forex markets finance
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FOREX MARKETS
Indian Forex Market is a 3 Tier structure headed by the Reserve Bank of India - the CentralBank of the country.
Forex Market
Reserve Bank of India Tier I
Authorised Dealers Tier II(Commercial Banks; Financial Institutions)
Money Changers -
FFMCs, RMCs
Customers Tier III
(Exporters, Importers, Remitters, External
Commercial Borrowers, Tourists, etc. etc.)
Foreign branches of Indian Banks, Branches of
Foreign Banks & Correspondents Tier IV
The RBI acts as controller of foreign exchange operations of Authorized Dealers while
Authorized Dealers handle customers' export/import business, inward/outward remittance and
provide the required foreign exchange.
Institutions authorized to deal in foreign exchange, in exchange control parlance are called"Authorized Dealers". ADs are usually banks and other financial institutions who have been
given permission/authorization- in the form of licenses by the RBI to deal in foreign exchange
under FEMA,1999. Once a licence is issued to operate as an AD, it holds good for ever, unless
it is revoked by RBI.
ADs are of three types:
Category A Can maintain independent foreign currency accounts -
NOSTRO/VOSTRO in its own name; creates market giving buy and
sell quotes of a foreign currency; takes currency positions.
Category B Handles all types of forex transactions by operating through the
accounts of category A brs.
Category C Can transact forex business through category A / B brs.
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How ADs make forex services available?
The banks deal among themselves from their dealing rooms - a centralized establishment,
offering a two way dealing price for different currencies at all times even when do not wish to
deal, but all during prescribed business hours, directly or through Brokers for transacting in
different foreign currencies vis-a-vis Indian Rupees either on behalf of their customers orthemselves/their branches in major forex market centres viz. Mumbai, Ahmedabad, Chennai,
Delhi and Calcutta.
Money Changers
To facilitate exchange of foreign currency into Indian currency and vice versa by the members
of public or tourists visiting India, RBI has granted licenses to various firms and individuals to
undertake money exchange business at sea/airports and places of tourists interest in India.
There are two kinds of money changers:
Full - Hedged
Restricted MCs
MCs Can buy and sell foreign currency subject to directions issued to
them
by RBI from time to time; They can dispose of their surplus holdings
by sale to others or to ADs.
Can only purchase foreign currency TCs and coins. subject to their
surrendering such collections to ADs or full-fledged money changers
Services offered by ADs:
financing exporters:
Preshipment credit in Rs./Foreign currency
Inland Guarantees for procurement of raw material
Bid bonds and other guarantees connected with project exports
Post shipment credit-
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FBP/FBD and rediscounting of foreign currency bills
negotiation of LCs
Collection of export bills
Adding confirmations to LCs
Forward Purchase contracts
financing Importers
Opening of LCsGuarantees
Collection of Bills
Remittances for direct import bills
forward Sale contracts
Hedging products:
Forward rate agreements
forward contracts for all types of liabilities other than imports / exports
Range/ Ratio range forwards
Currency/ interest rate Swaps
Cross Currency options and forwards
Foreign Currency loans
f CNR (B) Loans
Short/Long/Medium Term Loans
Syndicated Lending under ECB Scheme
Remittances and misc. services
Issuing Drafts/TTs/MTs in foreign currency against Indian rupees
Payment of foreign currency, Drafts/TTs/MTs in Indian rupees
Issuing foreign currency notes/travellers' cheques for persons going abroad as
tourists/for medical check up/business development etc.
Issuing exchange permits for students going abroad and releasing foreign currency
Advising corporates on currency price movements, hedging etc.
Facilitating Forfeiting transactions
ADs while offering their services should bear in mind that they are responsible for
observance of Exchange Control regulations and changes made therein from time to time
both by themselves and their constituents.
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EXCHANGE ARITHMETIC - BASICS
The Spaniards coming into the West Indies, had many commodities of the country
which they needed, brought unto them by the inhabitants, to who when they offered
them money, goodly pieces of gold coin, the Indians, taking the money, would put it into
their mouths, and spit it out to the Spaniards again, signifying that they could not eat it,
or make use of it, and therefore would not part with their commodities for money, unless
they had such other commodities as would serve their use._____________________________
-Edward Leigh (1671)
Foreign Exchange is nothing but the claims on and/or of the residents of a country to foreign currency
payable/ recoverable abroad. It could also be said as a method of conversion of one currency into
another. Obviously, in all such conversions, foreign currency is simply treated as a commodity to be
traded with the purchasing power of home currency. But then how/why such a need for
conversion/exchange arises at all. Let us now look at the following instances:
Why Foreign Exchange?
a resident Indian intending to visit USA has to obviously pay for hotel expenses, etc. in that
country's currency, whereas, his stock of money is in rupees;
a non-resident remits dollars to his brother in India and this being foreign currency, his brother
cannot use it for his local purchases;
L&T Co. exported earthmoving machinery to USA. Payment is received in dollars i.e.
currency of the importer. But L&T needs rupees for its local disbursals.
Don't you think in situations like 2 & 3, the recipient of the foreign currency has to perforce convert it
into rupees, (as otherwise, they , like West Indies may have to spit it out) while in the case of former,
the resident has to convert his stock of Rupees into dollars before embarking on his journey to USA?
Where do such people go?
Forex Markets are the obvious destination for such people to either sell or buy foreign currency. Forex
Markets are, in fact, an abstract concept for there is no such single location say like an exchange pit,
where people can come and exchange their currencies. It is merely an over the counter market. In fact,
It is the commercial banks, who predominantly offer such conversion facilities besides certain notified
money changers. A commercial bank, as a dealer, trading in foreign exchange may, therefore -
stock currency notes and coins of foreign countries;
stock travelers cheques denominated in foreign currencies;
maintain accounts in foreign currencies in foreign countries(Nostro Accounts);
maintain accounts in home currency of banks established in other countries (Vostro
Accounts).
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How these transactions are put through?
The commercial banks cater to these conversion needs by various means:-
By selling actual currency notes, coins, travelers cheques, demand drafts/international money
orders denominated in foreign currency against payment in home currency (for international
travelers).
Direct payment abroad in foreign currency on behalf of the resident by transferring balances in
nostro account against recovery of equivalent home currency plus charges from the remitter Payments against remittance from abroad may be made locally in home currency by debiting
vostro account of remitting bank.
