Introduction to ForexForeign Exchange Market (Forex) is the arena where a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 70's when international trade transitioned from fixed to floating exchange rates, and nowadays is considered to be the largest financial market in the world because of its tremendous turnover.All currencies are traded in pairs and each is assigned with an abbreviation.
Singapore Dollar The rate at which currencies are exchanged one for another is called the currency exchange rate. For example, "EUR/USD exchange rate is 1.2505" means that one Euro is exchanged for 1.2505 US Dollars.The exchange rate of any currency is usually given as the Bid price (left) and the Ask price (right). The Bid price represents what will be obtained in the quote currency (US Dollar in our example) when selling one unit of the base currency (Euro in our example). The Ask price represents what has to be paid in the quote currency (US Dollar in our example) to obtain one unit of the base currency (Euro in our example). The difference between the Bid and the Ask price is referred to as the spread.
Margin:
1% of transaction size for account balances below $ 100,000
2% of transaction size for account balances up to $ 250,000
4% of transaction size for account balances above $ 250,000 Contracts Specifications
Calculating profit/lossFor example, EUR/USD exchange rate is 1.2505/1.2509 and your leverage is 1:100. You believe that EUR/USD will go up and buy 0.1 lot of EUR/USD at 1.2509 (Ask price) - for the contract size refer to Table 2. As we can see from Table 2, 1.0 lot of EUR/USD is 100,000 EUR, which means that 0.1 lot (our example deal size) is 10,000 EUR.So, you buy 10,000 EUR and sell 10,000*1.2509=12,509 USD. In fact to fund this position you do not have to have 12,509 USD but only 125.09 USD. The rest of the money (in our example 12,383.91 USD) is leveraged to you by Alpari (UK).Leverage (or gearing) mechanism allows you to open and hold a position much larger than your trading account value. 1:100 leverage means that when you wish to open a new position, then you need to support a deposit 100 times less than the value of the contract you are interested in.For example, you believe that EUR/USD is moving higher and buy 10,000 EUR and sell 12,509 USD. Assuming you are right and EUR/USD goes up to 1.2599/1.2603 and you decide to close the position: when you close a long position you sell the base currency (10,000 EUR in our example) and buy the quote currency (10,000*1.2599 = 12,599 USD)
NB: When you close a short position you buy the base currency and sell the quote currency.To fund this position you only need 100 EUR (approximately 125 USD) not 10,000 EUR. The profit on this position is 90 pips (1.2599-1.2509=0.0090). A pip or point is a minimal rate fluctuation. For EUR/USD 1 pip is 0.0001 of the price (see Table 2).This example shows a favourable outcome. If EUR/USD had fallen you would realise a loss not a profit and with leverage this loss will be magnified. For example, if you close the position at 1.2419, your loss would be $90. Should you have doubts about your understanding of risks, please consult your financial adviser.
Rollover / Interest PolicyForeign exchange trading at Alpari (UK) is dealt on a "Spot" basis only. This means that all trades settle two business days from inception, as per market convention. The settlement date is referred to as the value date. Alpari (UK) does not arrange physical delivery of currencies hence, all positions left open from 10:59:45 p.m. to 10:59:59 p.m. (London time) will be rolled over to a new Value Date.As a result, positions are subject to a swap charge or credit based on the "Rollover / Interest Policy" webpage.Please note that since 03 June 2007 Alpari (UK) Limited no longer closes and reopens the positions which are open at 11:00 pm London time. Instead we have introduced a more convenient method of rollover which involves debiting or crediting a customer’s trading account when he/she holds open positions overnight.The cost of rollover is based on the interest rate differential of the two currencies. Let’s assume that the interest rates in the EU and USA are 4.25% p.a and 3.5% p.a respectively. Every currency trade involves borrowing one currency to buy another. If you have a buy position of 1.0 lot in EUR/USD, then you earn 4.25% on your Euros and borrow USD at 3.5% per year.In other words:
If you have a long position (i.e. bought) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you receive a gain.
If you have a short position (i.e. sold) and the first currency in the currency pair has a higher overnight interest rate than the second currency, then you lose the difference.
