PDF -FOREIGN EXCHANGE RISK MANAGEMENT - Welcome to Bombay Chamber - Forex Risk Management
Wait Loading...


PDF :1 PDF :2 PDF :3 PDF :4 PDF :5 PDF :6 PDF :7 PDF :8 PDF :9 PDF :10


Like and share and download

Forex Risk Management

FOREIGN EXCHANGE RISK MANAGEMENT - Welcome to Bombay Chamber

web wpi edu Pubs E project Available E project ii Abstract In this paper we cover the technical and fundamental aspects of Forex analysis and the development of our own money management and risk assessment system bmocm products marketrisk fx images perfect foreign exchange management

Related PDF

Forex Analysis and Money Management

web wpi edu Pubs E project Available E project ii Abstract In this paper we cover the technical and fundamental aspects of Forex analysis and the development of our own money management and risk assessment system
PDF

Foreign Exchange Management policy Objectives and Controls

bmocm products marketrisk fx images perfect foreign exchange management system Exposure Identification and Reporting The starting point for the formulation of an exposure management program is to decide exactly what the company has at risk The following exposures are generally considered in developing a foreign exchange policy • Transaction exposure Generally
PDF

Proposed Forex Risk Management Policy For India Glycols Limited

indiaglycols forex risk management pdf This risk can be reduced by diversifying the duration of the fixed income investments that are held at a given time This is often referred to as Risk Diversification OBJECTIVES FOR THE FOREX RISK MANAGEMENT POLICY The broad objectives of this document are To identify the Forex risks the company is exposed to due to the nature of
PDF

FOREX RISK MANAGEMENT - ncfm-indiacom

ncfm india ORE ERP Programme brochure pdf Quantifying Foreign Exchange Risk • Forex exposure and quantifying risk – Exporters and Importers perspective • Platforms and Instruments in Foreign Exchange Risk Management • Functions and participants of major forex markets PROGRAMME OBJECTIVE Trading on Foreign Exchange Markets • Understanding and application of forex derivatives
PDF

The Principles of Risk Management - OANDA

pages oanda rs OANDA Priciples of Risk Management pdf The Principles of Risk Management Irrespective of your level of trading experience, this e book should be of great value to you It is aimed at providing traders of all levels of ability with the necessary information include effective risk management as part of your trade strategy
PDF

RISK MANAGEMENT GUIDE - UFXcom

ufx 2017 07 Risk Management Guide en pdf Risk management is essential to the success of any trader Success may be defined as the point where trades return more profits than losses As such, it is crucial that as a trader you realise that potential losses are as integral and important a part of trading as potential profits A correct approach to risk management attributes
PDF

THE MATHEMATICS OF MONEY MANAGEMENT - Forex Brokers

forexhug ebooks MathematicsMoneyManagement pdf Vince Ralph 1958 The mathematics of money management risk analysis techniques for traders by Ralph Vince Includes bibliographical references and index ISBN 0 471 54738 7 1 Investment analysis—Mathematics 2 Risk management—Mathematics 3 Program trading (Securities) HG4529N56 1992 332 6'01'51 dc20 91 33547 Preface and Dedication
PDF

Chapter 12 25 Foreign Exchange Risk Management F

trade gov publications pdf s tfg2008ch12 pdf Foreign Exchange Risk Management F oreign exchange (FX) is a risk factor that is often overlooked by small and medium sized enterprises (SMEs) that wish to enter, grow, and succeed in the global market ­ place Although most U S SME exporters prefer to sell in U S dollars, creditworthy
PDF

Exchange Rate Risk Measurement and Management: Issues - IMF

imf external pubs ft wp 2006 wp06255 pdf After defining the types of exchange rate risk that a firm is exposed to, a crucial aspect in a firm’s exchange rate risk management decisions is the measurement of these risks Measuring currency risk may prove difficult, at least with regards to translation and economic risk (Van Deventer, Imai, and Mesler, 2004; Holton, 2003)
PDF

FOREIGN EXCHANGE RISK MANAGEMENT - Welcome to Bombay Chamber


PDF

Forex Risk Management

FOREIGN EXCHANGE RISK MANAGEMENT - Welcome to Bombay Chamber

web wpi edu Pubs E project Available E project ii Abstract In this paper we cover the technical and fundamental aspects of Forex analysis and the development of our own money management and risk assessment system bmocm products marketrisk fx images perfect foreign exchange management

forex scalping strategies

Unlock the secrets of trading gold - FOREXcom

The Wyckoff VSA Super Scalping Strategy For FOREX, Futures, Stocks and Commodities Background When I first met Tom Williams in the year 2000 and  trading platform we would like to introduce you to the Forex trading technique of strategy along with the

  1. VSA Super-Scalping Strategy
  2. What is Scalping
  3. Forex Scalping
  4. 6simple strategies for trading forex
  5. Management Strategy for Mechanical Trade
  6. How to trade forex using RoboForex StrategyQuant software
  7. FOREX.com
  8. Forex Factory
  9. Forex-strategies-revealed.com
  10. 17 Proven Currency Trading Strategies

Forex Scalping System

5 Minute Scalping System Advanced Forex Strategies

PDF 10 21 50 EMA Forex SCALPING SYSTEM Forex Trading aboutcurrency 3EMA forex scalping system pdf PDF This book describes my no loss Forex scalping system as developed c mql5 forextsd currency grail

