Foreign Exchange Market – Forex 2009
Forex
From contraction of the words Foreign Exchange, Forex is the nickname given to the universal exchange market where currencies are traded against each other, exchange rates, which vary continuously.
Economic significance
This global market, which is essentially interchange fees the other market in the world with respect to the total volume behind interest rates. However, it is the most concentrated, and the first of liquidity in most treaties, such as euro / dollar.
To give an impression of cash in circulation, the daily trading in 2004, 1 900 billion dollars, namely:
600 billion in spot transactions and 1 300 billion futures almost exclusively in transactions over the counter, after the three-year study by the Bank for International Settlements (BIS).
Transaction volume was 53% between banks;
33% between a bank and a fund manager or a non-bank financial institutions;
and finally to 14% between a bank and a non-financial nature.
In every major bank, traders (traders) of 3 × 8, but generally in different locations. A team-based in Asia or Australia follows another is in Europe and one third in North America, and so on.
But despite the global nature of the release schedule between continents, a large (31% of total volume, according to BIS) on the market activity is still physically located in London.
In its latest triennial review, the BIS (Bank for International Settlements) have shown that an increasing number of people choosing to invest in Forex. Although they still represent a very small minority of transactions and volumes, a dedicated private investors has grown in parallel. Simply record the number of trading platform available to them on the Internet and tools for real-time information once reserved professional dealers in the rooms. Now, the active trader of foreign exchange to invest a minimum amount and because of the existence of leverage-trader in almost (!) equivalent to the professional trader. Information Tools in real-time broadcast news and information forex fundamental (economic indicators) and provides individuals possibility of trading conditions in real time.
Foreign exchange market has existed in its present form, called a floating exchange rate since March 1973 and the abandonment of fixed exchange rates of various currencies against the dollar standard Bretton Woods in 1944.
Processed products
Spot
Cash (called spot) was the main parities treated in 2004, according to BIS:
euro / dollar – 28%
U.S. dollar / yen – 17%
The sterling / U.S. dollar (Cable said in English) – 14%
Despite the strong development of the euro, U.S. dollar remains the dominant center, present in 89% of transactions (37% compared to euro, 20% for the yen and 17% for the pound sterling, all in all, 200% since each transaction involves two currencies). For a non-European currency XXX, a transaction between the euro and the currency is usually divided into a EUR / USD and USD / XXX.
Change Term
The exchange term is split into two products, both inter-bank term dry (say directly in English), rather little treaty and currency swaps. Unlike other financial markets, futures held never been imposed on the foreign exchange and remain marginal.
Options Exchange
Finally, options market exchange is the most diverse and most inventive of the options markets. He is responsible for almost all forms of so-called exotic options, or second generation (barrier options, Asian options, options on options, etc.)..
Trading and Foreign Exchange
Coverage (hedging)
The principle is to take positions with opposite sign to cancel the risks.
Forecasting
This is to anticipate market movements through a more or less sophisticated financial environment. economic and political advantage by anticipating the movement of foreign currency speculation. To this are many sources of information for forex traders (Reuters, Telerate, Bloomberg LP) to get access to all quotes and financial information for the trade. It also has access to economic indicators of major countries and global financial information. It is able to form a view regarding prices or rates and to predict future movements.
Arbitration
It is trying to take advantage of price differences or occasional courses on the same medium, the same currency at 2 different markets. The switch can perform these operations in a single market as spot-on or multiple markets such as currency swaps. Powerful tools (called prices) makes it possible to calculate different prices or interest in a transaction arbitration. This strategy requires a response and stress management in real time from the operator.
Exchange Rates
Electronic exchange between monnaies.Le rate for a currency (currency A) is the price (ie price) of that currency relative to another. Also called "Parity of a currency."
Exchange Rates listed on foreign exchange markets, vary continuously, but also vary depending on the place where list.
Examples
For example, the euro exchange rate U.S. dollar will be noted: EUR / USD = 1.3120 and the dollar will be quoted in Yen USD / JPY = 89.4454.