If you have a long position (i.e. bought) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you lose the difference.
If you have a short position (i.e. sold) and the first currency in the currency pair has a lower overnight interest rate than the second currency, then you receive a gain. Please note that if you open and close a position before 10:59:45 p.m. (London time) you will not be subject to a rollover.The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day. NB: When you roll an open position from Wednesday to Thursday, then Monday next week becomes the value date, not Saturday; therefore the rollover charge on a Wednesday evening will be three times the value indicated on the "Rollover / Interest Policy" webpage.
Why trade Forex?Unlike other financial markets Forex has no physical location, like stock exchanges, for example. It operates through the electronic network of banks, computer terminals or via telephone. The lack of a physical exchange enables Forex to operate on a 24-hour basis, spanning from one time zone to another across the major financial centres (Sydney, Tokyo, Hong Kong, Frankfurt, London, New York etc). In every financial centre there are many dealers, who buy and sell currencies 24 hours a day during the whole business week. Trading begins in the Far East, New Zealand (Wellington), then Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Maine, London and ends in New York and Los Angeles. Below there are approximate trading hours for regional markets (London time)
Forex has some advantages which make it very popular among investors:
Liquidity. Forex is the largest financial market in the world, with the equivalent of over $3-4 trillion changing hands daily whereas traded volume on the stock markets equates to only 500 billion US dollars.
Flexibility. Forex is a 24-hour market, which offers a major advantage over other markets, for example, stock exchanges which are only open during regional business hours. You can respond to breaking news immediately if the situation requires it and customise your trading schedule.
Lower transaction costs. Traditionally there are no commissions or charges on Forex, except for the spread.
Margin. Our 1:100 leverage (only for deposits below $ 100,000) is a powerful tool. You need to support a deposit of 1,000 US dollars to make a deal with $100,000. Such high leverage combined with rapid rate fluctuations can make this market profitable but at the same time risky: please see Risk Warning below.
Risk Warning: Under margin trading conditions even small market movements may have a great impact on the customer's trading account. You must consider that if the market moves against you, you may sustain a total loss greater than the funds deposited. You are responsible for all the risks, financial resources you use and for the chosen trading strategy.
Forex GlossaryBase currency is the first currency in the pair. Quote currency is the second currency in the pair.
USD
/
JPY
=
120.25
Base currency
Quote currency
RateThis abbreviation specifies how much you have to pay in quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or pip.Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2394 the quote may be abbreviated to 89/94.The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
Bid
Ask
USD / JPY =
120.25
/
120.30Bid is the rate at which you can sell the base currency, in our case it's US dollar, and buy the quote currency, i.e Japanese Yen.Ask ( or Offer) is the rate at which you can buy the base currency, in our case US dollars, and sell the quote currency, i.e. Japanese Yen.Spread is the difference between the Bid and the Ask price.Pip is the smallest price increment a currency can make. Also known as a point. e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY. Currency Rate is the value of one currency expressed in terms of another. The rate depends on the supply and demand on the market or restrictions by a government or by a central bank.Lot Size is the number of base currency, underlying asset or shares in one lot defined in the contract specifications. For details refer to the Table 2.Lot is an abstract notion of the number of base currency, shares or other underlying asset in the trading platform.Transaction (or deal) size is lot size multiplied by number of lots.Long Position is a buy position whereby you profit from an increase in price. In respect of currency pairs: buying the base currency against the quote currency.Short Position is a sell position whereby you profit from a decrease in price. For currency pairs: selling the base currency against the quote currency.Completed Transaction consists of two counter deals of the same size (open and close a position): buy then sell or vice versa.Leverage is the term used to describe margin requirements: the ratio between the collateral and the value of the contract. 1:100 leverage means that you can control $100,000 with only $1,000 (1%).Margin is the collateral required by Alpari (UK) to open and maintain a position.Balance is the total financial result of all completed transactions and deposits/withdrawals on the trading account.Floating Profit/Loss is current profit/loss on open positions calculated at the current prices.Equity is calculated as balance + floating profit - floating loss.Free margin means funds on the trading account, which may be used to open a position. It is calculated as equity less necessary margin.