  1. the forex scalper handbook pdf
  2. forex price action scalping pdf
  3. the forex scalper book pdf
  4. theforexscalper pdf
  5. the forex scalper pdf
  6. the forex scalper review
  7. the forex scalper master of forex the exclusive handbook pdf
  8. forex scalping strategies

Forex Scalping

Great GBPJPY M1 Scalping Strategy - Rita Lasker & Green Forex

files meetup 1715605 ScalpingCheatSheets pdf Scalping the Forex market brings certain challenges that you don’t have when trading on larger time frames For example, if you are trying to take 100+ pips out of the market with a spread of 2 pips, the cost of this trade

Forex Summer Project

Blueprint To Making Money With Options Trading, Index Options

PDF Forex Trading System Development Worcester Polytechnic Institute web wpi edu project project TradeSystemDevelopmentFINAL pdf PDF Trading, Investment & Portfolio Management Worcester web wpi edu Pubs E project E project

  1. forex mathematics pdf
  2. trading strategies pdf
  3. forex trading rules pdf

Forex System Research Forex Trading with Candlestick and Pattern I.pdf

heuristic based trading system on forex data using technical - METU

about Forex trading is that you can test this system for FREE on a demo account C Click on currencypro and go to 'Today's Market Research' and Jun 1, 2014 system The process of building a forex trading strategy,

  1. The Day Trade Forex System
  2. Forex Trading System Development
  3. Automated Foreign Exchange Trading System
  4. Multi-Agent Forex Trading System
  5. Adaptive Systems for Foreign Exchange Trading
  6. An Automated FX Trading System Using Adaptive
  7. Technical Analysis in the Foreign Exchange Market
  8. heuristic based trading system on forex data using technical
  9. Technical analysis of Forex by Parabolic SAR Indicator.pdf
  10. Developing a Forex Expert Advisor Based on Japanese

Forged 59

Forged Gate, Globe and Check Valves

PDF forged back up rolls Societa' delle Fucine fucineterni file prodotti Rolls eng pdf PDF Liquid forging processing of automobile wheels Жидкая штамповка lettersonmaterials Upload Journals 415 56 59 pdf PDF Forged Chain Systems

Forget Me Nots - Chords - Full Score.pdf

Game Day My Life On And Off The Field - sinhueycom

piano3sheets weebly uploads 4 3 3 7 4337601 yiruma t | tttt Ð t ttt| | Ñ 40 t ttt tttt t ttt t ttt Ð t t t t t t t t tt tttttttt t ttt Ð t t t t Ð t t Ñ """ """

Forget Regret - Roy Hargrove - Piano

An Evening with Gregory Porter - Hopkins Center for the Arts at

PDF jazzzeit roy hargrove juli 2003 ANDREA LEIBER STUDIO andrealeiber musik jazzzeit roy hargrove hard groove andrea leiber pdf PDF sonny rollins the Jazz & Blues Report jazz blues pdf JazzBlues336 C

  1. jazz piano exercises pdf
  2. jamey aebersold pdf free
  3. jamey aebersold books pdf
  4. jamey aebersold volume 3 pdf
  5. jazz improvisation exercises pdf
  6. jamey aebersold pdf free download
  7. scales for jazz improvisation pdf
  8. trumpet jazz exercises pdf
Home back Next

Description

Risk Management in Forex Markets

All investments are subject to risk,

but some have a greater degree of risk than others

Risk is often viewed as the potential for an investment to decrease in value

Though quantitative analysis plays a significant role,

market knowledge and judgment play a key role in proper risk management

As complexity of financial products increase,

so do the sophistication of the risk manager’s tools

We understand risk as a potential future loss

When we take an insurance cover,

what we are hedging is the uncertainty associated with the future events

Financial risk can be easily stated as the potential for future cash flows (returns) to deviate from expected cash flows (returns)

There are various factors that give raise to this risk

Return is measured as Wealth at T+1- Wealth at T divided by Wealth at T

Mathematically it can be denoted as (WT+1-WT)/WT

Every aspect of management impacting profitability and therefore cash flow or return,

We can say the return is the function of:

Prices,

Productivity,

Market Share,

Technology,

Competition etc,

Financial risk management Risk management is the process of measuring risk and then developing and implementing strategies to manage that risk

Risk Management in Forex Markets Financial risk management focuses on risks that can be managed ("hedged") using traded financial instruments (typically changes in commodity prices,

foreign exchange rates and stock prices)

Financial risk management will also play an important role in cash management

This area is related to corporate finance in two ways

Firstly,

firm exposure to business risk is a direct result of previous Investment and Financing decisions

Secondly,

both disciplines share the goal of creating,

All large corporations have risk smanagement teams,

and small firms practice informal,

Derivatives are the instruments most commonly used in Financial risk management

Because unique derivative contracts tend to be costly to create and monitor,

the most cost-effective financial risk management methods usually involve derivatives that trade on well-established financial markets

These standard derivative instruments include options,

The most important element of managing risk is keeping losses small,

which is already part of your trading plan

Never give in to fear or hope when it comes to keeping losses small

Risk can be explained as uncertainty and is usually associated with the unpredictability of an investment performance

All investments are subject to risk,

but some have a greater degree of risk than others

Risk is often viewed as the potential for an investment to decrease in value

? Risk is anything that threatens the ability of a nonprofit to accomplish its mission

