Foreign Exchange Basics

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Lesson 2

Workings of the Foreign Exchange Market

Objectives:

To show the workings of the Foreign Exchange

Market

-Market Participants

-Currencies Traded and How

-Where and when does trading take place

-What moves the FX markets and why

Lesson 2-Lesson Plan

What currencies are traded?

Who are the Forex Players?

When do they trade?

Where do they trade?

Why do they trade?

How do they trade? 2

Review

What is the FOREX market?

• a global market for trading of

currencies at a fixed exchange rate

• 'Forex' for short - where you can

potentially profit from the

movement of these currencies.

• other terms –FOREX, FX, currency

market

3

What is an Exchange Rate?

The currency exchange rate is the rate at which

one currency can be exchanged for another.

Eg

1 Singapore Dollar = 2.60 Malaysian Ringgit

1 Malaysian Ringgit = 0.38 Singapore Dollar

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• always quoted in pairs like the EUR/USD (the

Euro and the US Dollar).

• fluctuate based on economic factors like

inflation, industrial production and geopolitical

events. These factors will influence whether you

buy or sell a currency pair.

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What Currencies are Traded?

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WHAT IS TRADED

Symbol Country Currency % daily share

USD United States Dollar 87%

EUR Euro zone

members Euro 33.4%

JPY Japan Yen 23%

GBP Great Britain Pound 11.8%

AUD Australia Dollar 8.6%

CHF Switzerland Franc 5.2%

CAD Canada Dollar 4.6%

NZD New Zealand Dollar 2.0%

SGD[#14] Singapore Dollar 1.4%

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Trading Volume of FX & Stocks

8 BIS-Triennial Central Bank Survey 2013 https://www.bis.org/publ/rpfx13fx.pdf

Major Pairs

• Currencies traded in

pairs

MAJOR CROSSES

• USD/JPY

• USD/CHF

• USD/SGD

• EUR/USD

• AUD/USD

• GPB/USD

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Crosses

MINOR CROSSES-

Any currency pair that does not include US$

EG

• CHF/JPY

• EUR/GBP

• EURAUD

• EUR/CHF

• AUD/SGD

• AUD/JPY

About 34% in market share 10

Pairs

• Transactions in FX always involve 2 currencies

• Buy one currency, sell the other currency

• At a fixed exchanged rate

• Eg Buying USD/SGD ,

• Buy US Dollar and sell Singapore Dollar

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Understanding Forex Quotes

• http://www.youtube.com/watch?v=8VFapv2-94Y

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Exchange Rates 1 Apr 2014

Symbo

l USD AUD KRW SGD

USD 1 1.0832 1072.6 1.2654

AUD 0.9235 1 990.91 1.1683

KRW

1000 0.9319 1.01 1 1.179

SGD 0.798 0.856 848.189 1

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WHAT IS TRADED

Symbol Country Currency % daily share

USD United States Dollar 87%

EUR Euro zone

members Euro 33.4%

JPY Japan Yen 23%

GBP Great Britain Pound 11.8%

AUD Australia Dollar 8.6%

CHF Switzerland Franc 5.2%

CAD Canada Dollar 4.6%

NZD New Zealand Dollar 2.0%

SGD[#14] Singapore Dollar 1.4%

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Market Share of Currency Pairs

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Trading Volume by Country

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*Bank of International Settlements(BIS) 2013

Who are the Major FX

players?

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Major Banks

• Inter-Bank(Professional / Wholesale)

• All Banks (Investment, Merchant, Commercial,

Central) trade with one another

• Activity of these banks determines supply and

demand

• Sets the exchange rates of the currencies

• Special rates

• Eg DBS, UOB, MAS

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1) Central Banks

• Major Government Body eg MAS

• Does not specifically announce desired level of currency

• Take action if currency moves out of preferred range

• Able to move exchange rates through trading activities

due to their size

• How?

• Open market ie inter- bank market buying and selling

• Rumours

• Jaw-boning eg Bank of Japan, 1985 Plaza Accord

• http://www.swfinstitute.org/swfs/temasek-holdings/

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Central Bank Chairmans

• USA- Federal Reserve Bank (FED)

Janet Yellen

• European Union- European Central Bank(ECB)

Mario Draghi

• Singapore – Monetary Authority of Singapore

Tharman Shanmugaratnam

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2) Investment, Merchant, Commercial

Banks

Investment Banks Customers – Government,

corporations, individuals

• Creation of capital for their customers

• Raise capital – underwriting , mergers and

acquisitions, trading currencies for the bank etc

• Give advice to clients regarding buying investment

services eg stock IPO, private share offerings

• Rarely provide financing

• Trade for their own account

• eg JP Morgan, DBS, Goldman Sachs

• Temasek-ING deal

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Merchant Bank

• Medium to Small scale companies

• Provide financing through share ownership instead

of loans

• Advisory services for mergers and acquisitions

• Provide advice to business planning to expand for

bigger market share

• Eg Citibank, Coutts, ANZ, Islamic Bank of Asia, JP

Morgan, Mitsusbishi UFJ

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Commercial Banks

• Accept deposits

• Internet banking

• Letter of credit

• Safe deposit boxes

• Sales of insurance or unit trust

• Provide loans

• Eg DBS , UOB, POSB

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If You had $10,000 , which method of investment will you invest in your money in ? Why?