Tuesday, August 7, 2007
Forex kitty swells $4.12 b, touches $219 b
The country�s forex kitty swelled by an additional $4.12 billion during the week ended July 13, 2007, taking the total reserves to $218.956 billion. While currency assets accounted for a value of $211.703 billion, the balance represented reserves with International Monetary Fund and gold holdings of the Reserve Bank of India.
The rise in exchange reserves during the week is a recent high, the last one being in February this year when the forex reserves went up by $5.119 billion to $178.084 billion on February 9, 2007.
Market participants feel that the RBI has been aggressively buying dollars to maintain the rupee at 40.35 levels. Talking about the dollar-rupee parity, Mr Ajay Mahajan, Group President, Financial Markets, Institutions and Investment Management, Yes Bank, said, �The rupee-dollar parity is where it is now because of RBI�s aggressive intervention in the forex market.� He felt that the apex bank will continue to intervene in the market. He said �the rupee will be fairly well supported.�
High reserves
The euro and sterling have strengthened this week against the dollar contributing to the strong forex kitty when measured in dollar terms, feel dealers. �The strong inflows coupled with the revaluation of other currencies like euro and pound has contributed to the high reserves,� said Mr P. Mukherjee, Senior Vice-President, Treasury, UTI Bank.
Traders attributed the strong RBI intervention as prompted by the robust dollar supplies from foreign direct investments and portfolio flows in that week. Interestingly enough, the week in question did not see any mega primary offering as was the case in the previous week, which saw ICICI Bank issue attracting support from qualified overseas investors in a major way, said a banking analyst.
In a measure that perhaps signalled determined intervention by the RBI in the face of strong flows, its �reference rate� (usually a signal to the market participants as to where RBI�s preferences lay) pegged the rupee�s exchange rate to the dollar, a shade lower during that week, having moved it down from Rs 40.41 on Monday, July 9, to Rs 40.47 on July 13.
However, market transactions during the week pushed the rupee to a slightly higher level of Rs 40.42 to a dollar on Friday from Rs 40.43, the rate prevailing on Monday.
Meanwhile, in a report released on Thursday on the management of foreign exchange reserves in the country, the RBI said that reserves were 2.6 times the size of volatile capital flows (the sum of cumulative portfolio investments and outstanding short term debt) as at the end of March 2007.
The figure represents an improvement over the performance as of March 2006 when such reserves were only 2.3 times the sum of outstanding portfolio investments and short-term debt.
The RBI has traditionally placed the foreign exchange reserves principally as deposits with the IMF, foreign central banks and commercial banks, and investments in government and other securities. As of March 2007, it had nearly 48 per cent of foreign currency assets as deposits with the Bank for International Settlements and the IMF, the RBI release said. The rest was invested in deposits with foreign commercial banks (23 per cent) and tradable securities (31 per cent).
It earned on an average, during 2006-07, 3.9 per cent on its investments, up from 3.1 per cent in the previous year.
The rise in exchange reserves during the week is a recent high, the last one being in February this year when the forex reserves went up by $5.119 billion to $178.084 billion on February 9, 2007.
Market participants feel that the RBI has been aggressively buying dollars to maintain the rupee at 40.35 levels. Talking about the dollar-rupee parity, Mr Ajay Mahajan, Group President, Financial Markets, Institutions and Investment Management, Yes Bank, said, �The rupee-dollar parity is where it is now because of RBI�s aggressive intervention in the forex market.� He felt that the apex bank will continue to intervene in the market. He said �the rupee will be fairly well supported.�
High reserves
The euro and sterling have strengthened this week against the dollar contributing to the strong forex kitty when measured in dollar terms, feel dealers. �The strong inflows coupled with the revaluation of other currencies like euro and pound has contributed to the high reserves,� said Mr P. Mukherjee, Senior Vice-President, Treasury, UTI Bank.