Payments may be made in the home currency against reimbursement received in foreign
currency by credit to a nostro account maintained abroad.
Cheques, drafts, etc., including travelers cheques payable abroad are collected through banks in
the country of payment by way of credit to nostro accounts.
Cheques, drafts, etc., denominated in local currency are paid locally against credit to a nostro
account or authorization to debit vostro account.
To undertake such transactions, the commercial banks maintain correspondent
relationships/arrangements with various banks located abroad.
Any restrictions on such currency movements/transactions?
Under the regulations, a license granted by RBI is necessary for transacting in foreign
exchange. Such license holders are known as -
Authorized Dealers - only commercial banks; can under take any
type of transaction.
Full-fledged Money Changers - travel agents, hoteliers, reputeddepartmental stores, etc.; only permitted to
buy and sell foreign currency - notes,
coins; foreign currency traveller's Cheques;
Restricted Money Changers - same as above but only authorized to buy
foreign notes, coins and traveller's cheques.
(Both" the types of money changers have to route their final foreign exchange transactions
through ADs only)
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Transactions at what rate?
Foreign exchange transactions - buying or selling - involve payment in home currency against
reimbursement in foreign currency or vice versa. The rates, at which these conversions are
effected by Authorized Dealers/Money Changers, are called "Exchange Rates".
How Exchange Rates quoted?
There are two ways in which these exchange rates are quoted:
Direct Quote/Home Currency Quote:
Unit of foreign currency is kept constant against the amount of home currency to be exchanged for
it.
It otherwise mean how much of home currency is worth of one unit of foreign currency.
Example: US $ 1 = INR 39.30 GBP
2 - INR 76.50
Since 2.8.1993, Indian Markets are using Direct Quote.
Indirect Quote/ Foreign Currency Quote:
It is just opposite of Direct Quote i.e. number of units of foreign currency which will be exchanged
for a fixed number of home currency units.
Example: INR 100 = US $ 2.50
However, this method of distinguishing rates, on the basis of home currency relationship, may not
always hold good say for example:
when neither is a home currency;
when global markets quote their rates as equivalent of US $ (which is a well-established tradition) it
looks indirect quotation in US while in other countries it sounds as a direct quotation.
It may, therefore, be sensible to differentiate the direct and indirect quotes:-based on
currency, which is dealt in i.e.
direct quote - when currency dealt in is expressed as fixed unit e.g.
EUR 1 = 1.4470 USD
which means deals are done in Euro terms and parties
contract to huw or sell Euro?
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indirect quote - currency dealt in is the. one whose quantity is variable
i.e. just reverse to direct quote
e.g. USD 1=0.6910 EUR
A dealer would always quote both the prices at which he is willing to buy and sell foreign
currency, which in usual parlance known as two way quote/bid and offer rate.
w hue offering a two way quote, tracer win always ensure some profit margin by fixing buying
and selling prices differently.
It is needless to say that a dealer, while quoting a bid and offer rate, would always work on it
from bank's point of view i.e. desires to give less units of home currency while purchasing
foreign currency and give less units of foreign currency while selling it against rupees.
So in a direct quotation, the market dictum would be buy low, sell high or give less take more.
Where Quotes available?
The commercial banks offer these quotes through their Dealers from Dealing Rooms, mostly
over phones, telexes, computer, etc.
The dealers maintain several means of communication including Reuters Dealing System and
hot lines to keep in touch with other players in the market i.e. Dealing Rooms of other
commercial banks, brokers, their clientele, etc. Dealers, being market makers, offer a two-way quote i.e. bid and offer rates for each currency
and are available on Reuters screen - a 24 hour international computerized electronic messaging
system, besides responding on phone.
How Rates are arrived?
Ever since (01.03.1993) Rupee became convertible on Current account, exchange rates became
market determined. So, a Dealer in Mumbai now starts his day with a look at New York closing
prices of major currencies like Dollar, Euro, etc. of the previous day and opening rates in Tokyo,
Hong Kong and Singapore. He would then inquire with local dealing rooms / brokers about the
current rates, their momentum, market mood, etc. and also looks at his own position and makes
up his mind as to what should be his quote. Simultaneously a Dealer would be looking for a rate at which he can remain "squared". Here
"Squared" means covering every large purchase with a matching sale in every currency so that
no gaps are left that are vulnerable for rate fluctuations. Such disposals are usually made at the
ruling inter-bank spot rate that gives no profit or loss. Such a rate is known as "cover rate".
Now, based on the inter-bank spot rate/cover rate and adding a little cushion to the cover rate for
remaining on safer side, a Dealer arrives at his base rate.
To make it more explicit, let us look at this -
An export customer of your bank called on you for selling his export proceeds that are in
dollars.
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Say, inter-bank US dollar INR spot rate is 39.30/35, It means that there are Banks/Dealers, who
are prepared to buy dollars at Rs.39.30 per dollar and sell at Rs.39.35. These rates at which the
Dealers are in a position to square their currencies are known as "Cover Rates".
Since we have to quote a rate for purchasing dollars from the customer, we have to base our
quote on the cover rate i.e. the rate at which other banks are willing to buy dollars from us, since
our cover transactions being sale of dollar (purchase from the customer) in the wholesale
market.
However, as Rupee is freely floating in inter-market, a Dealer would always wish to, of coursedepending on the market trend/mood, add a little cushion to these cover rates so as to guard
himself from adverse movement in rates, while formulating his base rates/quotes to his
customers.
We have thus seen two kinds of rates in the forex market: One meant for wholesale transactions
known as inter-bank spot rate and the other known as base rate for working out rates for retail
market.
Is base rate available for merchant transactions?
No, base rates are meant for inter-bank transactions alone. Transactions relating to non-bank
customers involve additional work.
Say for example, a customer calls on you for a DD in US $ 300. Similarly, an importer calls on
you for arranging payment of his import bills designated in dollars. No doubt, these two are
foreign currency sale transaction, but work involved for the Dealer is different i.e. issuing DD is
a simple transaction of recovering equivalent rupees from a customer and issue a DD in foreign
currency. Secondly, rupee equivalent is received from the customer while issuing DD itself and
the same remained with the Dealer till DD is actually encashed abroad.
Whereas, in case of import bill, work involved is not that simple for the bill has to be
scrutinized on receipt of documents, recorded; acknowledged; presented to the drawee;followed up for payment; etc. Hence, a Dealer naturally likes* to be compensated for the
additional work being undertaken by him.