Risk management is a discipline that enables people and organizations to cope with uncertainty by taking steps to protect its vital assets and resources

Risk Management in Forex Markets

But not all risks are created equal

Risk management is not just about identifying risks

it is about learning to weigh various risks and making decisions about which risks deserve immediate attention

Risk management is not a task to be completed and shelved

It is a process that,

integrated into all aspects of your organization's management

Risk management is an essential component in the successful management of any project,

It is a process that must start from the inception of the project,

and continue until the project is completed and its expected benefits realised

Risk management is a process that is used throughout a project and its products' life cycles

It is useable by all activities in a project

Risk management must be focussed on the areas of highest risk within the project,

with continual monitoring of other areas of the project to identify any new or changing risks

each risk that you have identified

You can:

Accept it

Ttransfer it

Reduce it

Eliminate it

For example,

you may decide to accept a risk because the cost of eliminating it completely is too high

You might decide to transfer the risk,

which is typically done with insurance

Or you may be able to reduce the risk by

Risk Management in Forex Markets introducing new safety measures or eliminate it completely by changing the way you produce your product

When you have evaluated and agreed on the actions and procedures to reduce the risk,

these measures need to be put in place

Risk management is not a one-off exercise

Continuous monitoring and reviewing is crucial for the success of your risk management approach

Such monitoring ensures that risks have been correctly identified and assessed,

and appropriate controls put in place

It is also a way to learn from experience and make improvements to your risk management approach

All of this can be formalised in a risk management policy,

setting out your business' approach to and appetite for risk and its approach to risk management

Risk management will be even more effective if you clearly assign responsibility for it to chosen employees

It is also a good idea to get commitment to risk management at the board level

Contrary to conventional wisdom,

risk management is not just a matter of running

quantitative analysis plays a significant role,

market knowledge and judgment play a key role in proper risk management

As complexity of financial products increase,

so do the sophistication of the risk manager's tools

“Good risk management can improve the quality and returns of your business

Risk Management in Forex Markets

For a country its currency becomes money and legal tender

For a foreign country it becomes the value as a commodity

Since the commodity has a value its relation with the other currency determines the exchange value of one currency with the other

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 supply

Foreign exchange is that section of economic activity,

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

Most countries of the world have their own currencies The US has its dollar,

France its franc,

Brazil its cruziero

Trade between the countries involves the exchange of different currencies

The foreign exchange market is the market in which currencies are bought & sold against each other

It is the largest market in the world

Transactions conducted in foreign exchange

Risk Management in Forex Markets 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

the value of goods was expressed in terms of other goods,

an economy based on barter between individual market participants

The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history,

to set a common benchmark of value

In different economies,

everything from teeth to feathers to pretty stones has served this purpose,

in particular gold and silver,

established themselves as an accepted means of payment as well as a reliable storage of value

Originally,

coins were simply minted from the preferred metal,

but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages

Such IOUs,

often introduced more successfully through force than persuasion were the basis of modern currencies

Before the First World War,

most central banks supported their currencies with convertibility to gold

Although paper money could always be exchanged for gold,

in reality this did not occur often,

fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government

At times,

the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability

To protect local national interests,

foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility

In the latter stages of the Second World War,

the Bretton Woods agreement was reached on the initiative of the USA in July 1944

The Bretton Woods Conference rejected John Maynard 6

Risk Management in Forex Markets Keynes suggestion for a new world reserve currency in favour of a system built on the US dollar

Other international institutions such as the IMF,

the World Bank and GATT (General Agreement on Tariffs and Trade) were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilizing monetary crises which led to the war

The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard,

fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar

The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties

A number of realignments kept the system alive for a long time,

but eventually Bretton Woods collapsed in the early seventies following President Nixon's suspension of the gold convertibility in August 1971

The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits

The following decades have seen foreign exchange trading develop into the largest global market by far

Restrictions on capital flows have been removed in most countries,

leaving the market forces free to adjust foreign exchange rates according to their perceived values

The lack of sustainability in fixed foreign exchange rates 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,

But while commercial companies have had to face a much more volatile currency environment in recent years,

investors and financial institutions have found a new playground

The size of foreign exchange markets now dwarfs any other investment market by a large factor

It is estimated that more than USD1,200 billion is traded every day,

far more than the world's stock and bond markets combined

Risk Management in Forex Markets

the government (or the central bank acting on the government's behalf) intervenes in the currency market so that the exchange rate stays close to an exchange rate target

When Britain joined the European Exchange Rate Mechanism in October 1990,

we fixed sterling against other European currencies Since autumn 1992,

Britain has adopted a floating exchange rate system

The Bank of England does not actively intervene in the currency markets to achieve a desired exchange rate level

In contrast,

the twelve members of the Single Currency agreed to fully fix their currencies against each other in January 1999

In January 2002,

twelve exchange rates become one when the Euro enters common circulation throughout the Euro Zone

Exchange Rates under Fixed and Floating Regimes With floating exchange rates,

changes in market demand and market supply of a currency cause a change in value

In the diagram below we see the effects of a rise in the demand for sterling (perhaps caused by a rise in exports or an increase in the speculative demand for sterling)

