher quality, the system supports the integration with web services (www, wap). This feature allows realtime publishing of quotations and charts on your site, dynamic tables containing contest results and much more.
Flexibility of the systemThe platform possesses a wide range of customizable functions. You can set all parameters, from trade session time to detailed properties of financial instruments of each user groups.
SubadministrationSubadministration mechanisms allow leading many Introducing Brokers on one server quite easily. For processing all accounts and orders of the clients of your IBs, you will need one server only

Foreign Exchange Markets

Foreign Exchange Markets

Participants of a foreign exchange market The main participants of a foreign exchange market are:
Commercial banks
Exchange markets
Central banks
Firms that conduct foreign trade transactions
Investment funds
Broker companies
Private persons Commercial banks conduct the main volume of exchange transactions. Other participants of the market have their accounts at the banks, conducting necessary conversion transactions. Banks accumulate (through transactions with the clients) the combined needs of the market in exchange conversions as well as in calling and distributing money, breaking with it into new banks. Besides satisfying clients' requests, banks can operate independently, using their own assets. In the end, a foreign exchange market is a market of interbank dealings, and when speaking about the exchange rates movement, one should bear in mind the existence of an interbank foreign exchange market. In international foreign exchange markets, international banks with the daily volume of transactions of billions dollars have the biggest influence. These are Barclays Bank, Citibank, Chase Manhatten Bank, Deutsche Bank, Swiss Bank Corporation, Union Bank of Switzerland, etc.
Exchange markets Contrary to stock markets and markets for terminal exchange dealings, exchange markets do not work in a definite building and they do not have definite business hours. Thanks to the development of telecommunications most of the leading financial institutions of the world use services of exchange markets directly and via mediators 24 hours a day. The biggest international exchange markets are the London, New York and Tokyo exchange markets. In some countries with transitional economies there are exchange markets for currency exchange by juristic persons and for forming a market exchange rate. The state usually regulates the exchange rate in an active manner, using the compactness of the exchange market.
Central banks control currency reserves, realize interventions that influence the exchange rate, and regulate the interest investment rate in the national currency. The central bank of the United States, the US Federal Reserve Bank, or "FED", has the greatest influence in the international exchange markets. It is followed by the central banks of Germany, (the Deutsche Bundesbank or BUBA) and of Great Britain (the Bank of England, nicknamed the "Old Lady").
Firms that conduct foreign trade transactions. Companies participating in international trade have a stable demand for foreign currency (importers) and supply (exporters). As a rule, these organizations do not have direct access to exchange markets, and they conduct their conversion and deposit transactions via commercial banks.
Investment funds. These companies, represented by various international investment, pension,and mutual funds, insurance companies, and trusts, realize the policy of diversified management of portfolio of assets by placing there money in securities of the governments and corporations of different countries. The world-know fund, Quantum, is owned by George Soros, and it executes successful exchange speculations. Big international corporations as Xerox, Nestle, General Motors a.o. that make foreign industrial investments (creating branches, joint ventures etc.), also are firms of this kind.
Broker companies bring together a buyer and a seller of foreign currency and conduct a conversion dealing between them. Broker companies take a broker's fee. As a rule, in the FOREX market there is no fee as a per cent from the sum of a transaction, or as a sum agreed in advance. Usually the dealers of broker companies quote currency with a spread, that includes their fee. A broker company, having the information about the asked rates, is a place where the real exchange rate is formed according to closed deals. Commersial banks get their information about the current exchange rate from broker companies. The biggest international broker companies are Lasser Marshall, Harlow Butler, Tullett and Tokio, Coutts, and Tradition.