So, he sells the currency a little costlier i.e. at a worse rate to the importer-customer as
compared to the remittance-customer.
Thus, Dealers quote different kinds of rates for undertaking different kinds of transactions of
their non-bank customers by loading different rates of profit margins and such rates are known
as Merchant Rates.
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Merchant Rates
These are the rates quoted by a Dealer to his non-bank customers for carrying out different
types of transactions. These rates are arrived at by adding varying exchange margins to the base
rate.
Member banks are now free to load exchange margins at their discretion for the transactions,
subject to compliance of maximum spreads and other provisions relating to calculation of
exchange rates as prescribed by FEDAI from time to time.
Are these margins mandatory?
A dealer uses his discretion to load margins on various quotes, keeping in view :
size of transaction - a sale of 1 lac dollars would be at a finer rate
than the sale of 100 dollars;
customer relationship - a regular customer, giving large volumes,
obviously commands finer margins.
customer awareness - customer knowing as to what is happeningacross the Dealing Rooms, both domestic and
overseas, obviously enjoys a better rate
Merchant Rates Vis-a-vis Value Date:
Every forex transaction involves exchange of two currencies by the counter parties to the
transaction. Say for example, Bank of India receiving dollars in New York and paying rupees in
Mumbai.
Principle of "Valeur Compensee" - requires the currencies to change hands at the same point of
time. However, it is not practicable because of time differences. To take care of
. these constraints, usage of value date i.e. exchange of currencies on a prescribed day visa-vis therate quoted has come into vogue internationally.
' Exchange of currencies on the very date of deal. Cash/Ready
Rates
^ Exchange of currencies on the next workingday i.e. tomorrow.
Tom Rates
Exchange of currencies on the second
working day after the date of deal.
Spot Rate
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Exchange of currencies after spot date. Forward Rate
How forward rates are quoted?
Forward Rates are generally quoted by indicating spot rates and forward
differentials/margins.
Forward differential/margin is nothing but the difference between the spot rate and forward rate
and the same can be in premium or discount.
Example: Spot EUR 1 - USD 1.4470/75
1 month Forward = 1 2 - 1 0
2 months Forward = 22 - 17
3 months Forward = 32 -27
In the cited example - we can buy EURO 1 month Forward at -
Spot EUR = USD 1.4475
Subtract swap points 0.0010USD 1.4465 '
Forward Premium: Indicates the costliness of currency vis-a-vis spot rate for a future date delivery.
Premium is added to both selling and buying spot rates (under direct quotes).
Forward Discount: Indicates the, cheapness of currency vis-a-vis spot rate for a future delivery.
The discounts are subtracted from both selling and buying spot rates.
Forward Exchange Rates - what are they?
We have already seen that forward rates afford the facility for exchange of currencies on a date
beyond the spot date. It consists of two components:
Spot Rate plus
Forward points reflecting the interest differentials adjustment for different settlement dates.
Forward points are determined by the factors like :-
supply and demand for currency for the settlement date;
market view;
interest rate differential between the countries of respective currencies.
- Calculation of Forward Points :
Spot rate x interest rate differential x forward period100 x
No. of days in the year (usually 360)
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First figure in the Forward Points being lower than the second figure, indicates that the base
currency is at a premium in forwards.
Reverse indicates that base currency is at a discount in forwards.
Did markets offer quotes for all currencies?
No, all currencies may not always be quoted in all markets. For instance, we do not get a quote
for EURO/INR in our inter-bank market. We only get a US $/TNR quotation. However, EURO-
USD quotations are freely available outside Indian Markets (say in Tokyo/London).
In instances of this nature, the parity between EURO/INR is obtained by using the intermediaiy
currency i.e. US $ and the rate so obtained is called a cross rate and the principle applied for
obtaining cross rate is known as chain rule.
What is Chain Rule? Let us try to understand the concept of Chain Rule by
taking an example -
Suppose a customer calls on us to purchase EURO against payment in Indian Rupees,
To meet his requirement
we have to first buy US Dollars in the local market against rupees; and
then sell them in London/outside markets to purchase EURO
But then how to quote a rate to customer?
let us say the local market quotes for USD/INR as :
US$ 1 =Rs39.30/35and
London quotes 1 EURO = USD 1.4470/75
Now, by using this relationship, we can build up the chain rule as under -
Step 1 -. Write the question to be answered i.e
how many Rs. = EUR 1
Step 2 - The second equation begins with currency in which first equation
ended i.e.
if EUR 1 = 1.4475 USD
The third equation begins with the currency in which the second
equation ended i.e.
US$ 1 =Rs. 39.35
Therefore, EUR 1 = 39.35 X 1.4475 = 56.9591 = SAY 56.96
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Step 3
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add your own margins and quote different rates for different transactions.
Are there different Merchant Rates?
Yes. There are different rates meant for different transactions viz. -
Merchant TTBuying Rates It is meant for -
purchase of TT/MT/DD for which cover has already been credited to AD's nostra
account:
converting proceeds of bills/cheques under collection as soon as nostro account is
credited;
cancellation of a outward TT/MT/DD/PO etc.;
cancellation of forward sale contract (forward rate to be used when delivery is in
future).
For all conversions where nostro account is credited, TT buying rate is applied.
The rate is quoted -
= Base Rate - Exchange Margin-
Select appropriate Base Rate (market buying rate). Ex.
US$ 1 =Rs.39.30/39.35
Deduct appropriate exchange margin Rs.39.30
' . ~ - Rs. 0.05
Rs.39.25
Merchant Bill Buying Rate
It is meant for -
purchasing/discounting/negotiating of Export Bills;
as it involves extra labour by way of handling the documents, etc., cost of handling is
loaded to the base rate;
The rate is quoted -
Select appropriate Base Rate;
' Add/deduct on-going forward premium / discount depending upon the transit period,
tenor of the bill such as sight, usance and grace period, etc.;
Deduct appropriate exchange margin;
. And resultant"rate rounded off as per FEDAI Guidelines.
Merchant Forward Bill Buying Rate
It is meant for -
Purchase of export bills with usance by determining the notional due date;
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NDD = Normal transit period + usance period + grace period, if applicable
' The rate is quoted -
Choose an appropriate Base Rate;
o Add/deduct on-going forward premium / discount depending upon the deliver}' period of
the bill, transit period, tenor of the bill such as sight, usance and grace period, etc.