This causes an appreciation in the value of the pound

Risk Management in Forex Markets

Changes in currency supply also have an effect

In the diagram below there is an increase in currency supply (S1-S2) which puts downward pressure on the market value of the exchange rate

A currency can operate under one of four main types of exchange rate system FREE FLOATING 

Value of the currency is determined solely by market demand for

and supply of the currency in the foreign exchange market

Trade flows and capital flows are the main factors affecting the

exchange rate In the long run it is the macro economic performance of the economy (including trends in competitiveness) that drives the value of the currency

No pre-determined official target for the exchange rate is set by the Government

The government and/or monetary authorities can set interest rates for domestic economic purposes rather than to achieve a given exchange rate target

It is rare for pure free floating exchange rates to exist

governments at one time or another seek to "manage" the value of their currency through changes in interest rates and other controls

UK sterling has floated on the foreign exchange markets since the

UK suspended membership of the ERM in September 1992

MANAGED FLOATING EXCHANGE RATES

Risk Management in Forex Markets 

Value of the pound determined by market demand for and supply of

the currency with no pre-determined target for the exchange rate is set by the Government 

Governments normally engage in managed floating if not part of a

Policy pursued from 1973-90 and since the ERM suspension from

1993-1998

SEMI-FIXED EXCHANGE RATES 

Exchange rate is given a specific target

Currency can move between permitted bands of fluctuation

Exchange rate is dominant target of economic policy-making

(interest rates are set to meet the target) 

Bank of England may have to intervene to maintain the value of the

currency within the set targets 

Re-valuations possible but seen as last resort

October 1990

FULLY-FIXED EXCHANGE RATES 

Commitment to a single fixed exchange rate

Achieves exchange rate stability but perhaps at the expense of

domestic economic stability 

Bretton-Woods System 1944-1972 where currencies were tied to

Gold Standard in the inter-war years

Countries joining EMU in 1999 have fixed their exchange rates

which is based on the degree of exchange rate flexibility that a particular regime reflects

The exchange rate arrangements adopted by the developing countries cover a broad spectrum,

Risk Management in Forex Markets ⇒ Single Currency Peg The country pegs to a major currency,

Dollar or the French franc (Ex-French colonies) with infrequent adjustment of the parity

Many of the developing countries have single currency pegs

⇒ Composite Currency Peg A currency composite is formed by taking into account the currencies of major trading partners

The objective is to make the home currency more stable than if a single peg was used

Currency weights are generally based on trade in goods – exports,

About one fourth of the developing countries have composite currency pegs

⇒ Flexible Limited vis-à-vis Single Currency The value of the home currency is maintained within margins of the peg

Some of the Middle Eastern countries have adopted this system

⇒ Adjusted to indicators The currency is adjusted more or less automatically to changes in selected macro-economic indicators

A common indicator is the real effective exchange rate (REER) that reflects inflation adjusted change in the home currency vis-à-vis major trading partners

⇒ Managed floating The Central Bank sets the exchange rate,

but adjusts it frequently according to certain pre-determined indicators such as the balance of payments position,

foreign exchange reserves or parallel market spreads and adjustments are not automatic

⇒ Independently floating Free market forces determine exchange rates

The system actually operates with different levels of intervention in foreign exchange markets by the central bank

It is important to note that these classifications do conceal several features of the developing country exchange rate regimes

Risk Management in Forex Markets

also referred to as the "Forex" or "FX" market is the largest financial market in the world,

with a daily average turnover of US$1

"Foreign Exchange" is the simultaneous buying of one currency and selling of another

Currencies are traded in pairs,

for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY)

There are two reasons to buy and sell currencies

About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency

The other 95% is trading for profit,

For speculators,

the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies,

more than 85% of all daily transactions involve trading of the Majors,

Japanese Yen,

British Pound,

Swiss Franc,

Canadian Dollar and Australian Dollar

A true 24-hour market,

Forex trading begins each day in Sydney,

and moves around the globe as the business day begins in each financial center,

London,

Unlike any other financial market,

investors can respond to currency fluctuations caused by economic,

social and political events at the time they occur

The FX market is considered an Over the Counter (OTC) or 'interbank' market,

due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network

Trading is not centralized on an exchange,

as with the stock and futures markets

Risk Management in Forex Markets

Their role is of paramount importance in the system of international payments

In order to play their role effectively,

it is necessary that their operations/dealings be reliable

Reliability essentially is concerned with contractual obligations being honored

For instance,

if two parties have entered into a forward sale or purchase of a currency,

both of them should be willing to honour their side of contract by delivering or taking delivery of the currency,

? Foreign Exchange is the prime market in the world

Take a look at any market trading through the civilised world and you will see that everything is valued in terms of money

Fast becoming recognised as the world's premier trading venue by all styles of traders,

foreign exchange (forex) is the world's largest financial market with more than US$2 trillion traded daily

Forex is a great market for the trader and it's where "big boys" trade for large profit potential as well as commensurate risk for speculators

Forex used to be the exclusive domain of the world's largest banks and corporate establishments

For the first time in history,

it's barrier-free offering an equal playing-field for the emerging number of traders eager to trade the world's largest,

most liquid and accessible market,

Trading forex can be done with many different methods and there are many types of traders

