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and Forex Options trade. The document also explains in brief about the advantages of the Forex market and the Forex market participants. By going through this document reader is expected to get a brief idea about Forex and general business terminologies, understanding of reading Forex quotes, the most actively traded FX currency pair etc., The document is designed for the new entrants to the Forex support services in the GCC IT team. It is to be noted that the Forex market and the related aspects are vast in nature and the points briefed in the document are only a synopsis of a few main aspects of the FOREX. The document will help a new joiner to grasp the business/technical aspects of the project quickly.
₪ -Israeli new shekel $-Dollar €-Euro Rs. Rupees
-Philippines Peso ¢-Cents ¥-Japanese Yen £ - British Pound
A very brief introduction to Forex and Forex trading: Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. Unlike other financial markets, the Forex market has no physical location and no central exchange (off-exchange). It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers. Foreign currency exchange (Forex) market is the largest trading market in the world. It yields an average turnover of $1.9 trillion daily. The figure is nearly 30 times larger than the total volume of equity trades in United States.
a pip can worth $1 (for a mini account) or $10 (for a 100K account). you will be given a quote like EUR/USD 1. All currencies are traded in pairs. USD/JPY refers to the US dollars and Japanese Yen pair. currencies are always traded against one another and quoted in pairs. British Pound (GBP) and the Japanese Yen (JPY). For example.Forex is actually the short form of the word Foreign Exchange.4675. this means the rate had move by 2 pips from 1. depending on the account type that you are trading with. The Bid price is the price that you will get for selling a currency while the Ask price is the price that you will get for buying a currency. Within the pair itself. A pip is actually the smallest movement a currency quote can have. This means that one dollar is equivalent to 1. Base Currenc y USD Quote Currency JPY As mentioned earlier. Both these prices are expressed in terms of the base currency. In this case. . the first currency is known as the base currency while the second currency is known as the quote or counter currency. Some of the major currencies being traded on the Forex market are Swiss Franc (CHF). It refers to the simultaneous buying and selling of a currency pair. All these currencies are traded against the US dollar (USD).4673/75. you will be given two prices. Euro (EUR). For example if you requested a quote for EUR/USD. The price on the left side of the quote is the Bid price (1. Let us say that the exchange rate for the USD/CHF currency pair is 1. all currency quotes have two prices.6550 Swiss francs. All quotes for Forex are quoted in terms of the base currency. any fluctuation of the rates is referred to by how many “pips”.4673) while the price on the right side is the Ask Price (1. For example. In Forex.6550.4675). When you ask for a currency quote. In Forex.4673. if the EUR/USD Bid price moves to 1. the bid price and the ask price.
you do not need to wait the market to open. regardless on the fall or rise period of one single country currency. you can always response to world latest movement and news immediately. Trade Forex 24 hours a day Forex market never sleeps. In Forex trading. 150. you can always response to the market trend a lot faster than in any other trading market. Leverage trading in Forex market Also. This means you can start small and work as part time trader before going full time on FX trading. Rather than merely loading up on risk as many people incorrectly assume. Singapore. leverage is essential in the Forex market. the substantial leverage available from online currency trading firms is a powerful. As trades are always done in pair of currency pairs. whereas a stock can easily have a 10% price move on any given day. a $1. High Leverage Margin Forex brokers offer trade margin of 50. followed by Tokyo. For example. moneymaking tool. Every Sunday 5. Hong Kong. Trading in Forex gives you an equal prospective in rising and falling market.Advantages in Forex currency trading Equal Prospective in Rising or Falling Market Trend There is no structural bias to the market and there are no restrictions on short selling in FX market.000 in a 150:1 Forex account will gives you the purchase power of $150. Forex traders often find themselves controlling a huge sum of money with little cash outlay on the table. with the flexibility of Forex market trading time. or even 200 to 1 of trade margin. This is because the average daily percentage move of a major currency is less than 1%. While certainly not for everyone.000 in the currency market. London. Forex market starts its week from Sydney.00pm in New York. 100. . and New York. Forex traders can always find chance to make money in anytime. In Forex trading. you can work on your trade in Forex during your free time.