Traders attributed the strong RBI intervention as prompted by the robust dollar supplies from foreign direct investments and portfolio flows in that week. Interestingly enough, the week in question did not see any mega primary offering as was the case in the previous week, which saw ICICI Bank issue attracting support from qualified overseas investors in a major way, said a banking analyst.
In a measure that perhaps signalled determined intervention by the RBI in the face of strong flows, its �reference rate� (usually a signal to the market participants as to where RBI�s preferences lay) pegged the rupee�s exchange rate to the dollar, a shade lower during that week, having moved it down from Rs 40.41 on Monday, July 9, to Rs 40.47 on July 13.
However, market transactions during the week pushed the rupee to a slightly higher level of Rs 40.42 to a dollar on Friday from Rs 40.43, the rate prevailing on Monday.
Meanwhile, in a report released on Thursday on the management of foreign exchange reserves in the country, the RBI said that reserves were 2.6 times the size of volatile capital flows (the sum of cumulative portfolio investments and outstanding short term debt) as at the end of March 2007.
The figure represents an improvement over the performance as of March 2006 when such reserves were only 2.3 times the sum of outstanding portfolio investments and short-term debt.
The RBI has traditionally placed the foreign exchange reserves principally as deposits with the IMF, foreign central banks and commercial banks, and investments in government and other securities. As of March 2007, it had nearly 48 per cent of foreign currency assets as deposits with the Bank for International Settlements and the IMF, the RBI release said. The rest was invested in deposits with foreign commercial banks (23 per cent) and tradable securities (31 per cent).
It earned on an average, during 2006-07, 3.9 per cent on its investments, up from 3.1 per cent in the previous year.
Flux in forex accounting norms
It is not only the rupee that has been in a flux these days. The accounting guidelines on the subject too are apparently in a state of indefiniteness.
A recent announcement by the Institute of Chartered Accountants of India (ICAI) has deferred to April 1, 2008, the applicability of its guidance on �Accounting for exchange differences arising on a forward exchange contract entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction�.
Issued in January 2006, the guidance had been earlier announced to be applicable to accounting periods commencing on or after April 1, 2007.
The current postponement, decided at the ICAI�s council meeting on July 18, is due to the non-finalisation of the Accounting Standard on �Financial Instruments: Recognition and Measurement� now under formulation.
Another recent announcement on www.icai.org, the Institute�s homepage, is about how the accounting treatment of exchange differences contained in AS 11 is applicable, and not the requirements of Schedule VI to the Companies Act, 1956, in respect of accounting periods commencing on or after December 7, 2006.
A recent announcement by the Institute of Chartered Accountants of India (ICAI) has deferred to April 1, 2008, the applicability of its guidance on �Accounting for exchange differences arising on a forward exchange contract entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction�.
Issued in January 2006, the guidance had been earlier announced to be applicable to accounting periods commencing on or after April 1, 2007.
The current postponement, decided at the ICAI�s council meeting on July 18, is due to the non-finalisation of the Accounting Standard on �Financial Instruments: Recognition and Measurement� now under formulation.
Another recent announcement on www.icai.org, the Institute�s homepage, is about how the accounting treatment of exchange differences contained in AS 11 is applicable, and not the requirements of Schedule VI to the Companies Act, 1956, in respect of accounting periods commencing on or after December 7, 2006.
Monday, August 6, 2007
FOREX
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The trade happening in the forex markets across the globe currently exceeds $1.9 trillion/day (on average). Retail traders (individuals) are currently a very small part of this market and may only participate indirectly through brokers or banks and may be targets of forex scams.According to David Krutz from the Financial Times website (Published: October 9 2006 20:48) " The foreign exchange market will have doubled in size in just three years next year, thanks to increased participation by fund managers and pension funds, says research out on Monday. TowerGroup, a financial services research consultancy, said it expected total global average daily volumes on the FX market to exceed $3,000bn in 2007. FX volumes, which rose from $1,770bn in 2004 to $2,000bn in 2005, were set to rise to $2,600bn in 2006 and $3,600bn for 2007, as foreign exchange became accepted as an asset class in its own right according to TowerGroup.
TRADE FOREX
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