Forex Market Case Study Analysis

Forex Market Case Study AnalysisPrefaceJust as stranger walk on course of study last arrive at their destination project work is like a travel guidebook after walking in which students weed gain make knowledge that crumb be stepping st maven towards their success. It is such a work that enhances each of all measurey individual working capacity knowledge.The Importance of Thesis is that it is unify of both theoretical practicable knowledge. Through the thesis, I got a coinen variegate to arrive guidance under professionals senior executives which can definitely be a platform of establishing themselves.During my thesis work I visited AMA Library, Gujarat Chamber of Commerce and SBI which helped us a lot to gain information about Forex derivatives.This opportunist of thesis provided to me was not exclusively a platform to develop enhance my appetite of learning and in like manner served a fusion of the theoretical concept their matter-of-fact application in co rpo place population.INTRODUCTIONTo make a improvement from the forex commercialise of International craftiness you absorb a grip on principally five key factors that adjoins a up-to-dateness value. When making our quite a littles we analyze five key factors which atomic number 18 as follows. interest aggroup RatesEconomic GrowthGeo-Politics championship and Capital FlowsMerger and Acquisition Activity touch RatesInterest income and keen appreciation these ii methods we can use to make attain from variant in terms of countries interest place.Interest Income.E actually up-to-dateness in the field comes attached with an interest respect that is set by its countrys primal stick. all(a) things being equal, you should alwaysBuy currencies from countries with high-interest evaluate andFinance these purchases with coin from countries with low-interest evaluate.For example, as of the fall of 2006, interest rank in the United States stood at 5.25%, while order in Ja pan were set at .25%. You could have askn advantage of this rate difference by borrowing a large sum of Nipp unityse yen, ex ever-changing it for US dollars and using the US dollars to purchase bonds or cds at the US 5.25% rate.In opposite words, you could have borrowed m angiotensin converting enzymey at .25%, lent it out at 5.25%, and made a 5% return.Or you could save yourself all the hassle of becoming a m integrityy imparter by simply duty the silver pairto push the kindred transaction.Capital appreciation.Asa countrys interest rate rises, the value of the countrys currency as well as tends to rise this phenomenon gives you a chance to profit from your currencys increased value, or swell appreciation.In the case of the USD/JPY spread in 2005 and 2006, as the US interest grade stayed higher than Japans, the dollar continued to increase in value. Investors who traded yen for dollars gained from interest income as well as the US dollars capital appreciation.Economic Gro wth.Economic Growth is next factor when predicting a countrys currency movements.The upstandinger the economy, the great the possibility that the of import money box will raise its interest rates in order to the growth of inflation.Andthe higher a countrys interest rates, the bigger the likelihood those extraneous throneors will perpetrate in a countrys financial commercialises.More unusual investors mean a greater demand for the countrys currency.A greater demand results in an increase in a currencys value. hence economic growth inspires higher interest rates inspires more than(prenominal) foreign investment inspires greater currency demand which inspires an increase in the currencys value.Geo-Politics.The currency commercialise is the only merchandise in the world that can be successfully traded on political advanceds as well as economic releases.Because currencies re laycountries or else than companies and constantlyy(prenominal) disturbance to the political lands cape will often snips affect the direction in which the transfigure rate moves.The key to understanding speculative fashion with respect to any geopolitical unrest is that speculators run first and ask questions later.In early(a) words, whenever investors fear any threat to their capital, they will quickly retreat to the sidelines until they atomic number 18 real that the political encounter has disappe atomic number 18d. t present(predicate)fore, the general rule of thumb in the currency grocery store place is thatpolitics almost always trumps economics. occupation and Capital FlowsBefore ever making a final prediction regarding the movement (or trend) of a particular currency you should determine whether or not the currency is dependent on its countrys capital or trade flow. Capital flow refers to the amount of investment a country receives from international sources. Trade flow is the income resulting from trade. Some countries can be truly dependent their capital flo w, while early(a) countries be extremely sensitive to trade flows.Mergers and AcquisitionsMerger and acquisition bodily function is the least(prenominal)(prenominal) important factor in determining the long-term direction of currencies. It can be the most powerful force in stagingnear-term currency moves.Merger and acquisition activity occurs when a company from one economic region wants to make a transnational transaction and demoralise a corporation from an different country.For example, a European company wants to barter for a Canadian asset for $20 billion, it would have to go into the currency market and acquire the currency to affect this transaction.Typically, these deals argon not equipment casualty sensitive, notwithstandingtime sensitivebecause the acquirer whitethorn have a date by which the transaction is to be completed. Because of this underlying dynamic, merger and acquisition flow can exert a very sacrosanct temporary force on FX calling, sometimes skewin g the natural course of currency flow for days or weeks.OBJECTIVEMain Objective is for getting in depth knowledge of my topic.To critically analyze the Forex market of International trade.To analyze the five key factors that moves the Forex market and how to make profit out of them.To analyze the precede data and forecasting a future movement of Forex market.METHODOLOGHY* Introduction of the topic in detail.