High Liquidity Market Turnover value in Forex is $1. In the Forex market there is no commission charges payable when you buy or sell a currency. where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. and British Pound are acting as the base currency. a trader is able to profit from the market situation depending on whether he undertakes a “Short” or “Long position”. For example USD/JPY.Table below demonstrates how a high trading margin can impact on the trades ROI. Instead what you pay is a “spread”. Euro Dollar.9 trillion per day.24/7 trading via computer A computer with Internet connection plus an active Forex account are sufficient for you to execute a trade in Forex market. It is the largest trade market in the world and the liquidity of the market is huge. No Commission Charges Payable. USD. Trade Forex anywhere from the world virtually Forex market . This is the difference between the Bid and Ask price. EUR/GBP. Professional Forex traders have the privilege to travel around the world but yet still connected to the market anytime. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY. Understanding Forex Quotes Quoting Foreign Currency Currencies are always quoted in pairs. The first currency in the quotes act as the 'base currency'. The Base currency in a Forex quote will . and GBP/AUD. The freedom of this is something you could not get else where by being an employee of a corporation. in such cases. anywhere. Traders can easily cash in or cash out their capital in Forex market Ability to Profit from a Bull’s or Bear’s Market Regardless of whether the market is moving up or down.
0001 (the fourth decimal place).95.1. EUR/USD 1.00 When selling Euros. the value of a pip is different from one another. Spread = | 127. Spread = | 1.95.) What's a pip? A pip is the smallest value in a Forex quote. a pip would be 0.2390 is the asking price. USD$1. USD/JPY indicates how much Japanese Yens you can buy with 1 United States Dollar. The different of the bidding and the asking price is called 'spread'. 1 Euro = USD$1. Note that as each currency has its own value.01 . For example EUR/USD 1.2390 | = 0. Take our example earlier on EUR/USD.0001 EUR/JPY 127. while for EUR/USD 1. that's one pip. Say USD/JPY rate at 120.2386.2390. Ask price= 1. FX Quoting: Bid/Ask and Spread Sometimes you only see one number in the quote but often currency exchange prices are displayed in pairs with the 'bid price and the ask price'.2385.2390 = 1 Euro. when buying Euros.95/128. If the exchange rate goes from 1. similarly EUR/GBP indicates the exchange rate of Great Britain Pound with 1 Euro Dollar. Bidding price is the price that you sell the base currency (EUR in our case here).0005 Pip value= 0.05 Pip value= 0.2385.00 = 1 Euro. while 1.always have a value of 1.01 (the second decimal place). asking price is the price that you buy the base currency.128.2385.00 • • • • • Base currency= Eur Bid price= 127. JPY128.2385 .2385/1. 1.2385/1. Ask price= 128. a pip would be 0.2390 When selling Euros. In mathematical definition.75. a pip means the last decimal place of a quotation. 1 Euro = JPY127.2390 • • • • • Base currency= Eur Bid price= 1.00 | = 0.2385 to 1. You might notice that bidding price is always lower than the asking price.2385 is known as the bidding price.95 . Ever wonder why? The different of the bid-ask price (so called 'spread') is how currency brokers make profits without charging commissions to their clients (sell high and buy low in the same time. when buying Euros.
Because of leveraging.7504=40. The sell is made at Bid price.1 Example of a USD/INR trade whereby the trader is of a view that USD would appreciate against INR.7504 41. USD$1. Ask price= 1.7410 = 1 Pound.7400/1.75.860 Leveraging your money in Forex margin trades In Forex.7400.GBP/USD 1. 1 Pound = USD$1. when buying Pound. . USD/INR Current Day A Week Later Bid 40.7590 Ask 40.7590 .7410 When selling Pound. the concept of leverage refers to the situation where a trader borrows the money of the Forex brokerage firm and uses that money specifically for trading in the Forex market.7410 | = 0.00. so the sell value would be 100.001 Pip value= 0. spread value not available.40.000*41. now the trader can book profit by selling USD to INR whereby he will be receiving more INR.75.7400 .900 The profit for this trade will be 41. Buying will be at ASK rate which is 40.000*40.1.Hence a decision to buy is made. a trader with just a small capital outlay is able to invest in significantly larger value contracts.7594 Market conditions predict that the USD would appreciate/strengthen against INR.900 .0001 USD/JPY 119.75. Spread = | 1.75.8 • • • Base currency= USD No bid-ask price is displayed.7590=41.7500 41.7504 in this case So the buy value would be 100.7410 • • • • • Base currency= GBP Bid price= 1.040 = 1.7400.040 Few days later the USD value raises to 41. Pip value= 0.
