Financial markets

Tahira Jaffery

Currency markets

Equity markets (Pakistan – KSE)

Major players in the currency market

• Central banks• Banks• Dealers• Brokers• Speculators• Other financial institutions

• FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders.

• Shift of trade volume has been towards financial institutions (1/2 of transactions are inter-bank), but share of others has been increasing.

Concepts in currency trading

• Market maker• Price maker• Price taker• Spot Market• Rollover• Exchange Rate• Currency Pair• Base Currency• Counter Currency

• ISO Currency Codes• USD = US Dollar

EUR = EuroJPY = Japanese YenGBP = British PoundCHF = Swiss FrancCAD = Canadian DollarAUD = Australian DollarNZD = New Zealand Dollar

• Currency Pair Terminology• EUR/USD = "Euro"

USD/JPY = "Dollar Yen"GBP/USD = "Cable" or "Sterling"USD/CHF = "Swissy"USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie")AUD/USD = "Aussie Dollar"NZD/USD = "Kiwi"

• BID/OFFER • Spread• Pip size– The smallest price increment a currency can make.

Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.

Pip valueThe smallest price increment a currency can make. Also

known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.

• Margin• Leveraged position• Direct quote• A foreign exchange rate quoted as the domestic currency per unit of

the foreign currency. The foreign currency is fixed, while the domestic currency is variable– USD/PKR 84.45

• Indirect quote– A foreign exchange rate quoted as the foreign currency per

unit of the domestic currency.• PKR/USD 1/84.45 = 0.1184

Exchange rate determination

• PPP theory– The PPP derives from the assumption that in the

world there exists the "law of one price". This law states that identical goods should be sold at identical prices.

– Assumptions• Perfect arbitrage• No government intervention• Fluid movement of goods with little or no

transportation cost.

• Balance of payments Approach– The idea is that there exists an exchange rate at

which there exists internal and external equilibrium

– The internal equilibrium assumes that there is full employment: unemployment is in the natural rate of unemployment.

– The external equilibrium refers to equilibrium in the balance of payments.

Very difficult to assess equilibrium levels.

Cross rates

Currency pairs that do not involve USD are called cross rates.

Cross rate calculationY140/$DM1.5/$

(Order is the same )140/1.5 = Y93.333/DM

(Order not the same)

Y140/$$/DM 0.666

140*0.666/DM = Y93.333

Currency swaps

An arrangement between two parties to exchange a given amount of currency with another and to give back those currency with interest in the future.

Types . . .

What are the benefits??

Currency scandal

• Pakistani currency was already onslaught with external pressures

• Speculation • Hawala and hundi bypassing legal channels,

billions of dollars flowed out of Pakistan worsening the exchange rate

• Exchange dropped from 60 to 84.5• Travellers allowed $10,000 when travelling.

Stock Markets

Indexes

• KSE 100• KSE 30• All- share index• KMI -30 Index

Sectors in KSE

• Open-end Mutual Funds 19 Oil & Gas Marketing Companies• 2 Close-end Mutual Funds 20 Oil & Gas Exploration Companies• 3 Modarabas 21 Engineering• 4 Leasing Companies 22 Automobile Assembler• 5 Investment Banks/Securities Cos. 23 Automobile Parts & Accessories• 6 Commercial Banks 24 Cables & Electric Goods• 7 Insurance 25 Transport• 8 Textile Spinning 26 Technology & Communication• 9 Textile Weaving 27 Fertilizer• 10 Textile Composite 28 Pharmaceuticals• 11 Woollen 29 Chemical• 12 Synthetic & Rayon 30 Paper & Board• 13 Jute 31 Vanaspati & Allied Industries• 14 Sugar & Allied Industries 32 Leather & Tanneries• 15 Cement 33 Food & Personal Care Products• 16 Tobacco 34 Glass & Ceramics• 17 Refinery 35 Miscellaneous

KSE CRASH• 2008 and 2009 Karachi Stock Exchange Crisis• April 20 : Karachi Stock Exchange achieved a major milestone when KSE-100

Index crossed the psychological level of 15,000 for the first time in its history and peaked 15,737.32 on 20 April 2008. Moreover, the increase of 7.4 per cent in 2008 made it the best performer among major emerging markets.[3][4]

• May 23: Record high inflation in the month of May, 2008 resulted in the unexpected increase in the interest rates by State Bank of Pakistan which eventually resulted in sharp fall in Karachi Stock Exchange.[5][6]

• July 17 :Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani share prices.[7][8]

• July 16 : KSE-100 Index dropped one-third from an all-time high hit in April, 2008 as rising pressure on shaky Pakistan's coalition government to tackle Taliban militants exacerbates concern about the country's economic woes.[9]

• August 18: KSE 100 Index rose more than 4% after the announcement of the resignation of President Pervez Musharraf but Credit Suisse Group said that Pakistan's Post-Musharraf rally in Stock Exchange will be short-lived because of a rising fiscal deficit and runaway inflation.[10][11]

• August 28 :Karachi Stock Exchange set a floor for stock prices to halt a plunge that has wiped out $36.9 billion of market value since April.[12]

• December 15: Trading resumes after the removal of floor on stock prices that was set on August 28 to halt sharp falls.[13]

World Financial crisis

What were the makings of it???What happened?Bailouts? shou