* For predict market movement I am using 2 methods like fundamental analysis and technical analysis. Technical analysis includes Candlestick Charts and Moving Averages (Simple and Exponential)SOURCESPrimary source Taking interview of the expertise in the Forex market. substitute source Use Books, Magazines, Newspapers, Research papers and Internet as secondary sourcesLIMITATIONS I have to follow only these five factors for move the Forex market. Interview is the only primary research in the Forex market. Inflation is the main factor which moves the Forex market but which is not included in the five factors. Merger and Acquisition is the least important factor.CHAPTER 1INTRODUCTION OF FOREIGN EXCHANGEForeign Ex switch is the method or process of conversion/converting one currency into another currency. authenticness becomes money and legal tender for a country. But for a foreign country it becomes the value as a commodity. Since the commodity has a value its simile with the other currency determines the swap value of one currency with the other. It is just the game of release and demand. For example, the US dollar in USA is the currency in USA but for India it is just like a commodity which has a value which varies according to demand and go forth.Foreign switch is one of the economic activity which deals with the means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the online of another country. It involves the investigation of the method which give-and- ru n intos the currency of one country for that of another. Foreign rally can likewise be defined as the means of retribution in which currencies are converted into each other and by which international transfers are made excessively the activity of transacting business in further means. to the highest degree countries of the world have their own currencies. The US has its dollar, France its franc, Brazil its cruziero and India has its Rupee. Trade between the countries involves the switch of varied currencies. The foreign supervene upon market is the market in which currencies are bought and sold against each other. It is the largest market in the world. Transactions conducted in foreign supercede markets determine the rates at which currencies are exchanged for one another, which in turn determine the cost of purchasing foreign goods financial assets. The most recent, bank of international settlement survey stated that over $900 billion were traded universal each day. Durin g peak al-Quran period, the figure can reach upward of US $2 trillion per day. The corresponding to 160 times the daily slew of NYSE.CHAPTER 2ORIGIN OF THE FOREX MARKETThe FOREX calling traces its account statement to centuries ago. Different currencies and the need of exchange them had followed since the Babylonians. They are credited with the first use of paper notes and receipts.In that time the value of goods were expressed in terms of other goods which were called as Barter constitution. The obvious limitations of such a system encouraged establishing more generally recognized mediums of exchange. It was important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular property and silver, established themselves as an received means of defrayment as well as a reliable storage of value. Trade was carried among peck of Africa, Asia etc through this system. Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of political I.O.U. during the middle Ages in like manner gained acceptance. This persona of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of todays modern currencies.Before the First World contend, most Central banks erect their currencies with convertibility to favorable. However, the deluxe exchange standard had its weaknesses of boom-bust patterns. As an economy strengthened, it would import a great deal from out of the country until it ran down its gold hold ups involve to live on its money. As a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession. Ultimately, scathes of commodities had hit bottom and it appearing sweet to other nations who would sprint into get fury that injected the economy with gold until it increased its mone y supply, drive down interest rates and restore wealth into the economy.However, for this instance of gold exchange, at that place was not necessarily a Centrals bank need for full coverage of the governments currency grants. This did not occur very often, however when a separate mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called Run on banks. The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. The Great Depression and the removal of the gold standard in 1931 created a serious lull in FOREX market activity. From 1931 until 1973, the FOREX market went through a series of changes. These changes greatly affected the global economies at the time and supposal in the FOREX markets during these times was little.Inorder to protect local national interests, increased foreign exchange go overs were introduced to prevent market forces from punish ing monetary irresponsibility.Nearthe end of World struggle II, the Bretton woodwind instrument agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton woodland, New Hampshire rejected John Maynard Keynes suggestion for a hot world reserve currency in favor of a system built on the US Dollar. International foundings such as the IMF, The World Bank and GATT were created in the very(prenominal) period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of frozen(p) exchange rates that reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.TheBretton Woods system came under increasing military press as national economies moved in different directions during the 1960s. A number of realignments held the system bluck for a long time but eventually Bretton Woods collapsed in the early 1970s following president Nixons suspension of the gold convertibility in marvellous 1971. The dollar was not any longer suited as the sole international currency at a time when it was under repelling insistency from increasing US budget and trade deficits.Thelast few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been upstage in most countries, leaving the market forces free to adjustforeign exchange ratesaccording to their perceived values.TheEuropean Economic Community introduced a new system of better exchange rates in 1979, the European Monetary System. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but in addition actually replace many of them with the Euro in 2002. London was, and remains the principal offshore market. In the 198 0s, it became the key center in the Eurodollar market when British banks began totaling dollars as an alternative to pounds in order to maintain their leading position in global finance.InAsia, the lack of sustainability of stubbornforeign exchange rateshas gained new relevancy with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other determined exchange rates in particular in South America also looking very vulnerable.Whilecommercial companies have had to face a much more vapourific currency environment in recent years, investors and financial governing bodys have discovered a new playground. The FOREX exchange market initially worked under the central banks and the political institutions but later on it accommodated the various institutions. At present it also includes the dot com booms and the World Wide Web. The size of the FOREX market now dwarfs any other investment market. Theforeign ex change marketis the largest financial market in the world. Approximately 1.9 trillion dollars are traded daily in theforeign exchange market. It is estimated that more than USD 1,200 Billion are traded both day. It can be said easily that FOREX market is a lucrative opportunity for the modern day savvy investorSHORT INFO OF FOREXThe storey of FOREX trading was traced centuries ago. Different countries need different currencies and the need of exchange them had liveed since the Babylonians. It is said that Babylonians were the first one who used paper notes and receipts.During those days, goods were exchanged for another goods based on the value of both the goods, which was cognise as barter system. But this system had some limitations and this lead to encourage establishing more generally accepted medium of exchange. It was also important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon v arious metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Trade was carried among wad of Africa, Asia etc through this system.Coinswere initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the middle Ages also gained acceptance. This lineament of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of todays modern currencies.Beforethe First World War, most Central banks back up their currencies with convertibility to gold. However, the gold exchange standard had its weaknesses of boom-bust patterns. As an economy strengthened, it would import a great deal from out of the country until it ran down its gold reserves undeniable to support its money. As a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recessio n. Ultimately, prices of commodities had hit bottom and it appearing cunning to other nations who would sprint into acquire fury that injected the economy with gold until it increased its money supply, drive down interest rates and restore wealth into the economy.However, for this oddball of gold exchange, at that place was not necessarily a Centrals bank need for full coverage of the governments currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called Run on banks. The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. The Great Depression and the removal of the gold standard in 1931 created a serious lull in FOREX market activity. From 1931 until 1973, the FOREX market went through a series of changes. These changes greatly affected the global economies at the time and ass umption in the FOREX markets during these times was little.Inorder to protect local national interests, increased foreign exchange check intos were introduced to prevent market forces from punishing monetary irresponsibility.Nearthe end of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar. International institutions such as the IMF, The World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.TheBretton Woods sy stem came under increasing pressure as national economies moved in different directions during the 1960s. A number of realignments held the system existent for a long time but eventually Bretton Woods collapsed in the early 1970s following president Nixons suspension of the gold convertibility in expansive 1971. The dollar was not any longer suited as the sole international currency at a time when it was under implike pressure from increasing US budget and trade deficits.Thelast few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been outback(a) in most countries, leaving the market forces free to adjustforeign exchange ratesaccording to their perceived values.TheEuropean Economic Community introduced a new system of fixed exchange rates in 1979, the European Monetary System. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exc hange rates but also actually replace many of them with the Euro in 2002. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance.InAsia, the lack of sustainability of fixedforeign exchange rateshas gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.Whilecommercial companies have had to face a much more vapourific currency environment in recent years, investors and financial institutions have discovered a new playground. The FOREX exchange market initially worked under the central banks and the governmental institutions but later on it accommodated the various institutions. At present it also include s the dot com booms and the World Wide Web. The size of the FOREX market now dwarfs any other investment market. Theforeign exchange marketis the largest financial market in the world. Approximately 1.9 trillion dollars are traded daily in theforeign exchange market. It is estimated that more than USD 1,200 Billion are traded every day. It can be said easily that FOREX market is a lucrative opportunity for the modern day savvy investorCHAPTER 3METHODS OF QUOTING EXCHANGE RATES in that respect are two methods of quoting exchange rates.Direct methodFor change in exchange rate if foreign currency is kept constant and home currency is kept variable, then the rates are stated be expressed in Direct Method E.g. US $1 = Rs. 45.50.Indirect methodFor change in exchange rate if home currency is kept constant and foreign currency is kept variable, then the rates are stated be expressed in Indirect Method. E.g. Rs. 100 = US $ 2.5116With the effect from August 2, 1993, all the exchange rates are quoted in direct method, i.e.US $1 = Rs. 45.50 GBP1 = Rs. 79.82Method of QuotationIn the Forex market in that respect are two rates like one is for buying and one is for selling rates. This helps in eliminating the risk of being given bad rates i.e. if a political fellowship comes to know what the other party intends to do i.e., buy or sell, the former can take the latter for a ride.There are two parties in an exchange deal of currencies. To begin the deal one party asks for quote from another party and the other party quotes a rate. The party asking for a quote is cognise as Asking party and the party giving quote is known as Quoting partyThe advantages of two way quote. It automatically ensures alignment of rates with market rates. The market constantly makes available price for buyers and sellers. Two-way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done immediately. It is not necessary for any player in the market to show whether he intends to buy or sell foreign currency but this ensures that the quoting bank cannot take advantage by manipulating the prices. Two-way quotes lend depth and liquidity to the market and which is very essential for efficient. In two-way quotes for the first rate is the rate for buying and another rate is for selling. We should understand here that in India the banks which are authorized dealers, always quote rates. So the rates quote buying and selling is for banks will buy the dollars from him