20101118

The Basics of Foreign Exchange

Foreign exchange is essentially about exchanging one currency for another. The complexity arises from three factors. Firstly what is the foreign exchange exposure, secondly what will be the rate of exchange, and thirdly when does the actual exchange occur.

Identification of Foreign Exchange Exposures

Foreign exchange exposures arise from many different activities. A traveller going to visit another country has the risk that if that country's currency appreciates against their own their trip will be more expensive.

An exporter who sells its product in foreign currency has the risk that if the value of that foreign currency falls then the revenues in the exporter's home currency will be lower.

An importer who buys goods priced in foreign currency has the risk that the foreign currency will appreciate thereby making the local currency cost greater than expected.

Fund Managers and companies who own foreign assets are exposed to falls in the currencies where they own the assets. This is because if they were to sell (repatriate) those assets their exchange rate would have a negative effect on the home currency value.

Other foreign exchange exposures are less obvious and relate to the exporting and importing in ones local currency but where the negotiated price is being effected by exchange rate movements.

Generally the aim of foreign exchange risk management is to stabilise the cash flows and reduce uncertainty from financial forecasts. Fortunately there are a range of hedging instruments that achieve exactly that.

Spot and Forward Foreign Exchange Contracts

The most basics tools of FX risk management are 'spot' and 'forward' contracts. These are contracts between end users and financial institutions that specify the terms of an exchange of two currencies. In any FX contract there are a number of variables that need to be agreed upon and they are:
  1. The currencies to be bought and sold - in every contract there are two currencies the one that is bought and the one that is sold
  2. The amount of currency to be bought or sold
  3. The date at which the contract matures
  4. The rate at which the exchange of currencies will occur
It is point three that requires further explanation. Whenever you see exchange rates advertised either in the newspapers or on the various information services, the rates of exchange assume a deal with a maturity of two business days ahead -a deal done on this basis is called a spot deal.

In a spot transaction the currency that is bought will be receivable in two days whilst the currency that is sold will be payable in two days. This applies to all major currencies with the exception of the Canadian Dollar.

However most market participants want to exchange the currencies at a time other than two days in advance but would like to know the rate of exchange now. For example if ABC Ltd had contracted to purchase a machine for the price of USD 1 million payable in 6 months time but wanted to be sure that the USD would not become too strong in the interim. ABC Ltd could agree now to buy the USD for delivery in 6 months time. In other words ABC Ltd could negotiate a rate at which it could buy USD at some time in the future, setting the amount of USD needed, the date needed etc. and hence be sure of the local currency purchasing price now.

In determining the rate of exchange in six months time there are two components:

1) the current spot rate 
2) the forward rate adjustment

The spot rate is simply the current market rate as determined by supply and demand. The forward rate adjustment is a slightly more complicated calculation that involves the interest rates of the currencies involved.

Who are the Market Participants?

Exporters

This group consists of many of Australia's largest companies. Within group you find a diverse range of companies exporting goods and services from Australia to the rest of the world. Australia's export volumes give an excellent indication of the volumes of foreign exchange transacted by the sub sets of this group with resource sector companies taking centre stage. In general exporters have a positive impact on the value of the Australian Dollar.

Importers

This group of companies and individuals uses the foreign exchange markets to purchase foreign currency to make payments for the goods and services they have bought in other countries. In general they have a negative impact on the value of the Australian Dollar.

Australian Fund Managers

This industry has burgeoned over the last two decades underpinned by a regulatory environment that encourages private household saving. The net effect of the group depends on the investment decisions they make but in general as the industry grows they have been investing heavily offshore which generates a negative impact on the Australian Dollar. However they can hedge these investments which often sees them enter the market as buyers of forwards contracts and options.

Global Fund Managers

This group's influence changes depending on their interest in Australian asset markets. During periods where Australian stocks and bonds are attractive, Australia gets substantial allocations of global capital which drives up the value of the Australian Dollar. However when they wish to hedge existing investments in Australia this can generate selling flows.

Central Banks

In Australia the Reserve Bank of Australia generally lets the market determine the value of the Australian Dollar however there are a few exceptions to this policy. Firstly the Reserve Bank of Australia will intervene to buy or sell Australian Dollars if they believe it is substantially under or overvalued and that it is having a negative effect on the economy.

Other Government Agencies

Many government agencies have foreign exchange risk either as exporters, importers or borrowers.

Forex: EUR/USD rises back above 1.3600

FXstreet.com (Córdoba) – The retreated of the Euro found support at the 1.3580 zone. EUR/USD regained the upside and rose back above 1.3600. The pair is currently testing levels above 1.3630, approaching to daily highs that lie at 1.3666. 

Greenback lost momentum against the Euro and the Pound in the last hour. GBP/USD is testing daily highs at 1.6030. 

Stocks in the US are posting the biggest daily gains in two weeks. Gold regained the upside and reached fresh highs at $1,358 an ounce, after rebounding at $1,346. 

20101113

Bill Poulos Forex Nitty Gritty Program


Every industry has some secrets that and the forex industry has one too many and it is time that these secrets and myths were brought out in public eye. Bill Poulos Forex Nitty Gritty Program aims to do just that and make much removing the mystery surrounding the forex industry. Most of the programs and tools aimed at helping traders and investors alike do not work and the real reason behind is that there is no real data that is used. The tools have a lot of historical data which over a period of time might lose its relevance as the factors governing the forex industry might change.
The biggest myth that the industry has it that it needs you to spend enormous amount of time studying trends and patterns. The real fact is from this as good traders now have with them the systems that interpret all the conditions and factors that affect trade, do excellent technical analysis and helps you in minimizing risks and maximizing profits.
Irrespective of any economic condition a trader if he follows all the rules of trading diligently has the power to succeed. So the second myth that the economy has to recover before one can start trading is not at all true.
At times the harder you try to succeed the faster is your failure rate. There are so many experts to claim to know all and come up with very good packaged marketing tools that are very impressive to look at but fail to deliver the winning punch.
Most of them do not even address the importance of risk management and the systems advertized are nothing but gimmicks to fool the unwary investor. You also do not need to rely on the broker to get you the results. As you start taking decisions you will realize the correct pairs of currencies to trade, when to enter the trade and how much to invest in it and when to exit and make a profit.
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The loss of one’s personal happiness by indulging in log trading hours is a myth that has kept many from the forex industry and nothing could be further from the truth. You might have to spend less than 30 minutes to achieve excellent profits with minimum risks. You have the potential to succeed both personally and professionally.
One can achieve forex trading independence if one follows a step by step trading method. You shield yourself from risk and increase the chances of success substantially and all this without affecting your family life. There have been many instances of successful traders doing pretty bad personally all due to the myth that longer hours meant more profits.
You will have edge over other traders by following simple easy to understand rules of trading. Bill Poulos Forex Nitty Gritty Program aims to dispel all the myths of forex trading.