Risk Management in Forex Markets

Significant investments are being made on the part of banks,

systematize and consolidate what has historically been a manual,

fragmented and decentralized collection of trading venues

Combine this with the shifting ownership of the major FX trading exchanges,

and one needs a scorecard to keep track of the players,

their strategies and target markets

Fragmentation in markets results from competition based on business and technology innovations

As markets centralize or consolidate to gain scale,

certain segments become underserved and are open to alternative trading venues that more specifically meet their trading needs

with over $2 trillion USD traded daily

Forex is part of the bank-to-bank currency market known as the 24-hour interbank market

The Interbank market literally follows the sun around the world,

moving from major banking centres of the United States to Australia,

New Zealand to the Far East,

to Europe then back to the United States

In other words,

it is a market in which national currencies are bought and sold against one another

A foreign exchange market performs three important functions:

⇒ Transfer of Purchasing Power:

Risk Management in Forex Markets The primary function of a foreign exchange market is the transfer of purchasing power from one country to another and from one currency to another

The international clearing function performed by foreign exchange markets plays a very important role in facilitating international trade and capital movements

⇒ Provision of Credit: The credit function performed by foreign exchange markets also plays a very important role in the growth of foreign trade,

for international trade depends to a great extent on credit facilities

Exporters may get pre-shipment and postshipment credit

Credit facilities are available also for importers

The Euro-dollar market has emerged as a major international credit market

⇒ Provision of Hedging Facilities: The other important function of the foreign exchange market is to provide hedging facilities

Hedging refers to covering of export risks,

and it provides a mechanism to exporters and importers to guard themselves against losses arising from fluctuations in exchange rates

day traders have up to now focus on seeking profits in mainly stock and futures markets

This is mainly due to the restrictive nature of bank-offered forex trading services

Advanced Currency Markets (ACM) offers both online and traditional phone forex-trading services to the small investor with minimum account opening values starting at 5000 USD

There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures

Below are listed those main advantages

⇒ Commissions: ACM 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

Risk Management in Forex Markets ACM offers a foreign exchange trading with a 1% margin

In layman's terms that means a trader can control a position of a value of USD 1'000'000 with a mere USD 10'000 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 market: Foreign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 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 down: Futures markets contain 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 existing positions if they so desire

This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway,

the following day the futures market may undergo what is called a 'gap' or 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 buy: Equity brokers offer very restrictive short-selling margin requirements to customers

This means that a customer does not possess the liquidity to be able to

Risk Management in Forex Markets sell stock before he buys it

Margin wise,

a trader has exactly the same capacity when initiating a selling or buying position in the spot market

In spot trading when you're selling one currency,

you're necessarily buying another

the foreign exchange market has been an invisible hand that guides the sale of goods,

services and raw materials on every corner of the globe

The forex market was created by necessity

Traders,

importers and exporters recognized the benefits of hedging risk,

The fascination with this market comes from its sheer size,

complexity and almost limitless reach of influence

The market has its own momentum,

and arrives at its own conclusions

These conclusions impact the value of all assets

Inter-bank currency contracts and options,

are not traded on exchanges and are not standardized

Banks and dealers act as principles in these markets,

negotiating each transaction on an individual basis

Forward "cash" or "spot" trading in currencies is substantially unregulated

Risk Management in Forex Markets

Risk Management in Forex Markets

At the first level,

These are the immediate users and suppliers of foreign currencies

At the second level,

which act as clearing houses between users and earners of foreign exchange

At the third level,

are foreign exchange brokers through whom the nation’s commercial banks even out their foreign exchange inflows and outflows among themselves

Finally at the fourth and the highest level is the nation’s central bank,

which acts as the lender or buyer of last resort when the nation’s total foreign exchange earnings and expenditure are unequal

The central then either draws down its foreign reserves or adds to them

Exporters require converting the dollars into rupee and importers require converting rupee into the dollars as they have to pay in dollars for the goods / services they have imported

Similar types of services may be required for setting any international obligation i

payment of technical know-how fees or repayment of foreign debt,

Commercial banks dealing with international transactions offer services for conversation of one currency into another

These banks are specialised in international trade and other transactions

They have wide network of branches

Generally,

commercial banks act as intermediary between exporter and importer who are situated in different countries

Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of the goods

Similarly,

the banks for executing the orders of other customers,

who are engaged in international transaction,

not necessarily on the account of trade alone,

As every time the foreign exchange bought and sold may not be equal banks are left with the overbought or oversold position

If a bank buys more foreign exchange than what 19

Risk Management in Forex Markets it sells,

it is said to be in ‘overbought/plus/long position’

In case bank sells more foreign exchange than what it buys,

it is said to be in ‘oversold/minus/short position’

The bank,

in order to avoid risk on account of exchange rate movement,

covers its position in the market

If the bank is having oversold position it will buy from the market and if it has overbought position it will sell in the market

This action of bank may trigger a spate of buying and selling of foreign exchange in the market

Commercial banks have following objectives for being active in the foreign exchange market:  They render better service by offering competitive rates to their customers engaged in international trade

 They are in a better position to manage risks arising out of exchange rate fluctuations

 Foreign exchange business is a profitable activity and thus such banks are in a position to generate more profits for themselves

 They can manage their integrated treasury in a more efficient manner

If the country is following a fixed exchange rate system,

the central bank has to take necessary steps to maintain the parity,

Even under floating exchange rate system,

the central bank has to ensure orderliness in the movement of exchange rates

Generally this is achieved by the intervention of the bank

Sometimes this becomes a concerted effort of central banks of more than one country