so while count the first rate will be used which is a buying rate, as the bank is buying the dollars from the exporter. The same case will happen reciprocally with the importer, as he will buy the dollars from the banks and bank will sell dollars to importer.BASE CURRENCYEven if a foreign currency can be bought and sold in the same way as a commodity but theyre use as a minor difference in buying/selling of currency aid commodities. Unlike in case of commodities, in case of foreign currencies two currencies are involved so, it is necessary to know which the currency to be bought and sold is and the same one is known as Base notes.BID OFFER RATESThe buying and selling rates are also referred to as the bid and offered rates. In the dollar exchange rates referred to above, namely, $ 1.6288/96, the quoting bank is offering (selling) dollars at $ 1.6288 per pound while bidding for them (buying) at $ 1.6296. So in this source the bid rate for dollars is $ 1.6296 while the offered rate is $ 1.6288. The bid rate for one currency is automatically the offered rate for the other. In the above example, the bid rate for dollars $ 1.6296, is also the offered rate of pounds.CROSS RATE CALCULATIONUS Dollar is the most trading currency in the forex market. In other words one support of most exchange trades is the US currency so margins between bid and offered rates are lowest quotation marks if the US dollar. The margins tend to widen for miscegenation rates, as the following figuring would show.Consider the following structureGBP 1.00 = USD 1.6288/96EUR 1.00 = USD 1.1276/80In this rate structure, we have to calculate the bid and offered rates for the euro in terms of pounds. Let us see how the offered (selling) rate for euro can be calculated. Starting with the pound, you will have to buy US dollars at the offered rate of USD 1.6288 and buy Euros against the dollar at the offered rate for euro at USD 1.1280. The offered rate for the euro in terms of GBP, therefore, becomes EUR (1.6288*1.1280), i.e. EUR 1.4441 per GBP, or more conventionally, GBP 0.6925 per euro. Similarly, the bid rate the euro can be seen to be EUR 1.4454 per GBP (or GBP 0.6918 per euro). Thus, the quotation becomes GBP 1.00 = EUR 1.4441/54. It will be eagerly noticed that in percentage terms the difference between the bid and offered rate is higher for the EUR pound rate as compared to dollar EUR or pound dollar rates.CHAPTER 4ADVANTAGES OF FOREX MARKETThe Forex market is by far the largest and most liquid in the world but also day traders have up to now focused on looking for profits in mainly stock and futures markets. This is mainly due to the restrictive reputation of bank-offered forex trading services. There are Advanced Currency Markets (ACM) offers both online and traditional phone forex-trading services to the small investor with minimum account opening values start at 5000 USD.There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. These are the some advantages as under.CommissionsACM offers foreign exchange trading commission free. This is in sharp contrast to (once again) what stock and futures brokers offer. A stock trade can cost anywhere between USD 5 and 30 per trade with online brokers and typically up to USD 150 with full service brokers. Futures brokers can charge commissions anywhere between USD 10 and 30 on a round turn basis.Margins requirementsACM offers a foreign exchange trad ing with a 1% margin. In laymans terms that means a trader can control a position of a value of USD 1000000 with a mere USD 10000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.24 hour marketForeign exchange market trading occurs over a 24 hour period select up in Asia around 2400 CET Sunday evening and coming to an end in the United States on Friday around 2300 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.No Limit up / limit downFutures markets put up authoritative constraints that limit the number and suit of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a cert ain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating living positions if they so desire.The controlling of daily price volatility is the main mechanism but in effect since the futures currency market follows the spot market in any case the following day the futures market whitethorn undergo what is called a gap or we can say also in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unhoped-for price movements with stop- liberation orders the high volatility in the spot market can be fully controlled.Sell before you buyEquity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not feature the liquidity to be able to sell stock before he buys it. When initiating a selling or buying position in the spot market a trader has exactly the same capacity in margin wise. In spot trading when you are selling one currency you are necessarily buying another.CHAPTER 5FOREX EXCHANGE RISKThe Risk Management Guidelines are primarily an accent of some good and prudent practices in film management. They have to be understood and slowly internalized and customized so that they yield positive reimbursement to the company over time.Any business is open to risks from movements in competitors prices, raw sensible prices, competitors cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed.Forex RiskEverywhere in the world risk is attached. Without risk there is no gain. Also the FOREX is not risk-free. Like if you are trading with substantial sums of money and there is always a possibility that trades will go against you.Also there are several trading tools so that can minimize your risk and with ca ution and above all education the FOREX trader can learn how to trade profitably and while minimizing dischargees.RisksAssuming you are dealing with a reputable broker and there are still risks to FOREX trading. Transactions are subject to unexpected rate changes, volatile markets and political events.Exchange Rate RiskExchange rate risk which refers to the fluctuations in the currency prices over a long trading period. The Prices can fall rapidly which are resulting in substantial losses unless and until stop loss orders are used when trading FOREX. And so stop loss orders specify that the open position should be closed(a) if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate FOREX trading limit orders specify an open position should be closed at a specified profit target.Interest Rate RiskIt can result from discrepancies between the interest rates in the two countries which represented by the currency pair in a FOREX quote. This discrepancy can result in variations from the expected profit or loss of a particular FOREX transaction.Credit RiskIt is the possibility that when the deal is closed one party in a FOREX transaction may not honor their debt and this may happen when a bank or financial institution