(EUR = Euro, USD = U.S. dollar, yen JPY =, GBP = pound sterling by the International Monetary Fund encoding, ISO 4217 distinguish each single currency with three-letter abbreviation, cf. Complete list)
Exchange rate fixed or floating
This exchange of a currency is:
Either fixed, ie constant relative to a reference currency (usually U.S. dollars or euros), by decision of the State, to issue currency. The rate may not be amended by a decision of devaluation (or revaluation) in this state. A State may decide not to adopt an exchange rate of its currency. If the fixed exchange rate at a level too high or too low, the exchange rate can be "attacked" the foreign exchange market. If monetary authorities are unable to cope (through their currency reserves), they should change their parity.
Are fluid and determined for each transaction from the balance between supply and demand in the foreign exchange market. This is a global interbank currency, less centralized locations special offers and trade based on the correlation between banks.
The exchange rate:
is a "spot", ie "spot" for immediate purchase and sale of currencies. Generally, the deadline for delivery of foreign currency is less than 2 days.
is a course forward, "ie" forward "for foreign currency transactions resulting from future, more than 2 days. The mission is to manage risk. It is an agreement today to put the price that we buy / sell currency.
Factors affecting price:
The exchange rate is determined by supply and demand of both currencies: if demand exceeds supply, prices rise.
Since the currency of a country is mainly a debt incurred central bank in this country, detention of a foreign currency can be seen as having a claim to "see" in the country which has issued.
In the short term
The exchange rates vary widely during a single day, these variations are not explained by the theory of purchasing power parity (PPP) previously described. Within this framework Short-term analysis, it is necessary to refer to other explanations.
These daily changes based on the concept of early return of deposits in foreign currencies. Economic agents will determine their demand for different currencies depending on the returns they expect deposits in these currencies.
At long term
Recovery rate of the euro-dollar exchange rate from January 1972 to January 1999 for the price of French franc or Deutsche Mark. In the long term currencies theoretically be closer to equilibrium parities from structural parameters. Imbalances and more rarely balances in the valuation of currencies, measured basis of purchasing power parity (PPP). It is a complex statistical exercise, which is to compare over time the purchasing power of a consumer model in a country and a number of consumer products up with a second consumer-type in another country and for a range of consumer goods desired close, but similar to other local practices in terms of lifestyle and cost structure. In practice, generally U.S. dollar as a currency common index and true each time compare the purchasing power of a consumer-type country X and that a typical American consumer.
The purchasing power parity, if it is useful for international comparisons of living standards, where margins of error of a few percent is significant, it should be in the analysis of foreign exchange made with the greatest caution.
Currency crisis
A country will suffer a currency crisis where the capacity to repay foreign debt (Public and private) denominated in foreign currency in the country is much in doubt (confidence crisis). The flow of capital in the short term, then drop the price of the currency, which makes recovery even more difficult.
Economic role of exchange rates
Exchange rates (and interest rates that are closely related) is obviously on import and export. They have an influence on the direction of capital flows between economic regions.
As a result, countries and economic areas may be tempted to influence exchange rates, often under the pretext of preventing speculation (in fact these manipulations tend to encourage), and to improve (Lower rate).
Operation of foreign exchange markets
The case of the euro / dollar
The exchange rate says euro / dollar, the euro figures in U.S. dollars, therefore slash (not to be confused with Euro dollars).
Financial instrument is the most active and most informed world: 27% of the total spot transactions. Its value is an indicator monitored not only by economic and financial circles, but also by the media, both specialized and general, throughout the world.
This definition is in fact the external value of the euro against the dollar.
Profession (FX)
Those who conduct foreign exchange transactions are called professional traders.
Banks especially have different groups of traders, both to make it clean for those institutions in the market to meet the changing needs of their customers, for example on business, for their international trade. They act as market makers, ie they "are prices" for an amount specified by default, and gives both the buyer (bid, in English) and to whom they sell (ask at English), for example: 1 EUR = 1.2343 / $ 1.2346.
Round lots
Traders expressed unit listing an exchange rate on a currency pair in dots called pips. Pip stands for price interest point "or a" swap "in French. In the beginning, as the name suggests, it meant the unit "off" or "report" of the exchange term, but ultimately be used for social unity. It refers to the applied last decimal in the event of the euro, the fourth decimal place. A list of three "cores" which are standard on the interbank market in euro / dollar, will in the first example (EUR / USD = 1.3120) Section 1 above: EUR / USD = 1.3120 (bid) / 1.3123 (ask). Is a spread of 3 pips in the case of yen, it will be the second decimal place, and a list of four "pips" will be, again to the above example, USD / JPY = 89.4454 (bid) / 89.4654 (ask).