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Method of Investment Income Expense

1. Deposits Earns savings rate of 0.05%

per annum

0

1. Safe Deposit Box Earning-0% deposit box rental- $300 per

annum

1. Insurance

Will receive $20,000

At the end of 20years

Or

$40,000 at 55 years

Yearly payment of $1000 a

year

1. Unit Trust Projected payment of 3.5 %

per year

No capital guaranteed

1% sales fee-one time

1% admin fee per year

1. Personal Trading in forex No guarantee Account deposit of

$5,000

Trading commission of

$10 per trade

1. Gold coins worth $8000 No Income

Capital Appreciation

0

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Retail Market Makers and ECN

• Stock Market Trading Firms with FOREX sections

• Enables individuals to trade currencies

• Trade through broker or online

• Represents 5% of whole FX market in daily trading

turnover

- about $118 Billion *

• Eg Kim Eng, Lim and Tan, Philip Stocks

* Forexmagnates.com/retail-Forex-volumes-survey-september 2010

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Hedge Funds and MNC

Hedge Funds

• Money raised by wealthy individuals, pension funds, and

corporations and managed by a fund manager

• Buy and sell currency to make profit

Multinational Corporations

• Companies that operate in many countries

• Hedge currency risk- accounts receivables in foreign

countries

Eg 60 days accounts receivable – hedge through currency

• Profits translation- transferring of profits from one area of business to another area

• Not speculators

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Retail Traders • Speculators

• Individuals

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Lesson 2-Lesson Plan

What currencies are traded?

Who are the Forex Players?

When do they trade?

Where do they trade?

Why do they trade?

How do they trade? 30

Trading Hours

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24 HOUR

6AM 7 8 9 10 11 12 1PM 2 3 4 5

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SYDNEY

TOKYO

6PM 7 8 9 10 11 12AM 1 2 3 4 5

LONDON

LONDON

New York

24 HOUR

6AM 7 8 9 10 11 12 1PM 2 3 4 5

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SYDNEY

TOKYO

6PM 7 8 9 10 11 12AM 1 2 3 4 5

LONDON

LONDON

New York

Where do they trade?

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STOCK MARKET

CENTRALIZED

MARKET

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BUYERS SINGAPORE

EXCHANGE

SGX

SELLERS

FOREX MARKET

DECENTRALIZED MARKET [ECN] 24 HOUR

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SG-SUPER BANK 1

BANK 1

PHP SUPER BANK

SG-SUPER BANK 2

IDR –SUPER BANK

ECN BANK

2 RETATIL

ECN $ CHANGER

1

ECN

RETAIL

SHELL

SMALL BANKS

KIM ENG

TOM MARY

Why Trade Forex

Advantages Forex Stocks

24 Hour Trading Yes No

No middlemen Yes No

No market

manipulation

Yes No

Liquidity Yes No

Minimal commissions Yes N

Leverage Yes Yes/No 37

• Why Trade Currencies?

• Forex is the world's largest market, with about 5 trillion US

dollars in daily volume and 24-hour market action. Some

key differences between Forex and Equities markets are:

• Many firms don't charge commissions – you pay only the

bid/ask spreads.

• There's 24 hour trading – you dictate when to trade and

how to trade.

• You can trade on leverage, but this can magnify potential gains and losses.

• You can focus on picking from a few currencies rather

than from 5000 stocks.

• Forex is accessible – you don’t need a lot of money to get started.

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As technologies have improved, the

Forex market has become more

accessible resulting in an

unprecedented growth in online

trading. One of the great things

about trading currencies now is that

you no longer have to be a big

money manager to trade this market;

traders and investors like you and I

can trade this market.

Leverage

• Youtube

• What is FX?

• http://www.youtube.com/watch?v=h68UkEyC8Ww

• What is Leverage

• http://www.youtube.com/watch?v=3b0rhQWdmyg

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Practical

How

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• FX trading platform

• Elements

• Prices

• Time

• Bar Charts

• USD/JPY, USD/SGD. AUD/USD

• Yahoo.Finance

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Yahoo.sg

1. Finance (left side)

2. Market Datat > Currencies (Right side)

3. Click ‘USD/SGD’

4. Click on chart

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How to read a bar chart

• http://www.youtube.com/watch?v=5ZMc7RMCvKM

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Next Lesson

• What moves the FOREX Market?

-Market forces eg Demand and Supply, Interest

Rate, Government Policies

-Political Turmoil

• Practical

-How to read charts

-calculate currency pips

-charts of different trading sessions from Japan,

London and USA

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