declares insolvency. The Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness.Country RiskCountry risk is affiliated with governments that may become involved in foreign exchange markets by limiting the flow of currency. There is more country risk associated with exotic currencies than with study currencies that allow the free trading of their currency.Limiting Risk in your FOREX currency trading systemFOREX trading can be very risky but there are ways to limit your risk and financial image. Every FOREX trader should have a trading strategy for knowing when to enter and when to exForex Market Case Study AnalysisForex Mar ket Case Study AnalysisPrefaceJust as stranger walk on path last arrive at their destination project work is like a path after walking in which students can gain witness knowledge that can be stepping stone towards their success. It is such a work that enhances each every individual working capacity knowledge.The Importance of Thesis is that it is blend of both theoretical practical knowledge. Through the thesis, I got a golden change to have guidance under professionals senior executives which can definitely be a platform of establishing themselves.During my thesis work I visited AMA Library, Gujarat Chamber of Commerce and SBI which helped us a lot to gain information about Forex derivatives.This opportunist of thesis provided to me was not only a platform to develop enhance my appetite of learning but also served a fusion of the theoretical concept their practical application in corporate world.INTRODUCTIONTo make a profit from the forex market of International trade yo u have a grip on mainly five key factors that affects a currency value. When making our trades we analyze five key factors which are as follows.Interest RatesEconomic GrowthGeo-PoliticsTrade and Capital FlowsMerger and Acquisition ActivityInterest RatesInterest income and capital appreciation these two methods we can use to make profit from different in terms of countries interest rates.Interest Income.Every currency in the world comes attached with an interest rate that is set by its countrys central bank. exclusively things being equal, you should alwaysBuy currencies from countries with high-interest rates andFinance these purchases with currency from countries with low-interest rates.For example, as of the fall of 2006, interest rates in the United States stood at 5.25%, while rates in Japan were set at .25%. You could have taken advantage of this rate difference by borrowing a large sum of Japanese yen, exchanging it for US dollars and using the US dollars to purchase bonds or cds at the US 5.25% rate.In other words, you could have borrowed money at .25%, lent it out at 5.25%, and made a 5% return.Or you could save yourself all the hassle of becoming a money lender by simply trading the currency pairto affect the same transaction.Capital appreciation.Asa countrys interest rate rises, the value of the countrys currency also tends to rise this phenomenon gives you a chance to profit from your currencys increased value, or capital appreciation.In the case of the USD/JPY spread in 2005 and 2006, as the US interest rates stayed higher than Japans, the dollar continued to increase in value. Investors who traded yen for dollars gained from interest income as well as the US dollars capital appreciation.Economic Growth.Economic Growth is next factor when predicting a countrys currency movements.The stronger the economy, the greater the possibility that the central bank will raise its interest rates in order to the growth of inflation.Andthe higher a countrys inte rest rates, the bigger the likelihood those foreign investors will invest in a countrys financial markets.More foreign investors mean a greater demand for the countrys currency.A greater demand results in an increase in a currencys value. thence economic growth inspires higher interest rates inspires more foreign investment inspires greater currency demand which inspires an increase in the currencys value.Geo-Politics.The currency market is the only market in the world that can be successfully traded on political news as well as economic releases.Because currencies representcountries sooner than companies and any disturbance to the political landscape will oftentimes affect the direction in which the exchange rate moves.The key to understanding speculative expression with respect to any geopolitical unrest is that speculators run first and ask questions later.In other words, whenever investors fear any threat to their capital, they will quickly retreat to the sidelines until they a re certain that the political risk has disappeared.Therefore, the general rule of thumb in the currency market is thatpolitics almost always trumps economics.Trade and Capital FlowsBefore ever making a final prediction regarding the movement (or trend) of a particular currency you should determine whether or not the currency is dependent on its countrys capital or trade flow. Capital flow refers to the amount of investment a country receives from international sources. Trade flow is the income resulting from trade. Some countries can be very dependent their capital flow, while other countries are extremely sensitive to trade flows.Mergers and AcquisitionsMerger and acquisition activity is the least important factor in determining the long-term direction of currencies. It can be the most powerful force in stagingnear-term currency moves.Merger and acquisition activity occurs when a company from one economic region wants to make a transnational transaction and buy a corporation from a nother country.For example, a European company wants to buy a Canadian asset for $20 billion, it would have to go into the currency market and acquire the currency to affect this transaction.Typically, these deals are not price sensitive, buttime sensitivebecause the acquirer may have a date by which the transaction is to be completed. Because of this underlying dynamic, merger and acquisition flow can exert a very strong temporary force on FX trading, sometimes skewing the natural course of currency flow for days or weeks.OBJECTIVEMain Objective is for getting in depth knowledge of my topic.To critically analyze the Forex market of International trade.To analyze the five key factors that moves the Forex market and how to make profit out of them.To analyze the present data and forecasting a future movement of Forex market.METHODOLOGHY* Introduction of the topic in detail.