Apart from this central banks deal in the foreign exchange market for the following purposes:

Risk Management in Forex Markets  Exchange rate management: Though sometimes this is achieved through intervention,

yet where a central bank is required to maintain external rate of domestic currency at a level or in a band so fixed,

they deal in the market to achieve the desired objective  Reserve management: Central bank of the country is mainly concerned with the investment of the countries foreign exchange reserve in a stable proportions in range of currencies and in a range of assets in each currency

These proportions are,

influenced by the structure of official external assets/liabilities

For this bank has involved certain amount of switching between currencies

Central banks are conservative in their approach and they do not deal in foreign exchange markets for making profits

However,

there have been some aggressive central banks but market has punished them very badly for their adventurism

In the recent past Malaysian Central bank,

Bank Negara lost billions of dollars in foreign exchange transactions

 Intervention by Central Bank It is truly said that foreign exchange is as good as any other commodity

If a country is following floating rate system and there are no controls on capital transfers,

then the exchange rate will be influenced by the economic law of demand and supply

If supply of foreign exchange is more than demand during a particular period then the foreign exchange will become cheaper

On the contrary,

if the supply is less than the demand during the particular period then the foreign exchange will become costlier

The exporters of goods and services mainly supply foreign exchange to the market

If there are no control over foreign investors are also suppliers of foreign exchange

During a particular period if demand for foreign exchange increases than the supply,

it will raise the price of foreign exchange,

in terms of domestic currency,

This will no doubt make the imports costlier and

Risk Management in Forex Markets thus protect the domestic industry but this also gives boost to the exports

However,

in the short run it can disturb the equilibrium and orderliness of the foreign exchange markets

The central bank will then step forward to supply foreign exchange to meet the demand for the same

This will smoothen the market

The central bank achieves this by selling the foreign exchange and buying or absorbing domestic currency

Thus demand for domestic currency which,

coupled with supply of foreign exchange,

will maintain the price of foreign currency at desired level

This is called ‘intervention by central bank’

If a country,

follows fixed exchange rate system,

the central bank is required to maintain exchange rate generally within a well-defined narrow band

Whenever the value of the domestic currency approaches upper or lower limit of such a band,

the central bank intervenes to counteract the forces of demand and supply through intervention

In India,

the central bank of the country,

has been enjoined upon to maintain the external value of rupee

Until March 1,

under section 40 of the Reserve Bank of India act,

Reserve Bank was obliged to buy from and sell to authorised persons i

AD’s foreign exchange

However,

under Modified Liberalised Exchange Rate Management System (Modified LERMS),

Reserve Bank is not obliged to sell foreign exchange

it will purchase foreign exchange at market rates

with a view to maintain external value of rupee,

Reserve Bank has given the right to intervene in the foreign exchange markets

However the extent to which services of forex brokers are utilized depends on the tradition and practice prevailing at a particular forex market centre

In India dealing is done in interbank market through forex brokers

In India as per FEDAI guidelines the AD’s are free to deal directly among themselves without going through brokers

The forex brokers are not allowed to deal on their own account all over the world and also in India

Risk Management in Forex Markets

? Banks seeking to trade display their bid and offer rates on their respective pages of Reuters screen,

but these prices are indicative only

On inquiry from brokers they quote firm prices on telephone

In this way,

the brokers can locate the most competitive buying and selling prices,

and these prices are immediately broadcast to a large number of banks by means of hotlines/loudspeakers in the banks dealing room/contacts many dealing banks through calling assistants employed by the broking firm

If any bank wants to respond to these prices thus made available,

the counter party bank does this by clinching the deal

Brokers do not disclose counter party bank’s name until the buying and selling banks have concluded the deal

Once the deal is struck the broker exchange the names of the bank who has bought and who has sold

The brokers charge commission for the services rendered

In India broker’s commission is fixed by FEDAI

In fact major chunk of the foreign exchange dealings in forex markets in on account of speculators and speculative activities

The speculators are the major players in the forex markets

Banks dealing are the major speculators in the forex markets with a view to make profit on account of favourable movement in exchange rate,

if they feel the rate of particular currency is likely to go up in short term

They buy that currency and sell it as soon as they are able to make a quick profit

Corporations particularly Multinational Corporations and Transnational Corporations having business operations beyond their national frontiers and on account of their cash flows

Being large and in multi-currencies get into foreign 23

Risk Management in Forex Markets exchange exposures

With a view to take advantage of foreign rate movement in their favour they either delay covering exposures or does not cover until cash flow materialize

Sometimes they take position so as to take advantage of the exchange rate movement in their favour and for undertaking this activity,

they have state of the art dealing rooms

In India,

some of the big corporate are as the exchange control have been loosened,

booking and cancelling forward contracts,

and a times the same borders on speculative activity

Governments narrow or invest in foreign securities and delay coverage of the exposure on account of such deals

Individual like share dealings also undertake the activity of buying and selling of foreign exchange for booking short-term profits

They also buy foreign currency stocks,

bonds and other assets without covering the foreign exchange exposure risk

This also results in speculations

Corporate entities take positions in commodities whose prices are expressed in foreign currency

This also adds to speculative activity

The speculators or traders in the forex market cause significant swings in foreign exchange rates

