cfma forex

foreign exchange

termed as forex or FX, conversion of one country’s currency into another

value of any currency

is determined by market forces of supply and demand, investment, tourism, geo-political risk

Bank for International Settlements (BIS)

foreign exchange is handled globally between banks and all transactions fall under its auspice

Forex Market

where foreign exchange transactions take place

currency

it is a medium of exchange for goods and services

2 sides of money

obverse, inverse

virtual currency

a new form of currency in the 21st century. Example of bitcoins, have no physical existence or government backing and are traded and stored in electronic form

value of money

determined by the demand for it, just like the value of goods and services

3 ways to measure the value of the dollar

exchange rate, the demand for treasury notes, foreign exchange reserves

foreign exchange reserves

In PH, are the foreign assets held or controlled by the country central bank

foreign exchange reserves form

are made of gold or a specific currency, can be special drawing rights and marketable securities denominated in foreign currencies

marketable securities denominated in foreign currencies

t-bills, GSN, corporate bonds, equities, foreign currency loans

investment

an asset or item that is purchased with the hope that it will generate income or appreciate in value at some point in the future

types of investments

growth (shares, property)

defensive (cash, bonds)

Factors Affecting Currency Value

market forces based on trade, investment, tourism, geo-political risk

tourism

is the act and process of spending time away from home in pursuit of recreation, relaxation, and pleasure, while making use of the commercial provision of services

market forces that impact trading activity

cost of production, geopolitics, barriers in trade, cross-currency exchange rates

currency pairs

currencies are quoted and traced in pairs. Each currency pair has a base cirrency and a counter quoted currency

7 Most Traded Currencies

USD, EUR, JPY, GBP, AUD, CHF, CAD

EUR/USD = 1.13

EUR is the base currency, USD is the quoted currency. 1 Euro is equal to 1.13 USD

Major Currency Pairs

EUR/ USD

USD/JPY

GBP/USD

USD/CHF

USD/CAD

AUD/USD

NZD/USD

Minor Currency Pair

EUR/GBP

EUR/JPY

GBP/JPY

GBP/CAD

CHF/JPY

EUR/AUD

NZD/JPY

spread (income)

the difference between the bid price and ask price

Bid (Sell) Price

is the best price at which you can SELL this Currency Pair. It is always lower than the best price at which you can BUY it (Ask Price)

Ask (Buy) Price

is the best price at which you can BUY this Currency Pair. It is always higher than the best price at which you can SELL it (the Bid Price)

Long Position

a trader in a bullish market is optimistic, buys a currency pair hoping the price will rise

short position

a trader in a bearish market is pessimistic, sells a currency pair hoping the price will fall

PIP

means “Percentage in Point” and equals a 1/100th % price movement. a PIP is the smallest movement a currency pair can rise or fall by

Lots

when buying or selling, trades are conducted in this

standard lot

100,000 units of the base currency

mini lot

10,000 units

micro lot

1,000 units

leverage

results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital

Hedging

It is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset

Hedging strategies

derivatives such as options and future contracts

foreign exchange market

is the largest, most liquid market in the world, with trillions of dollars changing hands every day. It has no centralized location, only electronic network of banks, brokers

liquid market

It has many available buyers and sellers. Its prices change in comparatively small increments.

Main Players in the Foreign Exchange Market

Traders, Governments, Corporations, Investment Funds, Banks

exchange rate

It is the number of units of a foreign currency required to obtain one unit of a domestic currency

Exchange rate components

domestic currency, quotation, foreign currency, price

2 Ways of Determining Currency Prices

Floating Rate, Fixed Rate

Floating Rate

is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies

Fixed Rate

A regime in which the government entirely or predominantly determines the rate. Currency is pegged

Types of Foreign Exchange Transactions

spot, forward, future, swap, option

spot transaction

fastest way to exchange currencies, within two days of the deal without a signed contract

Forward Transaction

Are future transactions when the buyer and seller enter into an agreement of purchase and sale of currency after 90 days

Forward Exchange Rate

Rate at which the deal is fixed in a forward transaction

Future Transaction

standardized contracts in terms of features, date and size should be followed. An initial margin is fixed and kept as collateral in order to establish a future position

Swap Transaction

A simultaneous lending and borrowing of two different currencies between two investors

Option Transaction

Exchange of currency from one denomination to another at an agreed rate on a specific date is an option for an investor

Option

Is a contract which gives the buyer of the options the right but not the obligation to buy or sell the underlying at a future fixed date and at a fixed price

Call option

Gives the right to buy

Put option

Gives the right to sell