* For predict market movement I am using two methods like fundamental analysis and technical analysis. Technical analysis includes Candlestick Charts and Moving Averages (Simple and Exponential)SOURCESPrimary source Taking interview of the expertise in the Forex market. collateral source Use Books, Magazines, Newspapers, Research papers and Internet as secondary sourcesLIMITATIONS I have to follow only these five factors for move the Forex market. Interview is the only primary research in the Forex market. Inflation is the main factor which moves the Forex market but which is not included in the five factors. Merger and Acquisition is the least important factor.CHAPTER 1INTRODUCTION OF FOREIGN EXCHANGEForeign Exchange is the method or process of conversion/converting one currency into another currency. Currency becomes money and legal tender for a country. But for a foreign country it becomes the value as a commodity. Since the commodity has a value its similarity with the other currency determines the exchange value of one currency with the other. It is just the game of supply and demand. Fo r example, the US dollar in USA is the currency in USA but for India it is just like a commodity which has a value which varies according to demand and supply.Foreign exchange is one of the economic activity which deals with the means and methods by which rights to wealth expressed in terms of the currency of one country are converted into rights to wealth in terms of the current of another country. It involves the investigation of the method which exchanges the currency of one country for that of another. Foreign exchange can also be defined as the means of payment in which currencies are converted into each other and by which international transfers are made also the activity of transacting business in further means. to the highest degree countries of the world have their own currencies. The US has its dollar, France its franc, Brazil its cruziero and India has its Rupee. Trade between the countries involves the exchange of different currencies. The foreign exchange market is the market in which currencies are bought and sold against each other. It is the largest market in the world. Transactions conducted in foreign exchange markets determine the rates at which currencies are exchanged for one another, which in turn determine the cost of purchasing foreign goods financial assets. The most recent, bank of international settlement survey stated that over $900 billion were traded worldwide each day. During peak volume period, the figure can reach upward of US $2 trillion per day. The corresponding to 160 times the daily volume of NYSE.CHAPTER 2ORIGIN OF THE FOREX MARKETThe FOREX trading traces its history to centuries ago. Different currencies and the need of exchange them had existed since the Babylonians. They are credited with the first use of paper notes and receipts.In that time the value of goods were expressed in terms of other goods which were called as Barter system. The obvious limitations of such a system encouraged establishing more generally acce pted mediums of exchange. It was important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Trade was carried among volume of Africa, Asia etc through this system.Coins were initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the middle Ages also gained acceptance. This vitrine of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of todays modern currencies.Before the First World War, most Central banks supported their currencies with convertibility to gold. However, the gold exchange standard had its weaknesses of boom-bust patterns. As an economy strengthened, it would import a great deal from out of the country unti l it ran down its gold reserves required to support its money. As a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession. Ultimately, prices of commodities had hit bottom and it appearing attractive to other nations who would sprint into buying fury that injected the economy with gold until it increased its money supply, drive down interest rates and restore wealth into the economy.However, for this type of gold exchange, there was not necessarily a Centrals bank need for full coverage of the governments currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called Run on banks. The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. The Great Depression and the removal of the gold standard in 1931 created a serious lull in FOREX market activity. From 1931 until 1973, the FOREX market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the FOREX markets during these times was little.Inorder to protect local national interests, increased foreign exchange controls were introduced to prevent market forces from punishing monetary irresponsibility.Nearthe end of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar. International institutions such as the IMF, The World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.TheBretton Woods system came under increasing pressure as national economies moved in different directions during the 1960s. A number of realignments held the system alive for a long time but eventually Bretton Woods collapsed in the early 1970s following president Nixons suspension of the gold convertibility in August 1971. The dollar was not any longer suited as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.Thelast few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjustforeign exchange ratesaccording to their perceived values.TheEuropean Economic Community introduced a new system of fixed exchange rates in 1979, the E uropean Monetary System. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but also actually replace many of them with the Euro in 2002. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance.InAsia, the lack of sustainability of fixedforeign exchange rateshas gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.Whilecommercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The FOREX exchange market initia lly worked under the central banks and the governmental institutions but later on it accommodated the various institutions. At present it also includes the dot com booms and the World Wide Web. The size of the FOREX market now dwarfs any other investment market. Theforeign exchange marketis the largest financial market in the world. Approximately 1.9 trillion dollars are traded daily in theforeign exchange market. It is estimated that more than USD 1,200 Billion are traded every day. It can be said easily that FOREX market is a lucrative opportunity for the modern day savvy investorSHORT INFO OF FOREXThe history of FOREX trading was traced centuries ago. Different countries need different currencies and the need of exchange them had existed since the Babylonians. It is said that Babylonians were the first one who used paper notes and receipts.During those days, goods were exchanged for another goods based on the value of both the goods, which was known as barter system. But this sys tem had some limitations and this lead to encourage establishing more generally accepted medium of exchange. It was also important that a common base of value could be established. In some