These swings,

do not do any good either to the national or international trade and can be detrimental not only to national economy but global business also

However,

they provide the much need liquidity and depth to foreign exchange markets

This is necessary to keep bid-offer which spreads to the minimum

Similarly,

liquidity also helps in executing large or unique orders without causing any ripples in the foreign exchange markets

One of the views held is that speculative activity provides much needed efficiency to foreign exchange markets

Therefore we can say that speculation is necessary evil in forex markets

Risk Management in Forex Markets

rupee (INR) a legal lender in India as exporter needs Indian rupees for payments for procuring various things for production like land,

raw material and capital goods

But the foreign importer can pay in his home currency like,

Thus it becomes necessary to convert one currency into another currency and the rate at which this conversation is done,

Exchange rate is a rate at which one currency can be exchange in to another currency,

This is the rate of conversion of US dollar in to Indian rupee and vice versa

 Direct method: For 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

US $1 = Rs

 Indirect method: For 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’

with the effect from August 2,

all the exchange rates are quoted in direct method,

US $1 = Rs

GBP1 = Rs

Risk Management in Forex Markets

 Method of Quotation It is customary in foreign exchange market to always quote tow rates means one rate for buying and another for selling

This helps in eliminating the risk of being given bad rates i

if a party comes to know what the other party intends to do i

the former can take the latter for a ride

There are two parties in an exchange deal of currencies

To initiate 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 party’ 4

 Two-way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done instantaneously

 As it is not necessary any player in the market to indicate whether he intends to buy of sell foreign currency,

this ensures that the quoting bank cannot take advantage by manipulating the prices

 It automatically ensures alignment of rates with market rates

 Two-way quotes lend depth and liquidity to the market,

which is so very essential for efficient

In two-way quotes the first rate is the rate for buying and another rate is for selling

We should understand here that,

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 inversely with the importer,

as he will buy the dollars form the banks and bank will sell dollars to importer

Risk Management in Forex Markets

but they’re us a slight difference in buying/selling of currency aid commodities

Unlike in case of commodities,

in case of foreign currencies two currencies are involved

Therefore,

it is necessary to know which the currency to be bought and sold is and the same is known as ‘Base Currency’

In the dollar exchange rates referred to above,

6290/98,

the quoting bank is offering (selling) dollars at $ 1

In this quotation,

the bid rate for dollars is $ 1

The bid rate for one currency is automatically the offered rate for the other

In the above example,

is also the offered rate of pounds

one leg of most exchange trades is the US currency

Therefore,

margins between bid and offered rates are lowest quotations if the US dollar

The margins tend to widen for cross rates,

as the following calculation would show

Consider the following structure: GBP 1

00 = USD 1

00 = USD 1

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

Risk Management in Forex Markets USD 1

The offered rate for the euro in terms of GBP,

Similarly,

the bid rate the euro can be seen to be EUR 1

00 = EUR 1

4441/54

It will be readily noticed that,

the difference between the bid and offered rate is higher for the EUR: pound rate as compared to dollar: EUR or pound: dollar rates

Risk Management in Forex Markets

Rates are quoted round the clock

Every few seconds,

Quotations start in the dealing room of Australia and Japan (Tokyo) and they pass on to the markets of Hong Kong,

Singapore,

Bahrain,

Frankfurt,

Zurich,

London,

New York,

San Francisco and Los Angeles,

In terms of convertibility,

there are mainly three kinds of currencies

The first kind is fully convertible in that it can be freely converted into other currencies

the second kind is only partly convertible for non-residents,

while the third kind is not convertible at all

The last holds true for currencies of a large number of developing countries

It is the convertible currencies,

which are mainly quoted on the foreign exchange markets

The most traded currencies are US dollar,

Deutschmark,

Japanese Yen,

Pound Sterling,

Swiss franc,

French franc and Canadian dollar

Currencies of developing countries such as India are not yet in much demand internationally

The rates of such currencies are quoted but their traded volumes are insignificant

As regards the counterparties,

gives a typical distribution of different agents involved in the process of buying or selling

It is clear,

the maximum buying or selling is done through exchange brokers

The composition of transactions in terms of different instruments varies with time

Spot transactions remain to be the most important in terms of volume

Next come Swaps,

Forwards,

Options and Futures in that order

Options,

Futures and Swaps assemble in the Dealing Room

This is the forum where all transactions related to foreign exchange in a bank are carried out

There are several reasons for

Risk Management in Forex Markets concentrating the entire information and communication system in a single room

It is necessary for the dealers to have instant access to the rates quoted at different places and to be able to communicate amongst themselves,

as well as to know the limits of each counterparty etc

This enables them to make arbitrage gains,

The dealing room chief manages and co-ordinates all the activities and acts as linkpin between dealers and higher management

Dealers at banks provide these products for their clients to allow them to invest,

The complex nature of these products ,

combined with huge volumes of money that are being traded,

mean banks must have three important functions set up in order to record and monitor effectively their trades

These are Front Office and Back Office

The dealers who work directly in the market and are located in the Dealing Rooms of big banks constitute the Front Office

They meet the clients regularly and advise them regarding the strategy to be adopted with regard to their treasury management

The role of the Front Office is to make profit from the operations on currencies

The role of dealers is twofold: to manage the positions of clients and to quote bid-ask rates without knowing whether a client is a buyer or seller