It is common to find Forex brokerage firms offering up to a ratio of 1:100 for an account holder. In contrast. Canadian Dollars. in the equity market. P. and the Euro Dollars. The major players in Forex trading According to Wall Street Journal Europe. HSBC. One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin. Australian Dollars. J. Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. Morgan Chase. or even 200:1 trade margins. but in Forex. Merril Lynch. Barclays. also known as account margin or initial margin. and Morgan Stanley. Goldman Sachs.000 as a deposit on the position. Leveraging is all about profit maximization as well as risk minimization.!! The major traded currencies Major traded currencies are United States dollars. The broker will also specify how much they require per position (lot) traded. the broker wants $1. Typically the broker will require a minimum account size. followed by UBS.000 traded. the risk factor of his transaction is also multiplied many times over and hence the need for proper risk management. who covered 17% of the total currency trades. In the example above. a trader needs to come with 50% of the transaction value for every trade that they make. This in turns magnify the ROI dramatically.. This means that for every $100. With leverage. 73% of the trade volume is covered by Deutsche Bank. The minimum security (margin) for each lot will vary from broker to broker.000 of Forex.000 you have. for every $1. 15:1 margin for futures market. the Forex trader is able to profit more with each trade that he makes. British Pounds. For example. 2:1 margin for equity trading. Once you have deposited your money you will then be able to trade.000. . Japanese Yens.000 they may allow you to trade up to $500. Beware that just as the profits are magnified by using “margin” the same holds good for the losses too. Swiss Francs. normal trade margins are 100:1 and 150:1. Citi Group. So if you have $5. you can trade 1 lot of $100. Margin trading refers to the leverage amount given to the traders to trade in the market. You get 1:1 margin for stock exchanges. At the same time. ABN Amro. the broker required a one percent margin.
Commercial companies often trade in sizes that are insignificant to short-term market moves. The services of such brokers are more similar in nature to other investment brokers and typically provide a service-oriented approach to their clients.Participants to Forex Market There are four major players in the forex market which are listed below 1. analysis and strategic advice to such clients. The interbank market has become increasingly competitive in the foreign exchange market. Customer brokers 4. Commercial Companies 3. where dealers trade to make the bank profits.the difference between bids and asks prices. Frequently. but in the event of aggressive intervention the actual impact on the short term supply/demand balance can lead to the desired moves in exchange rates. However. Customer Brokers: For many commercial and private clients. Many banks do not undertake trading for private clients at all. Individual traders and Speculators Banks – Interbank: It is not uncommon for a large bank to trade billions of dollars on a daily basis. however. a minor part of the market liquidity is derived from the financial activities of companies seeking foreign exchange to pay for goods or services. but a large amount of trading is also conducted by proprietary desks. Commercial Companies: The backbone of foreign exchange markets is currency speculation. Among the most important responsibilities of a central bank is the restoration of an orderly market in times of excessive exchange rate volatility and the control of the inflationary impact of a weakening currency. there is a need to receive specialized foreign exchange services. Some multinational companies can have an unpredictable impact when very large positions are covered however due to exposures that are not commonly known to the majority of market participants. Banks – Interbank and Central banks 2. As many central banks have very substantial foreign exchange reserves. the mere expectation of central bank intervention is sufficient to stabilize a currency. There are a fair number of non-banks offering dealing services. Ultimately. . Central Bank: The national central banks play an important role in the foreign exchange markets. But it also clear that one of the decisive factors determining the long-term direction of a currency's exchange rate is the overall trade flow. as the main currency markets can quite easily absorb hundreds of millions of dollars without any big impact. For such brokers. Some of this trading activity is undertaken on behalf of customers. the intervention power is significant. the main source of revenue is the spread . and do not have the necessary resources or inclination to support medium sized commercial clients adequately. the central banks seek to control money supply and often have official or unofficial target rates for their currencies.
individual traders can’t watch the market all the time as they usually have other commitments such as work or family life. Below is the illustrative view of a trade cycle in general . Trading is simply buying and selling of financial instruments with a view to make profits or transfer risks to another party. Also. In fact. about 90% of individual traders lose money during their time in the FX markets. They may invest in a variety of financial instruments.Individual traders and Speculators: Individual traders are increasingly active in the FX markets. These factors are a disadvantage. and don’t manage risk well. This is driven by the ready access to the market through the Internet and the opportunities available to earn significant profits with a relatively low capital investment. individual traders face higher transaction costs than professional traders as they don’t have direct access to the market and have to use a broker. Hedge funds -Hedge funds are professional investment firms that usually manage funds on behalf of high net worth investors. Professional traders are pretty much obliged to trade all the time by the nature of their jobs which means that they may not be able to be as selective about the trades that they enter. Their motivation is speculative profit for their investors. as they earn their money from a percentage of profits earned. but the advantage is that the individual trader can choose whether to participate in the market at any given point in time. including foreign currencies. Individual traders are often unsuccessful. Synopsis about Trading Having learnt about market participants now let’s go through Trade lifecycle. Individual traders often don’t have systems. In addition.