economies, items such as teeth, feathers even stones served this purpose, but soon various metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Trade was carried among mint of Africa, Asia etc through this system.Coinswere initially minted from the preferred metal and in stable political regimes, the introduction of a paper form of governmental I.O.U. during the middle Ages also gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion and is now the basis of todays modern currencies.Beforethe First World War, most Central banks supported their currencies with convertibility to gold. However, the gold exchange standard had its weaknesses of boom-bust patterns. As an economy strengthened, it would import a great deal from out of the country until it ran down its gold reserves required to support its money. As a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession. Ultimately, prices of commodities had hit bottom and it appearing attractive to other nations who would sprint into buying fury that injected the economy with gold until it increased its money supply, drive down interest rates and restore wealth into the economy.However, for this type of gold exchange, there was not necessarily a Centrals bank need for full coverage of the governments currency reserves. This did not occur very often, however when a group mindset fostered this disastrous notion of converting back to gold in mass, panic resulted in so-called Run on banks. The combination of a greater supply of paper money without the gold to cover led to devastating inflation and resulting political instability. The Grea t Depression and the removal of the gold standard in 1931 created a serious lull in FOREX market activity. From 1931 until 1973, the FOREX market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the FOREX markets during these times was little.Inorder to protect local national interests, increased foreign exchange controls were introduced to prevent market forces from punishing monetary irresponsibility.Nearthe end of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The conference held in Bretton Woods, New Hampshire rejected John Maynard Keynes suggestion for a new world reserve currency in favor of a system built on the US Dollar. International institutions such as the IMF, The World Bank and GATT were created in the same period as the emerging victors of WWII searched for a way to avoid the destabilizing monetary crises leading to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that reinstated The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis.TheBretton Woods system came under increasing pressure as national economies moved in different directions during the 1960s. A number of realignments held the system alive for a long time but eventually Bretton Woods collapsed in the early 1970s following president Nixons suspension of the gold convertibility in August 1971. The dollar was not any longer suited as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits.Thelast few decades have seen foreign exchange trading develop into the worlds largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjustforeign exchange ratesaccording to their perceived values.TheEuropean E conomic Community introduced a new system of fixed exchange rates in 1979, the European Monetary System. The quest continued in Europe for currency stability with the 1991 signing of The Maastricht treaty. This was to not only fix exchange rates but also actually replace many of them with the Euro in 2002. London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance.InAsia, the lack of sustainability of fixedforeign exchange rateshas gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates in particular in South America also looking very vulnerable.Whilecommercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The FOREX exchange market initially worked under the central banks and the governmental institutions but later on it accommodated the various institutions. At present it also includes the dot com booms and the World Wide Web. The size of the FOREX market now dwarfs any other investment market. Theforeign exchange marketis the largest financial market in the world. Approximately 1.9 trillion dollars are traded daily in theforeign exchange market. It is estimated that more than USD 1,200 Billion are traded every day. It can be said easily that FOREX market is a lucrative opportunity for the modern day savvy investorCHAPTER 3METHODS OF QUOTING EXCHANGE RATESThere are two methods of quoting exchange rates.Direct methodFor change in exchange rate if foreign currency is kept constant and home currency is kept variable, then the rates are stated be expressed in Direct Method E.g. US $1 = Rs. 45.50.Indirect methodFor change in exchange rate if home currency is kept constant and foreign currency is kept variable, then the rates are stated be expressed in Indirect Method. E.g. Rs. 100 = US $ 2.5116With the effect from August 2, 1993, all the exchange rates are quoted in direct method, i.e.US $1 = Rs. 45.50 GBP1 = Rs. 79.82Method of QuotationIn the Forex market there are two rates like one is for buying and one is for selling rates. This helps in eliminating the risk of being given bad rates i.e. if a party comes to know what the other party intends to do i.e., buy or sell, the former can take the latter for a ride.There are two parties in an exchange deal of currencies. To begin the deal one party asks for quote from another party and the other party quotes a rate. The party asking for a quote is known as Asking party and the party giving quote is known as Quoting partyThe advantages of two way quote. It automatically ensures alignment of rates with market rates. The market constantly makes available price for buyers and s ellers. Two-way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done immediately. It is not necessary for any player in the market to show whether he intends to buy or sell foreign currency but this ensures that the quoting bank cannot take advantage by manipulating the prices. Two-way quotes lend depth and liquidity to the market and which is very essential for efficient. In two-way quotes for the first rate is the rate for buying and another rate is for selling. We should understand here that in India the banks which are authorized dealers, always quote rates. So the rates quote buying and selling is for banks will buy the dollars from him so while calculation the first rate will be used which is a buying rate, as the bank is buying the dollars from the exporter. The same case will happen mutually with the importer, as he will buy the dollars from the banks and bank will sell dollars to importer.BASE CURRENCYEven if a fore ign currency can be bought and sold in the same way as a commodity but theyre use as a minor difference in buying/selling