Deduct appropriate exchange margin.
Recovery of interest on bill transactions at the time of purchase:
The Rupee equivalent of the foreign currency bill amount shall be payable to the
customer on the basis of the rate arrived at as above. Simultaneously, interest shall be
recovered on the Rupee amount, from the customer by applying the appropriate interest
rate as applicable to export credit.
The procedure to be followed shall be as under :
Arrive at the Rupee equivalent of the foreign currency amount at the appropriate buying
rate;
Credit the Rupee amount to the customer's account; Simultaneously recover the interest amount and credit it to "interest on Export Bills Account";
Overdue interest, where applicable, shall be recovered separately.
NOTE: In case of payment to a party, not being a customer of the payee bank, only
the net amount shall be payable. Full details of the interest and other deductions shall be
advised.
Purchase of Rupee Bills
In the case of Rupee bill purchases the entire bill amount shall be first payable to the
customer. Simultaneously interest shall be recovered on the Rupee amount from the
customer by applying the appropriate interest factor.
Merchant TTSelling Rate:
It is meant for -
Remitting foreign currency in the form of DD/TT/MT/PO etc.;
' Paying import bills received by importer directly;
Cancelling purchases already made; Ex. Bills purchased earlier returned unpaid; Bills
purchased earlier transferred to collection account;
- Cancelling forward purchase contract (forward rate to be used when delivery is in
future);
Generally, TT Selling Rate is applied to all clean remittances i.e. no documents are tobe handed by the bank.
The rate is quoted -
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= Base Rate + Exchange Margin * Choose an appropriate
Base Rate; (Market Selling Rate)
Ex. US$ 1 = Rs.39.30/35
Add margin say 5 paise
is. 39.35
+ Rs. 0.05
Rs.39.40
Rounded off upto two digits in multiples of 1 paise. Rs.39.40
Merchant Bill Selling Rate
It is meant for - Remittance of Import Bills proceeds.(received through banks)
Tire rate is quoted -
= TT Selling Rate + Exchange Margin
Arrive at Merchant TT Sale Rate (as determined above);
Rs.39.40
Add appropriate exchange margin say 5 paise;
Rs 39.40
Rs. 0.05 Rs
39.45
Merchant Forward Sale Rate -
It is meant forWriting forward sale contracts and rates are arrived at as under:
Forward TT Selling Rate = Inter- bank spot selling rate
_.,.. . " - Forward discount/+Premium as applicable for the
Forward Period
+ Exchange margin
Forward Bill Selling Rate = Forward TT Selling Rate
+ Exchange Margin for Bill Selling
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How Traveller's cheques in foreign currency purchased/sold?
Buying - bank's first month forward rate of the currency of travelers cheques is taken as
base rate and crossed with appropriate dollar/currency rates abroad. From this crossed rate,
an all inclusive margin not exceeding 1% is deducted to arrive at the amount in rupees to be
paid for every unit of foreign currency. The resultant rate is rounded up to the nearest 5
paise.
Selling - Clean TT Selling Rate is 1 unit of the base rate. To this, 0.5% margin is added
at the option of ADs.
A commission not exceeding 1 % may be charged on the rupee equivalent of the value of
foreign currency cheques sold to the customer.
The resultant rate rounded off to the nearest 5 paise.
How Foreign Currency Notes bought/sold?
Buying - TC Buying Rate less 0.5%
Selling - TC Selling Rate plus 0.5%
NOTE: All Authorized Dealers shall keep a record of:
a) The BASE RATE for the purpose of arriving at the merchant rates; and
b) Any changes made in the BASE RATES during the day. Such record shall be made available
for audit.
The time of executing all merchant transactions shall be recorded so as to establish theapplication of the correct prevalent rates.
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DEALING ROOM OPERATIONS - AN OVERVIEW
Forex market is an over the counter market in which currencies are bought and sold against eachother. The global forex market is one of the largest in the world, the daily turnover beingaround a trillion US dollars. In India it is just around 2.5 to 3 billion US dollars per day.
2. There are, however, no individual physical market places like say Mumbai Stock
Exchange, where traders could meet and exchange currencies. The traders in the forex market,mostly from commercial banks, sit in their offices popularly called as dealing room and carry
out transactions either on behalf of their customers or themselves on phone, telexes, computer
terminals, etc.
3. Dealing Room - What its all about?
Dealing Room is a centralized establishment, usually of a commercial bank, which is willing to
make/offer a two way dealing price for different currencies at all times even when they may
not wish to deal, but all during prescribed business hours. It is a common practice amongst
Dealers to quote only the last 2 points of the rate as every dealer is expected to know the full
price. A Dealer tries to make profit while quoting his rate rather than attempting it from the
quote made to him. Usually, dealer call other dealing rooms for a quotation rather than for
quoting his own rate. In the event of a Dealer not being enthusiastic of trading in a given
context/currency tends to quote his spread in such a way that it itself expresses his unwillingness
to carry out the deal. At times, the Dealer also prefers to qualify his quote with words like
"good for standard lots", "choice price", etc. To sum up, the whole range of transactions in
forex market are carried out through the Dealing Rooms of participating banks.
Banks trading actively in the forex market and offering variety of products usually segregate
their trading activities/Dealing Room into:-
Front officeMid Office
Back Office
Dealing RoomRisk Management, Accounting Policies and MIS
Settlement, Reconciliation and Accounting
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Dealing Rooms/Front Offices are equipped with Electronic Data Processing Systems
matching with volumes of business undertaken. These systems ensure automatic recording
of trading date, time and transaction serial number with no scope for the Dealers to alter.
These systems usually are of multi-user type so that consolidation of various dealers
positions and results can be obtained. The Chief Dealer enjoys the facility of logging in to
any part of the system to see overall totals.
A large Dealing Room will be controlled by a Chief Dealer, who may or may not actually
deal himself. He would be responsible to implement management policies. He leadsmorning discussions with his junior Dealers on forecasts and strategies for the day, before
dealing begins. Usually, he would be responsible to assess the effectiveness of Dealers
working under him as also to guide them in their day-to-day business transactions. Under
the Chief Dealer, there can be Senior Dealers being individually responsible for a group of
currencies/a major currency/ spot/forward trades.