Else there is very lot of scope to loose money. A trader should do a thorough study of the stock / financial instrument on which he will be investing. OTC market means over –the-counter market meaning the traders will not be meeting in the designated exchange floor to place the orders. 3. Hence there is a requirement of written communication to be signed by both parties to trade in order to avoid discrepancies later at settlement stage. Once the preliminary research is done its now time to place orders in the market. Speculators and Investors. In this stage all the trades entered into are further taken by clearing corporations which will do the stock clearance by book entry. At this stage it’s necessary to know about 2 main kinds of traders’ viz. 2. Trade confirmation: Once the order is executed the next step is to get/generate confirmation for the trade.. This kind of order will wait for the specific price mentioned and will not execute until the specified price is reached.These orders take whatever is the value of the stock trading in the market as its target price and will execute the order. Market order. The firm which will provide you a demat account will be a member of the stock exchanges which will act as a middle-men between trader and the exchange. Market order and Limit order. This will help trader to place orders in the Electronic media without actually going for exchanges to trade. an investor will not have any chance of controlling the price because as the name suggests it’s a market order. Limit order. A trader who wants to begin trading should have a good knowledge about the financial product he is going to trade. Generally in case of market orders the trade will be executed within a few seconds and in case of Limit orders the order will not be executed until the specific price target is reached and will lapse on the end of trading hours. 4. Trade usually happens over the phone. Trader order Execution: Once the order is placed based on the type of order the trades will be executed. The trade confirmation usually is a practice widely used in OTC market thought its also used in normal exchange trades too.In this order the trader will specify the price on which the trade should be executed. Clearing organization acts just like a central bank of a country . This will be the next phase of trade cycle. Placing Orders: In order to place an order trader should be having a demat account.. Investors are the other type of traders who as the name suggests invests in the stock for duration generally more than 1 year with a view to earn dividend/bonus on the investments along with increase in the value of the shares. 5. Speculators are a kind of traders who will look opportunity in both raising and falling markets. In this type of order.1. Orders are mainly of two types’ viz. They generally invest for 1 day to make profits. Clearing and Settlement: This is the last phase of the trade lifecycle. Decision to Trade/ Invest: This is the first phase in any trade.
Once the settlement of a trade is done its irrevocable. Similarly the clearing corporation will do a net transfer of the security/script to respective members account. Pictorial view of the trade cycle: . Settlement.wherein the cheque of all the local banks are sent and the central bank just does a book entry of transferring the funds on a net basis.this is the stage wherein the actual money moves in /out of members /traders account in exchange for the stock they have traded. Before the settlement happens its necessary that all the trade details are agree upon by both the parties to trade.
Value Spot (in two business days).918. In order to minimize this uncertainty. You are therefore exposed to exchange rate movements between two business days and three months.6000. You can arrange a FX Swap to buy USD / sell AUD.7 AUD. Let’s assume that the AUD has appreciated over the following days and the rate rises to 0.000/0.7 AUD. The AUD/USD spot rate=0. Whilst your net USD position after three months is square. Now in this scenario.6455) So on the trading day you would give out 100.918. and sell USD / buy AUD. The buyer will pay you on delivery in USD. Value three months' time.253. there is an exchange of one currency amount (the first currency) for a pre-agreed amount of another currency (the second currency).549187 AUD (1/0. A FX Swap is effectively two foreign exchange transactions packaged together.6000=166.000 in return for 154.6700=149. you can choose to enter into a Forex Swap.666. . you would receive more AUD as the rate has decreased. In the second stage of the transaction occurs at a later date. lets assume that AUD has depreciated over the following days and the rate falls down to 0. The two currencies to be exchanged are the same in both stages of the transaction and are referred to as the currency pair. Assume you are an Australian-based importer who has committed to pay US dollars (USD) for goods in two business days. there is a timing difference in cash flows.Examples of different kinds of FOREX Trades Having understood the general trade cycle of a Spot trade lets relate with FOREX Swap and Options Foreign Exchange Swap: You may use a Foreign Exchange Swap (FX Swap) if you need to exchange one currency for another currency on one day and then re-exchange those currencies at a later date.6700 then at the close of the contract you would receive: 100.6455 USD or conversely 1USD =1. The counterparty usually a bank will give you $100. On that date. There is a contract to sell these goods in three months' time.000/0.73AUD On the contrary.6455 meaning. 1 AUD can fetch 0.7 AUD. there is an exchange of an agreed amount of the second currency for an agreed amount of the first currency. The AUD you would receive in this scenario would be: 100. In the first stage of the transaction.000/0.6455=154.