Private persons. Natural persons realize a wide range of non-commercial transactions in the sphere of foreign tourism, transfers of salaries, pensions, royalties, buying and selling foreign currency. This is also the biggest group that realizes speculative exchange transactions.The working hours of the markets Exchange markets work all the time. Their work in the calendar twenty-four-hour period is started in the Far East, in New Zealand (Wellington), passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Main, London, then finishing the day in New York and Los Angeles. The count of time zones begins from the zero meridian in Greenwich near London, and the time itself is called Greenwich Mean Time (GMT). Depending on the season (summer or winter), the time in different financial centers of the globe will differ from the GMT.
The working day of exchange brokers of Western commercial banks starts, as a rule, at 7:30 am by local time. At 8:00 am the dealers are already closing deals. The morning hours are usually devoted to short analyses of events on the international exchange markets at the moment. The dealers use economic and technical analyses of the situation in the market, read analytical articles in newspapers, then exchange points of view and the latest rumors with each other and with dealers from other commercial banks. On the basis of various data, a picture of possible behavior of the exchange rate on the coming day is put together, with variants of all sorts of possible events.
By 8:00 am the market, consisting of individual dealers, will have worked out the tactics of its behavior, and it enters the operations of the international exchange market, giving a new and powerful impulse to the movement of the exchange rate. Various territorial markets can be given the following characteristics of an average typical activity during a 24 hour day.
Far East. Here the most active deals in the market are conversion transactions with the dollar to the Japanese yen, the dollar to Euro, Euro to yen, and the dollar to the Australian dollar. Very often fluctuations of exchange rates at that time are insignificant, but there are days when currencies, especially the dollar against the yen, make breath-taking flights. Especially so when the central bank of Japan makes an intervention. In Moscow its night and morning at that time, so till noon one can work with Tokyo, till mid-day with Singapore.
Western Europe. At 10:00 am Moscow time the market in the European financial centers of Zurich, Frankfurt-on-Main, Paris, Luxembourg are open. However, the really powerful movement of the exchange rate against the main currencies starts after 11:00 am Moscow time, when the London market is opened. This continues, as a rule, for 2 to 3 hours, after that the dealers of the European banks go to have lunch, and the activity of the market falls down a bit.
North America. The situation livens up with the opening of the New York market at 4:00 pm Moscow time, when dealers of American banks start working, and when European dealers come back from their lunch. Powers of European and American banks are about equal, that is why fluctuations of the rate do not go out of the limits of usual European fluctuations. Nevertheless, exchange dealers look forward to the opening of the New York market in order to receive fresh data about a possible movement of the rate (the more so if the European market has been sluggish). But when the European market is closed about 7p m or 8pm Moscow time, aggressive American banks, left alone on the "thin" market, are able to cause a sharp change of the exchange rate of the dollar against other currencies.What is a FX speculator? In modern conditions practically all financial transactions in the market are speculative by their nature, and there's nothing abnormal or criminal in it. One of the most vivid indices of markets' globalization is their daily volume of exchange transactions. Only in 10 major financial centers it increased from 206 billion dollars in 1986 to 967 billion dollars in 1992. According to the IMF, on the whole the volume is over 1 trillion dollars a day, and on some days it reaches 3 trillions. It is enough to say that the volume of gold and foreign exchange reserves of all developed countries was only 555.2 billion dollars in 1992, which is two times less than a daily volume of market transactions. According to some calculations, the volume of exchange transactions is 40 times bigger that the daily volume of foreign trade transactions. Therefore, most of the deals are caused not by a commercial necessity, but by financial reasons. And a financial transaction is always caused by the fact that money is looking for some profitable usage.
The international exchange system functioning in the world at the moment develops among people dealing with exchange and financial transactions: the so-called speculative psychology. In the world where exchange rates fluctuate for some per cent every week, where currencies, that are considered to be stable can lose 20 to 30 per cent of their cost during a few months, it's absolutely clear that the manager of a fund, trying to compensate for inevitable losses, has to use speculative operations. For example, a reasonable owner of dollars has to get rid of them very quickly and exchange them for Euro every time the expected fall of the dollar against Euro surpasses the difference between the profit from American notes and the profit from the respective German notes. For instance, if in the coming months the dollar is expected to fall against the Euro by 6%, and the profit from American notes is 6 per cent bigger than the profit from German notes, a speculator will probably decide to keep dollars. If the gap in the interest rates is less than the expected fall of the rate, the "running away from the dollar" begins.