Dealer is supposed to be endowed with traits viz-
survival instincts
being good at understanding the changing nature of markets;
quick to react to new opportunities and situations; quick in reversing a previous stance;
overcomes the natural tendency to salvage something from a loss
making situation;
hunches as to what market will do next rather than sticking with his
own view; and
able to work under stress;
To be effective, a Dealer has to be trusted in the forex market. He can very quickly gain a
reputation as a good or bad Dealer. Forex market is one place where Dealer needs all the
friends that one can get.
Dealers are freed from undertaking accounting work of any kind as otherwise they would notbe able to concentrate on the market. Dealers maintain "deal slips" indicating the name of
the broker, if any, the counter-party bank, currency, amount, time, rate and due date under
his signature as soon as the deal is struck with and pass- on to back office for further
processing. However, in an automatic system, separate "deal slips" are redundant.
Some Dealing Rooms do maintain gadgets like voice recorders, etc., to record the Dealing
Room conversations for such taped conversations hastens resolution of differences.
The Accounting Department i.e. Mid Office/Back Office of a Dealing Room plays an
equally important role by providing operational support for the Dealing Room. It undertakes
:-
obtention of confirmation of contracts for all deals from counter-parties
;checking contents of contracts and signatures thereon rectification of defects on
the same day;
obtention of stamped agreements from the counter-parties and keep on record
wherever computer generated confirmation slips are forthcoming;
monthly evaluation of profit and loss;
Submission of daily currency position;
maintenance of position and funds registers;
preparation of rate-scan reports and enquires into wide variations, if any, in the
deals struck from the on-going market rates;
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Objectives ofDealing Room Operations
To give the best possible service to customers -
through adequate number of well attended phones and the telexes, sound
counsel about economic development, competitive rates and capability to
transact the entire amount of currency deal requested by the customer.
To manage the bank's position so that inventory in each foreign
currency is kept at the desired level - , .through matching the inflows and outflows of various currencies with
matching deployment.
To produce profits for the bank while accomplishing the first two objectives
through exchange rate differentials etc
Who knocks on the Dealing Rooms & why?
Corporates/
Firms/
Individuals
For payments towards Imports, conversion of export receipts,
hedging of receivables & payables, payment of interest and
principal of foreign currency loans.Giant multinationals of course do take speculative positions
purely for profit generation through their own .well-
established Treasury/Dealing room.
Commercial
Banks
90% of world Forex Trade is accounted for by inter bank
transactions;
Trade in currencies to meet client requirements;
Buy and sell on their own account and carry inventory ofcurrencies for speculative purposes since foreign Exchange
trading profits have become an important source of revenue
for commercial banks.
Central Banks Intervene to move exchange rates in a particular direction as
desired by the local government.
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Currencies: Multinational banks deal, in large number of currencies -
* Major currencies: US Dollar, EURO, Yen, Pound Sterling,Swiss Franc.
*
Minor currencies: Hong Kong Dollars,Singapore Dollars.
Exotic currencies: Norwegian Kroner
* Widening domestic forex market is slowly catapulting
leading banks, particularly of Mumbai, trading in all major
currencies.
In the Dealing parlance, major
in abbreviatinnc-
EUR EUR
US$ US Dollar GBP British PoundCHF Swiss Franc
HKD Hong Kong Dollar
INR Indian Rupee
SGD Singapore Dollar
AUD Australian Dollar JPY Japanese Yen
Quotes: A Dealer, upon enquiry for a price between a pair of currencies,
offers a two-way quote either as a direct or indirect quote. This
helps enquirer in not specifying whether he wants to sell or buy.
Market Maker - Major commercial banks act as 'Market Makers' in most of
the major currencies by offering "two-way" quotes and be
prepared to take either side of the transaction.
In a normal two-way market, a Dealer expects "to be hit" on
both sides of his quotes in roughly equal amounts. But, it is
always not necessary. He may suddenly find "being hit" on
one side of his quote, much more often than the other side. It
means that he is either buying many more dollars than he is
selling or vice versa. This leads to the trader building up "aposition" -
If he has sold more$ than he has bought, he is said to
have a "short position";
If he has bought more $ than he has sold, then he is
said to have a "long position".
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In a highly volatile forex market, a long/short position for too
long can be risky.
For instance, net short position may lead to a loss if it is to be
covered at an appreciated price or gain if currency
depreciated.
Similarly, a net long position may lead to loss if it is to be
covered at a lower price or a gain if it is to be covered at ahigher price.
Therefore a Dealer, realising that he has build up an
undesirable net position, quickly adjusts his bid offer quote
in such a manner that it discourages one type of deal (which
has already landed him in a over bought/sold, position) and
encourages the opposite deal.
Act as middlemen between two market-users
They provide information to market-making banks about
prices at which there are firm buyers and sellers in a pair of
currencies.
carry out bank's instructions to buy or sell a specific amount
of currency at specified rate and collects commission on
conclusion of deal.
Banks also use brokers to acquire information about general
state of the market.
In the Indian context -
brokers are prohibited from acting as principals and
maintaining positions in foreign currencies;
brokers' notes should be received promptly by the
dealers before close of the day's business;
nomination of brokers for deals not done through
them is not permitted;
desirable to have panel of brokers and fair-shuffling
of business among them;
dealers to be separated from maintaining broker-wise
record and payment of brokerage claims, etc.
1 millions US $ (In Indian Market)
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Mechanics of trading:
Inter-bank market deals are done on the Telephone/ (RMDS) Reuters
Monitor Dealing System/Telex/through Broker.
o A trader in bank A, needing GBP against Dollars, calls his counterpart inBank B and ask for a quotation.
If the price is acceptable, deal is struck and both will enter the details -amount bought/sold, the price, identity of the counter party etc., in theircomputerised record systems.
Written confirmations will be sent subsequently.
On the day of settlement, bank "A" will transfer Dollars to Bank B and 13'
will transfer GBP to A.
Non-bank customer transactions are entertained during normal banking
business hours while interbank transactions are carried-out upto 4 P..M.
Dealing Room Terminology
Some of the oft repeated expressions in the forex market and their accepted meaning are
as under -
Offered at; Comes at; I give at; I sell at; I offer at =
Sellers or lender of currency.
I bid at; I pay at; I Take at; I buy at =
Buyers or borrower of currency
Bid, Wanted, Firm, Strong =
Currency in question is appreciating/in demand/buyers pre-dominant
Offered, Weak =
Currency in question is depreciating/sellers pre-dominant
Value today =
Same day value
Value tomorrow -
Next working/business day
End/end =
Forward swaps intended for maturity on the last working day of the
appropriate future month are described as End/end.