Dealers should be ready to buy or sell as per the wishes of the clients and make profit for the bank

They should take into account the position that the bank has already taken,

and the effect that a particular operation might have on that position

They also need to consider the limits fixed by the Management of the bank with respect to each single operation or single counterparty or position in a particular currency

Dealers are judged on the basis of their profitability

The operations of front office are divided into several units

There can be sections for money markets and interest rate operations,

Risk Management in Forex Markets for forward market transactions,

for dealing in futures and so on

Each transaction involves determination of amount exchanged,

indication of the date of settlement and instructions regarding delivery

The Back Office consists of a group of persons who work,

Their activities include managing of the information system,

and follow-up of the operations of Front Office

The Back Office helps the Front Office so that the latter is rid of jobs other than the operations on market

It should conceive of better information and control system relating to financial operations

It ensures,

an effective financial and management control of market operations

In principle,

the Front Office and Back Office should function in a symbiotic manner,

All the professionals who deal in Currencies,

Options,

Futures and Swaps assemble in the Dealing Room

This is the forum where all transactions related to foreign exchange in a bank are carried out

There are several reasons for concentrating the entire information and communication system in a single room

It is necessary for the dealers to have instant access to the rates quoted at different places and to be able to communicate amongst themselves,

as well as to know the limits of each counterparty etc

This enables them to make arbitrage gains,

The dealing room chief manages and co-ordinates all the activities and acts as linkpin between dealers and higher management

Risk Management in Forex Markets

Because of the the time zone of the trading location,

decentralised clearing of trades and significantly restricting the number of overlap of major markets in Asia,

hours a market is open and when it can London and the United States,

throughout the day and overnight

Most liquid market in the world Threat of liquidity drying up after eclipsing all others in comparison

Most market hours or because many market transactions currency

since participants decide to stay on the required sidelines or move to more popular

mechanism needed to facilitate world markets

Commission-Free

Traders are gouged with fees,

One consistent margin rate 24 hours a Large capital requirements,

high margin day allows Forex traders to leverage rates,

very little their capital more efficiently with as autonomy

No Restrictions

Short selling and stop order restrictions

Risk Management in Forex Markets

foreign exchange rates and interest rates,

all of which need to be (ideally) managed

This section addresses the task

Foreign Exchange movements

These Risk Management Guidelines are primarily an enunciation of some good and prudent practices in exposure management

They have to be understood,

and slowly internalised and customised so that they yield positive benefits to the company over time

It is imperative and advisable for the Apex Management to both be aware of these practices and approve them as a policy

Once that is done,

it becomes easier for the Exposure Managers to get along efficiently with their task

You should therefore carefully consider whether such trading is suitable in light of your financial condition

You may sustain a total loss of funds and any additional funds that you deposit with your broker to maintain a position in the foreign exchange market

Actual past performance is no guarantee of future results

There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results

Risk Management in Forex Markets The risk of loss in trading the foreign exchange markets can be substantial

You should therefore carefully consider whether such trading is suitable for you in light of your financial condition

In considering whether to trade or authorize someone else to trade for you,

you should be aware of the following: If you purchase or sell a foreign exchange option you may sustain a total loss of the initial margin funds and additional funds that you deposit with your broker to establish or maintain your position

If the market moves against your position,

you could be called upon by your broker to deposit additional margin funds,

in order to maintain your position

If you do not provide the additional required funds within the prescribed time,

your position may be liquidated at a loss,

and you would be liable for any resulting deficit in you account

Under certain market conditions,

you may find it difficult or impossible to liquidate a position

This can occur,

for example when a currency is deregulated or fixed trading bands are widened

Potential currencies include,

but are not limited to the Thai Baht,

South Korean Won,

Malaysian Ringitt,

Brazilian Real,

The placement of contingent orders by you or your trading advisor,

such as a “stop-loss” or “stop-limit” orders,

will not necessarily limit your losses to the intended amounts,

since market conditions may make it impossible to execute such orders

A “spread” position may not be less risky than a simple “long” or “short” position

The high degree of leverage that is often obtainable in foreign exchange trading can work against you as well as for you

The use of leverage can lead to large losses as well as gains

Risk Management in Forex Markets In some cases,

managed accounts are subject to substantial charges for management and advisory fees

It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets

Currency trading is speculative and volatile Currency prices are highly volatile

Price movements for currencies are influenced by,

among other things: changing supply-demand relationships

exchange control programs and policies of governments

United States and foreign political and economic events and policies

changes in national and international interest rates and inflation

and sentiment of the market place

None of these factors can be controlled by any individual advisor and no assurance can be given that an advisor’s advice will result in profitable trades for a partic0pating customer or that a customer will not incur losses from such events

Currency trading can be highly leveraged The low margin deposits normally required in currency trading (typically between 3%-20% of the value of the contract purchased or sold) permits extremely high degree leverage

Accordingly,

a relatively small price movement in a contract may result in immediate and substantial losses to the investor

Like other leveraged investments,

any trade may result in losses in excess of the amount invested

Currency trading presents unique risks The interbank market consists of a direct dealing market,

in which a participant trades directly with a participating bank or dealer,

The brokers’ market differs from the direct dealing market in that the banks or financial institutions serve as intermediaries rather than principals to the transaction

In the brokers’ market,

brokers may add a commission to the prices they communicate to thei