Who are these speculators? An analysis shows that the main speculators acting in the market are institutional investors. Among them one can single out, first of all, official state institutions, and, secondly, private financial and other institutions. Thus according to the report of the "Group of Ten", state investors in Europe and Japan keep about 20 per cent of their assets in the form of foreign securities (in the USA only 7.5 per cent). However, the main feature of the 1980s was the growing international activity of private financial institutions: pension funds, insurance companies, and mutual funds. The Globalization of international financial markets is an objective process, reflecting the growing degree of economic relations in the world. It promotes a more effective distribution of financial resources.Major world exchange markets:

• AMEX - American Stock Exchange
• BOVESPA - Sao Paulo Stock Exchange
• CBOT - Chicago Board of Trade
• CHX - Chicago Stock Exchange
• CME - Chicago Mercantile Exchange
• Commodities on the Web - List of the commodities
• LIFFE - London International Financial Futures and Options Exchange
• London Stock Exchange -London Stock Exchange
• NasdaqNYMEX - New York Mercantile Exchange
• NYSE - New York Stock Exchange
• SBF - la Bourse de Paris
• SES - Singapore Exchange
• SET - Stock Exchange of Thailand
• TSE - Tokyo Stock Exchange
• TSE - Toronto Stock Exchange
• LSEX - London Stock Exchange
• CBOE - Chicago Board Options Exchange CBOE
• PHLX - Philadelphia Stock Exchange

The Main Principles of Trading

In contrast to exchange transactions with real supply or real currency the participants of FOREX use trading with a margin deposit; i.e. marginal or leverage trading. In marginal trading, each transaction has two obligatory stages (they can be divided by period of time, which can be as long as you like): buying (selling) of currency at one price, and then selling (buying) it at another (or at the same) price. The first transaction is called opening the position, the second one, closing the position.
Opening a position, a trader furnishes a deposit sum from 0.5 to 4 per cent of the credit line, granted for the transaction. So, in order to buy or sell 100,000 US dollars for Japanese yens, you will not need the whole sum, but only from 500 to 2000 US dollars depending on your policy of controlling risks. When the position is closed, the deposit sum returns, and calculation of profits or losses is done. All the profit or losses caused by the change of currency rates is credited on your account.
Let's take a concrete example of getting a profit from the changing the rate of the Euro, from 0,9162 to 0,9292. If you have anticipated this change by using technical or fundamental analysis, you can buy the Euro cheaper for dollars, and then sell it back at a higher price. For example, if you choose leverage 1:100, then 99,000 dollars of the credit line, granted by the Internet broker, is added to 1000 dollars, and you buy the Euro at the price of 0.9162. As a result of this transaction we get: $ 100,000 / 0.9162 = Euro 109.146, 47.
When the rate changes (an average daily change of Euro is about 70 to 100 pips), you close the position and sell the Euro for dollars, but at the rate of 0.9292. You get 109,146. 47*0.9292 =101,418.89 dollars. Your profit is $ 1,418.89. The same transaction with leverage 1:200 would give you $2, 837.78 of profit, with leverage 1:50 the profit would be 709.45, with leverage 1:25 - 354.72.
We'd like to remind you that the higher the credit leverage, the higher is your profit if the fluctuation of the currency rate was anticipated correctly. However, if your anticipation was wrong, your losses will be bigger.
One cannot feel confident in the FOREX market without a thorough knowledge of the terms used there.
Foreign exchange quotes are a relation between currencies.
USDCHF - the cost of $1 in Swiss Francs.
USDJPY - the cost of $1 in Japanese yens.
EURUSD - the cost of Euro 1 in US dollars.