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w
w ^
^
w Short dates =
Deals for a broken number of days upto one week
Broken/Odd Date =
Value date which is not the regular forward date.
Overnight - Today/Tomorrow =
Currency deposit transaction/simultaneous purchase and sale of currency
for value today against the next working day.
Tomorrow/Next; Tom/Next =
Currency deposit transaction/swap for value the next working dayagainst the spot value.
Spot/Next =
Currency deposit transaction/swap for the spot value date against next
working day.
Weekend =
Currency deposit transaction/swap for value the last working day of the
week, normally Friday against the first working day of the followingweek, normally Monday.
Outright/outright =
Purchase or sale of currency for delivery for any day other than spot not
being a swap transaction.
Par =Forward price is same as the spot.
Parity or same =
No proposition on the rates quoted by the other party. It does not imply
that the party using this expression is ready to do a deal at the rates
quoted.
For indication/information = Quotes not firm \^
~J' Details =
Needs of a Dealer regarding rate and dates following a transaction.
-
-
Mine =
Dealer takes the spot/forward/deposit whichever has been quoted from
the counter party.
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It is dangerous to use the expression unless amounts have been qualifiedfirst.
Yours =
Opposite of Mine.
Point/pip =
Last decimal place of a quotation.
Mio =
One million
Billion/Milliard =
One thousand millions.
At your risk =
Quote is subject to change.
Types of transaction:
Outright-Cash / ready
Same day value
TOM (Tomorrow)
Spot
Forward
Swap
Information
Systems: Real time on line prices
Information affecting and likely to affect currency prices;
Analysis of information
Available through - Reuter Monitor services - a million
individual quotes are flashed on the screen/12 weeks.
Tele rate
Knight rider
2000-2 - besides being a dealing system it also acts as an
electronic broker, wherever it can match the quoted rates of the
subscribing banks. Trading is not confined to local markets
Next working/business day
Settlement made two working or business days from
today.
All deals over two working/business days from today,
fixed at the time of dealing.
The simultaneous purchase and sale of identical
amounts of a currency for different value dates.
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alone. A fellow in London trades with Banks in Frankfurt, New
York, etc., and even with places in different time zones. Some
dealers are provided with dealing systems even in bed rooms.
11. Payment - Once a deal is done, the dealers will specify where they want the
Systems: currencies to be delivered. For example, in a $-EURO
transaction, the buyer of the $ may want $ to be credited to his
account with New York Bank whereas the receiver of EUR may
want it to be credited to his account in a bank located inFrankfurt/Dussel Dorf.
To cope up with such mind boggling volumes, the banks have
given up traditional settlement style through cheques and instead
developed electronic inter-bank funds transfer systems. Best
known of them are CHIPS in New York and CHAPS in London.
"Netting" inter-bank payments arising out of Forex transactions
is another development - FXNET.
--,. SWIFT - to transmit messages in standardised format.
12. Risks in Dealing Room Operations:
With the fast changing Exchange Control Regulations and the concomitant rise in volumes, the
need for risk identification in Dealing Room operations and its management has become quite
imperative.
Managements therefore, formulate policy- guidelines and control mechanism for smooth
functioning of the Dealing Room, perhaps covering broad parameters viz..
business strategies for trading in different product groups;
markets;
limits for counter parties;
procedures for measuring, analyzing, monitoring and managing risks;
ceilings for risk position;
Procedures for reacting to situation like over-shooting of limits and market
extremities;
functions and responsibilities of front, middle and back office;
internal accounting and reporting;
internal control and monitoring systems;
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Frustrating the deals.
12.6 Operational
RisksOmissions/commissions in operational procedures viz.
-Dealing & Accounting functions Follow up of
dealings and contract confirmation. Settlement
of funds. Pipeline transactions Overdue bills
and contracts.
12.7 Sovereign
Risk
Likely to result in losses.
Risk of Externalization Basicallypolitical hi nature generally for banksin other countries.
13. How to overcome/reduce risks:
Banks, assessing the risk involved in trading and non-trading activities, usually come up
with a well-drafted risk management procedure that could be well understood by
Dealers, Back Office staff etc. Such a mechanism shall assist in limiting andmonitoring risk prone activities across the Dealing Room.
Some of such time-tested mechanisms are :-
13.1 Open
RiskPosition Since these positions are taken at a particular rate, any
adverse movement in the rate leads to loss.
''Day light Limit
* Overnight Limit
* Cut-loss Limit
Dealer cannot take a position of more than day light limit
prescribed by the Bank.
Fixes overnight limit for a open position in each currency
-usually lesser than daylight limits - Global limit for ail thecurrencies put together is also fixed.
While undertaking transactions, if the rate goes on moving
against the bank, one never knows, where the loss would
end. Hence, banks fix a cut-loss-limit. Irrespective of the
Dealer's view, if the rate moves so adversely that the
resultant loss is equivalent to the limit, the dealer has to
liquidate the position and book loss.
All deals done in a day should be accounted for against the corresponding limits.
The limits when exceeded should be promptly reported to the SeniorManagement and got it approved.
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In Indian context, pipeline transactions and operations in foreign currency notes
needs to be specially attended to.
People not connected with Dealing Room operations should constantly monitor
compliance to these limits through timely, accurate and comprehensive MIS.
13.2 Maturity Mis- - Individual Gap Limit (IGL)
match RiskLimit put on mismatch in the currency bought and sold for a
particular month.
Aggregate Gap Limit (AGL)
Aggregate of gap limits for particular currency all the O/B &
O/S positions for various months.
Total Aggregate Gap Limit
Aggregate of all the AGLs in all currencies.
13.3 Credit Risk - Banks impose exposure limits on customers as well as on
other Banks. In general, separate limits are fixed for spot
and forward, the latter being lower than the spot. In case of
Forwards, the limits imposed, maximum level of the net
outstanding Forward contracts.
13.4 Operational - Dealings and execution functions are separated for early
Risks discovery of any transgressions of the imposed limits -
by dividing dealing room into front office solely
concentrating on dealings and back office for recording the
transactions and pursuing settlements, etc
Further confirmations are obtained.
Prompt follow-up for execution of funds transfer
instructions.