The pip represents a different percentage, and not fixed for each parity. This difference depends on the currency in which we choose by convention to express the exchange rate (the "unsafe" by comparison) the second is taken by a unit of goods (the "certain"), the number of decimal places quoted.
These differences between the current "buyer" and "sell" of one currency against another is much less a citizen can see when they want to implement a currency transaction in a pharmacy exchange (or his bank) for a modest sum.
Initially, the percentage (minimum) to a foreign currency on the Forex at 100 000 euros (the standard transaction is not in the tens of millions), the noted that for such a pip amount exchanged is $ 10. In the second example is the percentage of a foreign currency 100 000 U.S. dollars a pip for that volume 1 000 yen (around $ 9).
Exchange rate mechanism European
Exchange rate mechanism in Europe, or ERM, is a exchange rate mechanism introduced by the European Community in 1979 to statibiliser rates of European currencies to prevent risks and increase confidence in the currency in the medium and long-term inflation and promote trade and activity in intra-EU trade.
Originally called "The European Monetary System," it was significantly modified in its operation by the Maastricht Treaty was ratified in 1992 establishing the European Union in preparation for its economic and monetary union and common currency.
Since the introduction of the euro on 1 January 1999, was revised and replaced by the ERM II and is an agreement between the ECOFIN Council, which brings together all member countries in the European Union, European Central Bank and banks central banks of the Member States of the European Union outside the euro area.
ERM II
For Member States not participating in the European common currency, a second exchange rate mechanism in Europe, said the ERM II, was put in place. During negotiations the Maastricht Treaty of the 12 EU members and 3 new buyers (Finland, Sweden and Austria), it was expected that all members of the former ERM and all new members join The Union shall in EMU (if available) or in ERM II. ERM has ended, but Sweden (despite his signing of the Treaty) and the UK (who have opted to go retire, but was not allowed to do so) has not joined the ERM II. Such exemptions are no longer permitted for new candidates, who must first accept convergence of their economies and participation in ERM II (and the EMU as soon as conditions are met) with a timetable set out in the Accession Treaty.
ERM II is based on the euro only, ie on the common units are the only countries that joined the euro (and not on the ECU, which was calculated on all the European currencies Union) and tolerate a difference of 15% around an initial exchange rate between the currency and the euro. This reduction of basis for determining the exchange rates from the outside also should help to stabilize and distribute the budget on a more equitable. But this reduction of the base includes a risk of setting this budget, if inadequately European countries joining the euro. This was not the case and almost all countries in the European Union have all joined since the launch of the euro, which helped to end at the same time the ECU and consequently in ERM (at least formally, some financial institutions continued to calculate until about 2001, as a index, but given weight of the euro in the old basket of currencies, although the composition of the euro has since changed, and the methods for calculating the contribution to EU budget).
Since introduction of the euro on 1 January 1999, the parity between the euro and the legacy currencies of member countries join the euro was fixed and irrevocable. Other countries have ratified Maastricht Treaty (or its successor) is required to converge their economies in order to avoid economic distortions in their exchange rate, not to resort to devaluation, let the market determine the price of their currency in terms of their economic performance. In order to achieve to keep exchange rates stable around a pivot defined by membership in ERM II, the maximum fluctuation of ± 15%, they pursue a common policy on economic convergence criteria and a sound management of their public finances in short and long term.
These criteria are assessed by the Council of Finance Ministers of the EU Ecofin, in cooperation with the European Central Bank and national central banks of EMU members. If the economic convergence criteria are met for a period of at least 2 years, participants have the approval of the Ecofin Council to enter the euro, and their national central banks (NCBs) can adhere to the ECB, and finally, this integration is achieved (by submitting the signatures of ratification and financial conditions of approval representatives of national central banks and the money to convert, and the revenue guarantee funds deposited with the ECB), ECB set in accordance with the ECOFIN Council, the irrevocable conversion rate between their currencies and the euro, taking into account recent recordings official currency markets and adjustments based on the assets and international financial obligations NCB observe the day of closing.
All of the countries want to join the euro must first subscribe to the ERM II. This was the case for Greece in 2000 and 2001 before joining the euro. This is already the case in Estonia, Lithuania, Latvia, Malta and Cyprus and in Slovakia since November 2005. By integrating the euro area Slovenia left the ERM II on 1 January 2007.
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