GBPUSD - the cost of 1 GBP in US dollars. That is, quotes are expressed in the units of the second currency for a unit of the first one. For example, quote USDJPY 108,91 shows that $1 costs 108,91 Japanese yens. Quote EURUSD 0.9561 shows that 1 Euro costs 0.9561 US dollars.
The last figure in the quote is called "pip". The cost of the pip is different for every currency, and depends on the leverage and current quote.
The formula for calculating 1 pip is:
100,000/current quote without commas * Kwhere К=1 at leverage 1:100, К=2 at leverage 1:200, К=0,5 at leverage 1:50, K=0,25 at leverage 1:25. Examples: USDJPY = 108.91 leverage 1:100 100.000 / 10891 х 1 = 9,18 USD EURUSD = 0.9561 leverage1:200100.000 / 9561 х 2 =20,92 USD
GBPUSD and EURUSD are direct quotes, i.e. when the chart goes up, GBP and EUR become more expensive, and when it goes down, the currencies become cheaper. USDCHF and USDJPY are backward quotes, and when the chart grows, prices on CHF and JPY fall, and when the chart goes down, the prices grow.
On direct quotes you buy according to ASK and sell according to BID. With backward quotes, you buy according to BID and sell according to ASK . Trading in the FOREX market is realized in lots. When you open a position, you can choose the number of lots you want from 1 to 10. One lot equals $ 100,000. The deposit sum for one lot will vary from $500 to $2000, depending on the credit leverage you choose. Leverage is a financial mechanism that allows crediting speculative transactions with a small deposit. We give you an opportunity to choose a credit leverage in the range of 1:200 to 1:25.
In the course of trading you can fix your profit or cut off your losses according to the commands LIMIT and STOP that have been set up.
LIMIT is set up higher than the current meaning of the price.STOP is set up lower than the current meaning of the price.
With these commands the positions is closed without additional orders when the price reaches the agreed level.
In the process of trading you can create pending positions, that will be activated when the price reaches the agreed level (open price). When creating and closing orders, a temporary delay occurs, and lasts for about 30 to 40 seconds. When you make an inquiry, you are given a real market price, which is the current price at the moment of proposal, not at the moment of inquiry.
The process of trading is described in detail in section Description of the Trade Terminal.
The main terms that characterize the account:
Deal, realization of 2 trade transactions, when currency is bought (sold), and then the reverse conversion is realized.
Balance, the sum on the account of a client after the last transaction is conducted.
Floating Profit, the current profit on open positions.
Floating storage, fee for postponement of an opened position over midnight GMT.
Equity = Balance + Floating + Floating storage.
Margin requirement, a necessary deposit sum calculated according to the formula
100,000 / K + 100,000 / K,
where K = leverage, and the number of items equals the number of open positions.
Percentage, index of an account.
Percentage = Equity / Margin Requirement. At Percentage lower than 50 % it's impossible to open new positions.
Margin call, condition of an account when all opened positions are closed by the Internet broker according to current quotes. It occurs at a Percentage lower than 10%. Please note that contrary to the majority of other companies, in PRO-FOREX.com price levels of client's orders may differ from the current price only by 5 pips. However, very rarely are orders executed worse than requests, because of the high market volatility.

What is FOREX?

What is FOREX ?
FOREX (foreigns exchanges market) is an international foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand.
As far as the freedom from any external control and free competition are concerned, FOREX is a perfect market. It is also the biggest liquid financial market. According to various assessments, money masses in the market constitute from 1 to 1.5 trillion US dollars a day. (It is impossible to determine an absolutely exact number because trading is not centralized on an exchange.) Transactions are conducted all over the world via telecommunications 24 hours a day from 00:00 GMT on Monday to 10:00 pm GMT on Friday. Practically in every time zone (that is, in Frankfurt-on-Main, London, New York, Tokyo, Hong Kong, etc.) there are dealers who will quote currencies.