918.000/0.000. [The currency with the higher interest rate will be at a discount on a forward basis against the currency with the lower interest rate.] .225. After 3 months you would receive 100. And the Spot exchange rate for the second stage i.67 AUD to receive $100.e.6455 + (0. In the scenario explained above its assumed that the interest rate for AUD for 3months lending would be 4.000/0..6455 and you will be paying: 100. This is because when the forward rate is negative the Spot rate would decrease and you would receive more AUD when the 2nd phase of the trade happens. it is therefore necessary for the bank to compensate for the difference in the interest rate and hence the forward rate has to be negative. The exchange rate applied to the second stage will be the forward exchange rate based on the same spot exchange rate used for the first stage together with the forward margin.20% Since the bank has earned more interest on the AUD which you have given. The first exchange of currency happens at 0.65% and for USD its 1.6401=156.6401.6455 and the forward margin is (0.0054).6455=154. Assuming that the spot exchange rate for AUD/USD=0.The exchange rate applied to the first stage of the swap will be the spot exchange rate.6401 There for the rate at which the currency would be exchanged irrespective of whatever may be the spot rate for AUD/USD on or after 3 months would be 0.6 AUD.0054) = 0. after 3 months would be: Spot rate at first stage + forward margin 0.
9500. In this scenario the trader can let the contract expire without actually exercising it. Scenario-1 The traders assumption was wrong and the currency rate moved downwards (2.0250. The loss in this transaction is limited only up to the premium amount paid. The trader is very bullish on the rate and expects the rates to move up. Hence the trader decides to go for a Call option by paying a stipulated amount of premium to acquire the right to buy at a strike price of 2.0230.0250 whatever may be the spot rate for the currency pair in the market. but not the obligation to buy/sell the contract value”. The same logic holds good even in the Forex Options. Let’s try to understand the same with help of a simple option.0000).Forex options A plain Options contract means “A contract that gives the buyer right. But at the same time he doesn’t want to put in risk his entire portfolio. In simple terms it means that if and only if a buyer sees a profit in the contract entered into. The current spot price for GBPUSD is 2. he can exercise the option. Scenario-2 The traders view in the currency rate works out well and the rate moved way ahead to 2. . In this scenario the trader can execute the contract at 2. Else he can ignore the option to expire worthless.
xls .Forex Futures Example in the attached xls Margin Exam ple_New.
. an option is a contract between a buyer and a seller that gives the buyer the right—but not the obligation—to buy or to sell a particular asset (the underlying asset) at a later day at an agreed price. Trade Date-The date on which the trade is executed/entered into between buyer/seller. the seller collects a payment (the premium) from the buyer Call Option-Buying a Call option provides the right to buy a specified quantity of a security at a set agreed amount. known as the 'strike price' at some time on or before expiration.e. at a market determined price (the futures price). in the case of . Future Contract-Futures contract. 2 days from the date of trade execution. i. Options-In finance. in finance. The contracts are traded on a futures exchange.The fixed price at which the owner of an option can purchase. refers to a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future. Settlement Date-the date on which the trades are actually settled. known as the 'strike price' at some time on or before expiration Strike Price. A notable exception is the USD/CAD currency pair which settles T+1.Buying Put option provides the buyer right to sell a specified quantity of a security at a set agreed amount.Spot-Foreign exchange spot trading is buying one currency with a different currency for immediate delivery. It is the date on which cash will move out of the buyers account to seller and the security will be moved from sellers account to buyers account Forward-A forward contract or simply a forward is an agreement between two parties to buy or sell an asset at a certain future time for a certain price agreed today. The standard settlement timeframe for Foreign Exchange Spot trades is T+2 days. Put Option. rather than for future delivery. In return for granting the option.
or sell. or "derived" from. Pip .a call. Ask Price. the underlying security or commodity. a traditional security (such as a stock or bond).A pip is the smallest value change in a Forex quote. or a market index. in the case of a put. Bid Price. an asset (such as a commodity). Premium.An exchange of streams of payments over time according to specified terms.The price at which a broker is willing to sell a certain security. It's the price at which the stock will be bought or sold when the option is exercised. Swap . Derivative-A financial contract whose value is based on.The option premium is the price the buyer of the options contract pays for the right to buy or sell a security at a specified price in the future. .The price at which a broker is willing to buy a certain security.
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