Monitor export bills and forward contracts for their delivery
in accordance with the tenor.
13.5 * Legal Risk - - To obviate the risk involved in enforcing compliance with
Contractual obligations/securities, banks usually enter into
following master agreements with counter party
banks/clients:
Spot & Forward Exchange- International foreign Exchange Master
Agreement.
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Foreign Exchange Options- International Currency Options MarketAgreement.
All others - International Swap Dealers' Association Master
Agreement.
Banks also obtain Board Resolutions from their
Corporate Clients, specifically authorizing their officials
to deal and execute contracts.
Banks also obtain specific confirmation for eachtransaction with full details regarding amount, rate, valuedate, etc.. duly signed by the authorized signatories.
13.6 Sovereign Risks - Limits are fixed to overseas parties taking country risks too
into consideration.
14. Reconciliation of Nostro Balances
Reconciliation of Nostro Account Balances is quite essential for ensuring that everytransaction undertaken through Nostro Account is correctly executed.
Reconciliation is undertaken through Bank Statements and Mirror Account.
Unreconciled entries must be followed up on an on-going basis else, computerised accounting
system and micro filming procedures practised by overseas/correspondent branches/banks may
pose problems for back references.
No set off of debit and credit items or write off/appropriation to P&L of unreconciled
entries is attempted, unless permitted by Exchange Control Regulations and authorized by the
Bank.
15. Management of Risks in Vostro Account
Exchange Control Regulations commands close monitoring of funds flow in vostro
accounts with a view to averting hot money flows/speculative dealings on Rupee. Similarly,
sudden variations in operations say unusually large operation in an otherwise inactive account
demands closer scrutiny for assessing genuineness of operation.
The amount of credit risk arising from drawings on branches can be immeasurable
unless flow of information regarding paid drafts etc., from drawee branches to account
maintaining office is prompt and accurate.
These risks are minimized by -
reducing number of branches on whom drafts can be drawn;
imposing drawing limits per day;
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securing draft advices directly from the correspondents/telex messages of
large payments from paying branches;
> prompt value dating.
Monitoring of vostro accounts further ensures discipline in the usage of credit linesextended to correspondent banks identification of concealed overdrafts and interest recovery
there against etc.
Balance confirmation letters are mailed to the overseas banks maintaining vostro
accounts and confirmations are obtained.
16. Evaluation of Foreign Exchange Profits & Losses
Profits and Losses of foreign exchange transactions are calculated at the end of each
month, using uniform standard accounting procedure prescribed by FEDAI.
17. To sum up, Forex Trading has in fact become an important source of earning for banks
and volumes are likely to double or quadruple in the coming days due to on-going reforms.Driven by this enthusiasm, Dealers, may often go all out, but should not forget Hanis Law:
"Dealers never know why prices are moving because they are too busy moving prices."
The name of the game being money making, no dealer should forget the basic tenets of good
trading -
Cut losses
Cut losses
Cut losses
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DEALING ETHICS AND COPE OF BEHAVIOUR
Should only enter into transactions that he feels are prudent under existing market conditions.
He should not assume positions even with management approval, that in good conscience he
knows are of such high risk as to jeopardize the capital of his bank or the funds of its
depositors.
Should make sure that he complies with his management's prescribed policies and limitations
and conforms to all legal and administrative constraints.
Will not spread rumors that could be injurious to the market or any competitor.
Will offer assistance to competitor banks provided he does not jeopardize his own institution.
Will not agree to "washing names' for any reason.
Will stand by his word in all dealings directly between or through intermediates.
Will conduct his business in the market place in accordance with established procedure, both as to
definitive practices and intent of such practices.
Will maintain the confidentiality of all foreign exchange transactions, whether concluded or not.
Will not permit brokers to deal for their own account.
Will not take advantage of an obvious misquote by any counter-party.
Will always make sure that the dealers in his dealing room are properly instructed in the workings
of the market and their responsibilities and obligations before being placed in positions of actuallydealing in foreign currency.
Shall do all in his power to discourage improper conduct in the market by others.
Must remember that his responsibility is to his bank and any irregularity by others within his own
dealing room should report to the Management of Bank Auditors.
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THE PSYCHOLOGY OF THE INDIVIDUAL
Summary
l. Taking responsibility of your capital
2. Cut your losses early and let your Profits Run
3. Discipline4. Too much information
5. Do not marry your trades
6. Do not bet the farm
1. Taking responsibility of your capital
It is interesting how many people are happy to place their savings and funds in other peoples hands,
accept the losses as its easier to blame someone else than to take responsibility of those funds
ourselves.
The first step as an individual is believing in yourself and your own abilities. One of the most startlingdiscoveries when you start trading or may have observed from the stock market is how many experts
get it so wrong so often. This is a real confidence booster when you begin to understand that with a
solid background and knowledge, discipline and a well defined trading plan that you will often
outperform many professionals.
You will be in a market place that moves several times faster than any other market and with leverage,
the rewards and losses compound many times. The best way to overcome the thought of using your
own money and the volumes you will be trading is to forget about money and talk in terms of points.
So rather than calculate your profit and losses in terms of dollars talk in terms of gains and losses in
points. If you adopt this at a very early stage it will feel the same if you are trading a demo, a mini or
10 contacts of a full account.
Every trader that any member of Team Forex knows talks in terms of gains and losses in points. We
don't refer to the money as the bench mark of our own performance. We equate to other traders in the
terms or losses and gains in points, and measure our performance against this.
When trading a demo account most people do very well. They trade without fear. As soon as its real
money, even on mini account they suddenly find themselves trading in a manner where they miss many
opportunities and accumulate many losses. They quite simply loose their nerve and give into fear and
greed. This can happen also when you may go from a mini account to a full account or from trading-
single contracts to trading multiple contracts.
Try and trade without the thought of how much money you may gain or loose. Trade thinking ofpoints, no matter how many contracts you are trading or even if you is trading a demo account.
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2. Cut your losses early and let your Profits Run
This simple concept is one of the most difficult to implement and is the cause of most traders demise.
Most traders violate their predetermined plan and take their profits before reaching their profit target
because they feel uncomfortable sitting on a profitable position. These same people will easily sit on
losing positions, allowing the market to move against them for hundreds of points in hopes that the
market will come back. In addition, traders who have had their stops hit a few times only to see the
market go back in their favor once they are out, are quick to remove stops from their trading on thebelief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a
predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out
of 6 trades to be profitable then you are doing well. How then do you make money with only half of
your trades being winners? You simply allow your profits on the winners to run and make sure that your
losses are minimal.
