CURRENCY TRADING

Final Report Prepared Under the Sponsorship Of

CURRENCY TRADING

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 Final Report Prepared Under the Sponsorship Of

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Table of Contents

Declaration.......................................................................................................7

Acknowledgements…………………………………………………………………………8

Abstract………………………………………………………………………………………9

Learning Experience……………………………………………………………………….10

Introduction…………………………………………………………………………………11

Project Proposed………………………………………………………........................11

Objective of the project…………………………………………………………………..11

Methodology……………………………………………………………........................11

Limitations of the study…………………………………………………………………..12

Synopsis of the project…………………………………………………………………..13

Forex currency trading…………………………………………………………………….14

Forex currency trading system…………………………………………………………..14

Hedging in currency trading………………………………………………………………14

Currency trading online……………………………………………………………………15

Currency exchange………………………………………………………………………..15

Factors deciding currency fluctuation………………………………………………….16

Market participants………………………………………………………………………..18

Company profile…………………………………………………………......................19

The study…………………………………………………………………......................20

Rationale for the study……………………………………………………………….20

Study aims and objectives…………………………………………………..20

Offerings……………………………………………………………………………………21

Our schemes……………………………………………………………………………..22

Currency futures………………………………………………………………………….25

Research………………………………………………………………………………….25

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Chapter1 currency trading………………………………………………………………26

What is currency trading…………………………………………………………..26

Speculating as an enterprise……………………………………………………..26

Currency as a trading vehicle…………………………………………………….26

What effects currency rates……………………………………………………..27

Fundamentals drive the currency market………………………………………28

Finding your trading style………………………………………………………..29

Planning the trade…………………………………………………………………29

Executing the trade plan from starting to finish………………………………29

Chapter2 What is forex market………………………………………………………..30

Trading for spot………………………………………………………………...31

Speculating in currency market……………………………………………….31

Around the world in a trading day…………………………………………….32

The opening of the trading stock……………………………………...........33

Trading in Asia-pacific region…………………………………………………33

Trading in European-London session……………………………………….33

Key daily times and events…………………………………………………..34

The U.S. dollar index…………………………………………………...........35

Currencies and other financial markets…………………………………….35

Getting started with trading account……………………………………….37

Chapter 3 Who trade currencies…………………………………………………….37

Meet the players…….………………………………………………….........37

The interbank market is the market…………………………………………37

Trading in interbank market…………………………………………………38

Steeping onto a currency trading floor……………………………………39

Hedgers and financial investors…………………………………………..40

Global investment flows……………………………………………………41

Hedge funds…………………………………………………………………42

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 Bank for international settlements………………………………………..43

The group of 7………………………………………………………………43

Chapter4 the mechanics of currency trading……………………………………...44

Currency comes in pairs………………………………………………….44

Major currency pairs………………………………………………………44

Major cross currency pairs……………………………………………....45

Profit and loss……………………………………………………………..45

Unrealized and realized profit and loss…………………………………46

Currency is money, after all………………………………………………46

Understanding currency rates…………………………………………….47

Trading online………………………………………………………………48

Phone trading……………………………………………………………..49

Orders………………………………………………………………………49

Types of orders……………………………………………………………50

Chapter5 Getting to know the major currency pairs……………………………….52

The big dollar EUR/USD………………………………………………….52

Trading fundamentals of EUR/USD……………………………………52

Trading EUR/USD by the members……………………………………53

Trading behaviour of EUR/USD………………………………………..54

Trading USD/JPY by the members……………………………………54

Important Japanese data reports………………………………………55

Trading fundamentals of GBP/USD…………………………………...55

Chapter6 minor currency pairs and cross-currency trading……………………….56

Trading USD/CAD by the numbers…………………………………….56

Trading NZD.USD by the numbers……………………………………57

Cross currency pairs………………………………………………………57

Why trade the crosses……………………………………………………57

Chapter7 currency futures………………………………………………………………..58

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 Definition of currency futures………………………………………………58