of currency aid commodities. Unlike in case of commodities, in case of foreign currencies two currencies are involved so, it is necessary to know which the currency to be bought and sold is and the same one is known as Base Currency.BID OFFER RATESThe buying and selling rates are also referred to as the bid and offered rates. In the dollar exchange rates referred to above, namely, $ 1.6288/96, the quoting bank is offering (selling) dollars at $ 1.6288 per pound while bidding for them (buying) at $ 1.6296. So in this quotation the bid rate for dollars is $ 1.6296 while the offered rate is $ 1.6288. The bid rate for one currency is automatically the offered rate for the other. In the above example, the bid rate for dollars $ 1.6296, is also the offered rate of pounds.CROSS RATE CALCULATIONUS Dollar is the most trading currency in the forex market. In other words on e support of most exchange trades is the US currency so margins between bid and offered rates are lowest quotations if the US dollar. The margins tend to widen for get across rates, as the following calculation would show.Consider the following structureGBP 1.00 = USD 1.6288/96EUR 1.00 = USD 1.1276/80In this rate structure, we have to calculate the bid and offered rates for the euro in terms of pounds. Let us see how the offered (selling) rate for euro can be calculated. Starting with the pound, you will have to buy US dollars at the offered rate of USD 1.6288 and buy Euros against the dollar at the offered rate for euro at USD 1.1280. The offered rate for the euro in terms of GBP, therefore, becomes EUR (1.6288*1.1280), i.e. EUR 1.4441 per GBP, or more conventionally, GBP 0.6925 per euro. Similarly, the bid rate the euro can be seen to be EUR 1.4454 per GBP (or GBP 0.6918 per euro). Thus, the quotation becomes GBP 1.00 = EUR 1.4441/54. It will be eagerly noticed that in percentage terms the difference between the bid and offered rate is higher for the EUR pound rate as compared to dollar EUR or pound dollar rates.CHAPTER 4ADVANTAGES OF FOREX MARKETThe Forex market is by far the largest and most liquid in the world but also day traders have up to now focused on looking for profits in mainly stock and futures markets. This is mainly due to the restrictive constitution of bank-offered forex trading services. There are Advanced Currency Markets (ACM) offers both online and traditional phone forex-trading services to the small investor with minimum account opening values starting line at 5000 USD.There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. These are the some advantages as under.CommissionsACM offers foreign exchange trading commission free. This is in sharp contrast to (once again) what stock and futures brokers offer. A stock trade can cost anywhere between USD 5 and 30 per trade with online brokers and typically up to USD 150 with full service brokers. Futures brokers can charge commissions anywhere between USD 10 and 30 on a round turn basis.Margins requirementsACM offers a foreign exchange trading with a 1% margin. In laymans terms that means a trader can control a position of a value of USD 1000000 with a mere USD 10000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.24 hour marketForeign exchange market trading occurs over a 24 hour period cream up in Asia around 2400 CET Sunday evening and coming to an end in the United States on Friday around 2300 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.No Limit up / limit downFutures markets i nhibit certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating be positions if they so desire.The controlling of daily price volatility is the main mechanism but in effect since the futures currency market follows the spot market in any case the following day the futures market may undergo what is called a gap or we can say also in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.Sell before you buyEquity brokers offe r very restrictive short-selling margin requirements to customers. This means that a customer does not induce the liquidity to be able to sell stock before he buys it. When initiating a selling or buying position in the spot market a trader has exactly the same capacity in margin wise. In spot trading when you are selling one currency you are necessarily buying another.CHAPTER 5FOREX EXCHANGE RISKThe Risk Management Guidelines are primarily an accent of some good and prudent practices in exposure management. They have to be understood and slowly internalized and customized so that they yield positive reimbursement to the company over time.Any business is open to risks from movements in competitors prices, raw bodily prices, competitors cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed.Forex RiskEverywhere in the world risk is attached. Without risk there is no gain. Also the FOREX is not risk-free. Like if you are trading with su bstantial sums of money and there is always a possibility that trades will go against you.Also there are several trading tools so that can minimize your risk and with caution and above all education the FOREX trader can learn how to trade profitably and while minimizing losses.RisksAssuming you are dealing with a reputable broker and there are still risks to FOREX trading. Transactions are subject to unexpected rate changes, volatile markets and political events.Exchange Rate RiskExchange rate risk which refers to the fluctuations in the currency prices over a long trading period. The Prices can fall rapidly which are resulting in substantial losses unless and until stop loss orders are used when trading FOREX. And so stop loss orders specify that the open position should be closed if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate FOREX trading limit orders specify an open position should be closed at a specifie d profit target.Interest Rate RiskIt can result from discrepancies between the interest rates in the two countries which represented by the currency pair in a FOREX quote. This discrepancy can result in variations from the expected profit or loss of a particular FOREX transaction.Credit RiskIt is the possibility that when the deal is closed one party in a FOREX transaction may not honor their debt and this may happen when a bank or financial institution declares insolvency. The Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness.Country RiskCountry risk is committed with governments that may become involved in foreign exchange markets by limiting the flow of currency. There is more country risk associated with exotic currencies than with major currencies that allow the free trading of their currency.Limiting Risk in your FOREX currency trading systemFOREX trading can be very risky but there are ways to limit your ri sk and financial exposure. Every FOREX trader should have a trading strategy for knowing when to enter and when to ex