Another good strategy is to move stop losses (the point the trade will be sold if it goes the wrong way)
behind the trade to a level where a pullback can be accommodated but a reversal will lock in at least
some profit.
3. Discipline
Trade with a disciplined Plan. The problem with many traders is that they take shopping more seriously
then trading,. The average shopper would not spend $400 without serious research and examination of
the product he is about to purchase, yet the average trader would make a trade that could easily cost him
$400 based on little more than a "feeling" or "hunch." Be sure that you have a plan in place before you
start to trade. The plan must include stop and limit levels for the trade, as your analysis should
encompass the expected downside as well as the expected upside.
3. Too much information
As with many endeavors it is important to keep your trading simple. Many traders start out with a
simple strategy that is successful but find themselves chopping and changing trying to find a bettersystem. They also allow themselves to be influenced by other opinions and too much fundamentals. It is
not too different from going to a race track where everyone has a sure thing or the information available
becomes so confusing you can no longer see the wood from the trees. Trading the stock market is often
similar in this regard. A good exercise is to teach a child or teenager a simple trading strategy or set of
rules to follow and allow them to trade a demo account. Many traders who have done this have been
surprised that their children can actually trade well, consistently and often with spectacular results. The
lesson is that they don't stray from the rules, and are-not influenced by the media or fundamentals. Many
traders pay no attention to fundamentals at all and trade successfully. The rule here is to keep it simple
don't allow yourself to become confused with too much information and if you're not sure or not in the
right emotional frame of mind, don't trade.
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4. Do not marry your trades
The reason trading with a plan is so important is because most objective analysis is done before the trad
is executed. Once a trader is in a position they tend to analyze the market differently in the "hopes" tha
the market will move in a favorable direction rather than objectively looking at the changing factors tha
may have turned against your original analysis. This is especially true of losses. Traders with a losing
position tend to marry their position, which causes them to disregard the fact that all signs point toward
continued losses. Don't take more trades in the hope that the market will turn in your favour; it wionly accelerate your losses.
5 Do not bet the farm
Do not over trade. One of the most common mistakes that traders make is leveraging their account too
high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged
sword. Just because one lot (100,000 units) of currency only requires $ 1000 as a minimum margin
deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is
$100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most
traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves.
As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb
is to trade with 1-10 leverage or never use more than 5% of your account at any given time. Tradingcurrencies is not easy, (if it was, everyone would be a millionaire!)
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THE SPOT MARKET
Summary
1. Introduction2. Currency pairs and the rate of exchange
3. Buying equals selling
4. Practical spot trading
5. Worked examples
6. Controlling risk
7. Screen-based spot trading
8. Fundamental and technical analysis
9. Tips for aspiring spot
traders Appendix A
1. Introduction
The spot market accounts for nearly a third of global foreign exchange turnover. It can be
broadly divided into two tiers:
The interbank market where currency is bought and sold for delivery and settlement within
two days, with the banks acting as wholesalers or market makers
* The retail market made up of private traders, who deal over the telephone or the internet
through intermediaries (brokers).
The forex market has no centralized exchanges. All trades are over-the-counter deals, agreed and
settled by individual counterparties known to one another. The forex market is truly global and
operates 24 hours a day, Monday to Friday. Daily trading commences in Wellington, New
Zealand and follows the sun to (inter alia) Sydney, Tokyo, Hong Kong, Singapore, Bahrain,
Frankfurt, Geneva, Zurich, Paris, London, New York, Chicago and Los Angeles before starting
again.
2. Currency pairs and the rate of exchange
Every foreign exchange transaction is an exchange between a pair of currencies. Each currency is
denoted by a unique three-character International Standardization Organization (ISO) code (e.g.
GBP represent sterling and USD the US dollar). Currency pairings are expressed as two ISOcodes separated by a division symbol (e.g. GBP/USD), the first representing the "base currency"
and the other the "secondary currency".
The rate of exchange is simply the price of one currency in terms of another. For example
GBP/USD = 1.9445 denotes that one unit of sterling (the base currency) can be exchanged for
1.9445 US dollars (the secondary currency). The base currency is the one that you are buying or
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selling. This elementary point is often lost on beginners.
Exchange rates are usually written to four decimal places, with the exception of Japanese yen
which is written to two decimal places. The rate to two (out of four) decimal places is known as
the "big figure" while the third and fourth decimal places together measure the "points" or "pips".
For instance, in GBP/USD = 1.9445 the "big figure" is 1.94 while the 45 (i.e. the third and fourth
decimal places) represents the points.
2.1. Bid offer spread
As with other financial commodities, there is a buying price ("offer" or "ask" price) and a selling
price ("bid" price). The difference is known as the "bid-offer spread" or "the spread".
The spread is written in a particular format, best demonstrated by way of an example. GBP/USD
= 1.9445/50 means that the bid price of GBP is 1.9445 USD and the offer price is 1.9450 USD.
The spread in this case is 5 points.
2.2. The major pairings
All pairings with the US dollar are known as the "majors". The "big four" majors are: -
EUR/USD denoting euro/US dollar
GBP/USD denoting sterling/US dollar (known as
"cable") USD/JPY denoting US dollar /Japanese yen
USD/CHF denoting US dollar/Swiss franc
2.3. Cross rates
Pairings of non-US dollar currencies are known as "crosses". We can derive cross exchange rates
for GPB, EUR, JPY and CHF from the aforementioned major pairs. Exchange rates must be
consistent across all currencies, or else it will be possible to "round trip" and make risk less
profits. An illustration of how cross rates are computed is given in Appendix A.
3. Buying equals selling
Every purchase of the base currency implies a reciprocal sale of the secondary currency.
Likewise, sale of the base currency implies the simultaneous purchase of the secondary
currency.
For example, when I sell 1 GBP, I am simultaneously buying 1.9445 USD. Likewise, when I buy
1 GBP, I am simultaneously selling 1.9450 USD.
We can express this equivalence by inverting the GBP/USD exchange rate and rotating the bid
and offer reciprocals, to derive the USD/GBP rate i.e.
USD/GBP = (1/1.9450) bid; (1/1.9445) offer = 0.5141/0.5143
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