Future terminology…………………………………………………………...59

Rationale for introducing currency futures………………………………..60

Conclusion………………………………………………………………………………….62

Recommendations to the company…………………………………………………….63

Bibliography………………………………………………………………………………..64

References………………………………………………………………………………….65

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 Declaration

I hereby declare that this project work titled “Currency trading” conducted at
Religare Securities Ltd., New Delhi has been prepared by me during the academic year 2008-
09 under the guidance of my faculty guide Prof. Bijay Bhujabal (faculty-Marketing, IBS
Dehradun), and my Company guide Mr. Anand Sagar (Manager, Religare Securities ltd).

I also declare that this project is the result of my effort and has not been submitted
to any other University or Institution for the award of any degree, or personal favour
whatsoever. All the details and analysis provided in the report hold true to the best of my
knowledge.

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 ACKNOWLEDGEMENT

As a part of the MBA curriculum at ICFAI Business School, the ‘Summer Internship Program’
enables the students to enhance their skills, expand their craniums by applying various
theories, concepts and laws to real life scenario which would further prepare them to face
in the near future.

Summer internship is the part of curriculum of ICFAI BUSINESS SCHOOL which helps in
overall development of the student and gives him or her platform to understand the
corporate environment as well as to implement the theoretical knowledge.

I would like to thank my company guide Mr. Anand Sagar, Branch Manager, Religare
Securities Ltd, Delhi for allowing me to work in such a great organization.

I would like to thank my faculty guide Dr. Bijay Bhujabal for his valuable guidance and
support during my summer internship.

I would also like to thanks Prof. Love raj Takru (Dean IBS, Dehradun) for giving me the
opportunity to work in such a great organization and carry the college’s name forward.

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Abstract

In today’s world of highly competitiveness and changing atmosphere, it is not so easy to

carve a niche for oneself and stand on your own feet. As per the rule of the nature ‘Survival
of the fittest’, this SIP has taught me many important things that one needs to inculcate within
himself to face the cut-throat competition. In my opinion the internship program of this
curriculum is very practical and important for learning the necessary skills for a bright future
of a student and it will surely be helpful in the value addition to the knowledge base.

The study demonstrates how exchanges are versatile institutions, working across a variety of
developing country contexts, addressing a diverse range of challenges - some rooted in a
country's historical legacy, other arising with the globalization of the world currency
economy. Whilst the featured exchanges are operated by the private sector, the role of
government - establishing an appropriate enabling framework and providing ongoing
regulatory oversight - has been crucial in each country.

It was found that exchange risk management instruments - such as futures and options
contracts can be made accessible to and useable by small clients to reduce exposure to price
and, potentially, production risks.

The responsibility which I have got in the form of this project by the company, I have
completed the project in the best manner which I could do. I am enjoying working with
company also. Without any doubt in mind I can say that this opportunity of my life will
necessarily be beneficial for me and will add a value in terms of skills and knowledge that is
going to help me in near future.

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Learning Experience:

The project has been a great learning experience. It has provided me with learning
opportunities about currency market and various currency exchanges. The project involved
gaining information about various currency exchanges and getting awareness about various
terminologies associated with them.

After I began to use to use the personal network of my friends and asked them to speak to
their acquaintances- personal and official and check if they know anything about currency
markets.

The currency market trends, the rising currency prices giving rise to inflation, how some
currency linked are to linked with an economy also helped me a lot to gain more knowledge
about currency market.

By handling the project under the guidance of company guide and faculty guide has given
me exposure of organizational culture and environment. On the whole, I understood the
psyche of prospective and current trends of the market.

In the beginning of the project I was a bit uncomfortable as I did not knew anything about
currency market, but the project has made me realize that to reach heights of success and
position you have to start from the scratch.