FOREX is a more objective market, because if some of its participants would like to change prices, for some manipulative purpose, they would have to operate with tens of billions dollars. That is why any influence by a single participants in the market is practically out of the question. The superior liquidity allows the traders to open and/or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, that are accessible even to currency speculators with small capitals ($ 1,000 - 5,000), where the profit may be impressive. (You can learn more about it in the section: The main principles of trading.)
The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply. This decreases overhead expenses for transferring money and gives an opportunity to open positions with a small account in US dollars, buying and selling a lot of other currencies. That is, on can conduct transactions very quickly, getting a big profit, when the exchange rates go up or down. Many speculative transactions in the international financial markets are made on the principles of marginal trading.
Margin trading is trading with a borrowed capital. Marginal trading in an exchange market uses lots. 1 lot equals approximately $100,000, but to open it it is necessary to have only from 0.5% to 4% of the sum.
For example, you have analyzed the situation in the market and come to the conclusion that the pound will go up against the dollar. You open 1 lot for buying the pound (GBP) with the margin 1% (1:1000 leverage) at the price of 1.49889 and wait for the exchange rate to go up. Some time later your expectations become true. You close the position at 1.5050 and earn 61 pips (about $ 405). For the calculation of 1 pip .
Everyday fluctuations of currencies constitute about 100 to 150 pips, giving FX traders an opportunity to make money on these changes.
In FOREX, it's not obligatory to buy some currency first in order to sell it later. It's possible to open positions for buying and selling any currency without actually having it. Usually Internet-brokers establish the minimum deposit such as $ 2000, for working in the FOREX market, and grant a leverage of 1:100. That is, opening the position at $100,000, a trader invests $1,000 and receives $99.000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF). All of them are traded against the US dollar (USD).
In order to assess the situation in the market a trader has to be able to use fundamental and/or technical analysis, as well as to make decisions in the constantly changing current of information about political and economic character. Most small and medium players in financial markets use technical analysis. Technical analysis presupposes that all the information about the market and its further fluctuations is contained in the price chain. Any factor, that has some influence on the price, be it economic, political or psychological, has already been considered by the market and included in the price. The initial data for a technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions.A technical analysis is founded on three suppositions:
Movement of the market considers everything;
Movement of prices is purposeful;
History repeats itself. That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices.
A number of technical indicators have been installed into the PRO-CHARTS trading system. Analyzing the indicators one can come to the conclusion about further movements of the quoted currencies. For a more detailed description of the indicators, analyzing price charts and volumes of trading,
Fundamental analysis is an analysis of current situations in the country of the currency, such as its economy, political events, and rumors. The country's economy depends on the rate of inflation and unemployment, on the interest rate of its Central Bank, and on tax policy. Political stability also influences the exchange rate. Policy of the Central Bank has a special role, as concentrated interventions or refusal from them greatly influence the exchange rate.
At the same time one should not consider fundamental analysis just as an analysis of the economic situation in the country itself. A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations. Various prognoses and bulletins, issued by the participants, have a strong influence on the expectations. Very often an effect of the so-called self-filfilling prophecy occurs when market players raise or lower the exchange rates according to the prognosis. But a deep and thorough fundamental analysis is available only for big banks with a staff of professional analysts and constant access to a wide field of information.
In spite of these different approaches, both forms of analyses complement one another. Traders who act on the basis of a fundamental analysis, have to consider some technical characteristics of the market (the main rates of support, such as resistance and resale), and supporters of the technical approach to the market must track the main news (interest rates, important political events).The main merits of the FOREX market are:
The biggest number of participants and the largest volumes of transactions;
Superior liquidity and speed of the market: transactions are conducted within a few seconds according to online quotes;
The market works 24 hours a day, every working days;
A trader can open a position for any period of time he wants;
No fees, except for the difference between buying and selling prices;
An opportunity to get a bigger profit that the invested sum;
Qualified work in the FOREX market can become your main professional activity;
You can make deals any time you like.