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Introduction

Project Proposed: Currency trading

Objective of the project:

 To study currency trading.
 To study about the usage and utility, hedging and arbitrage in currency trading.
 To study about the factors deciding currency fluctuation.
 To study about currency trading in India.
 What are the instruments to protect any losses from currency fluctuation?
 To study about the initiatives taken by Indian government for currency trading.
 What are the major participants in currency trading?
 To study about currency exchange and currency exchange rates
 To study about hedging in currency trading.
 As company has started dealing in currency trading with NSE six months ago, so
it will help company in explaining to their clients regarding currency trading.

Methodology

1) Primary Data Sources:-

The methodology used is to study currency trading and its usage and utility, hedging and
arbitrage in currency trading. To study about factors deciding currency fluctuation. What
are the instruments to protect losses from currency fluctuation? How currency trading is
done. Currency trading in India. What are the initiatives taken by Indian government for
currency trading? Who are major participants in currency trading?

2) Secondary Data Sources: -

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 To keep pace with the existing market I seek to consult various existing data also in the
related company products so that a comparative study is formulated. The sources to be
used includes internet, friends working in other companies, faculty members, books.

Limitations of The Study

 Study is limited to currency trading and its usage and utility.

 Study is limited to currency exchange and factors deciding currency fluctuations.
 Study is limited to forex exchange and how forex trading is done.
 Study is limited to forex brokers.
 Study is limited to currency trading in India.
 Owing to the dynamic nature of the global economy in particular, the findings of the
report will not be applicable after a point of time.
 No practical access to global market exchanges.
 Time constraint.

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SYNOPSIS OF THE PROJECT:
This project is about currency trading, its usage and utility, what are hedging and arbitrage
in currency trading. How is currency trading done? What are its operations? What is pricing
in currency trading. What are factors deciding currency fluctuations. What are instruments
to protect any losses from currency fluctuation? How trading is done. What are initiatives
taken by Indian government for currency trading? Who are major participants in currency
trading? What is currency trading system? How hedging is done in currency trading. What
are currency trading platforms? How is currency trading done online? How is currency
trading done online? What is forex trading and forex trading in India?

CURRENCY TRADING
Currency trading means to exchange one currency for another currency is termed as
currency trading. This industry is one of the largest in the world with regards to trading
volume. Foreign currency is the ratio of one currency in consideration with another. How
this process takes place. For example if we take an interbank currency trade for instance,
there are two banks A and B. Then bank A will call bank B and will ask for the quote of the
currency. For example rupee against the dollar. Then bank B will reply to bank A with the
rate of his bank. If the rate seems attractive to bank A then they will enter a deal. All the
basic information like price, amount, and purchased amount will be entered in their
systems. When the actual settlement takes place bank A will depart with the specified rupee
amount and bank B will follow suit by turning in the dollar amount. If the rupee rises against
the dollar then bank A will gain the difference as profit.

When traders enter into currency trading they give a two- way quote. One of them is the
rate of purchase and other is the price of sale. The two prices are mainly separated by a
hyphen. On the left is the price at which the trader will purchase and on the right is the price
at which is the price at which the trader will sell. The difference between the purchase rate
and sale is called the bid-ask spread. The trader expects the slight variations on the sale and
purchase rate. He will also trade in the similar amounts of what he had purchased. There
will not be any drastic differences. The margin thus earned by the trader is the difference of
the bid-ask spread.

The profit gained depends on the variation in the exchange rate and the size of the position.
Speculating over a period of time can be dangerous and hence every government has the
strict rules laid down which have to be adhered to, to prevent the chaos.

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FOREX CURRENCY TRADING
Currency trading is done in Paris. They follow the International standards organization (ISO),
which has built a code abbreviation. For instance EUR/USD- EURO AND US DOLLAR. Similarly
we have USD/CHF, GBP/USD etc. Thus foreign exchange is the trading of one currency for
another. It is the ratio of one currency as valued for another. While trading the first currency
is known as the base currency and the other is known as the counter of quote currency.
Counter currency is purchased on one unit of the base currency. While selling we are told
how much the counter or quote currency we will receive for every base currency unit.

For simplifying foreign currency trade one monetary unit is considered equal to the base
currency. So if we are talking of the base currency i.e. Rupee, Euro, Dollar, it is 1 Rupee, 1
Euro, and 1 Dollar. As the US Dollar is mostly traded with any currency paired with the US
Dollar is known as the direct rate. If the currency is not against the US Dollar it is known as
the cross rate. As the quote currency is lower than the base currency it is converted into
smaller units of the base currency. Foreign currency trading involves many intricacies but
once one gain knowledge and practice it, it soon get easy and attractive.

FOREX CURRENCY TRADING SYSTEM

There are many currencies trading systems.1) Piranha system: this system depends upon
prevailing interest rates. It helps to determine that whether on should play long or short.
Smooth to enter and exit is the core is the core fund of this system. This system has solid
profit ground.

2) Cross bow Swiss trading system: this system is based on entering long on dips and selling
short on rallies, the system is designed to allow online trading, thus allowing online market
information and transactions.

HEDGING IN CURRENCY TRADING

Risk is the factor that is involved everywhere. It is very high in currency trading. With the
currency trading evolving as huge market it is important to cover the risks involved in case
of a huge unexpected downfall.

Hedging is the kind of a transaction where two positions are made to offset each other in
case of price changes. It is the risk covered by those who are desirous of taking it and who
are capable of taking and handling it.
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In the currency trading market high amounts are traded with. Hence if there is sudden
decline in prices it can be quite demanding on the investors and the whole economy per
say.

CURRENCY TRADING ONLINE

Trading is always given an impetus because of its ability to promote an activity beyond its
current realms. Be it basic trading or online currency trading. It gives the individual a
different feeling. More of one to one basis. It eliminates the need of middlemen and thus
reduces cost. Online currency trading is more dangerous unless you are adapting with its
requirements. Some brokers offer teaching the uses of online trading at a minimal fee.

Trading currency online gives one the advantage of working from home. If you are in
individual investor you can delineate your commands to your broker from the comfort of
your home. Receive confirmation and check the transfer of funds in your account. On the
other hand if you are an investor you can trade in the main market. Buy on dips and sell
on rallies or trade on whatever system. It’s possible from your home. Another advantage
of trading online is that no special software is required. Connect yourself to internet and
get working. You can get prices 24 hours a day. Through the internet you can access the
latest exchange rates, reports, news and analysis. It is absolutely commission free.
However it depends upon the portal you are using for online currency trading as the
charges differ from company to company.

CURRENCY EXCHANGE
With Indians going global and dealing in international trade, currency exchange is very
common. Indian rupee is exchange is anywhere in the world. However it’s still weak to US
Dollar, GB Pound and EURO, so the exchange rate varies according to vagaries of the day to
day market. For the common trader or professional who wished to invest in currency
exchange the best way to do is through official channels.

Banks, forex institutions, authorized travel agents are the only ones who can exchange the
rupee to any other currency. When a person goes abroad for a holiday or for a business, a
certain slab is reserved for exchange. Any amount of currency cannot be exchanged. Since
there a restrictions some people try to smuggle hard cash in suitcases. Which is an offence,
and if caught they can be deported or not allowed to leave the country, without giving
proper explanation.

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FACTORS DECIDING CURRENCY FLUCTUATION

1. CURRENCY FLUCTUATION

A market based exchange rate will change whenever the values of either of the two
component currencies change. A currency will tend to become more valuable whenever
demand for it is greater than the available supply. It will become less valuable whenever
demand is less then available supply (this does not mean people no longer want money, it
just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency is due to either an increased transaction demand for
money, or an increased speculative demand for money. The transaction demand for money
is highly correlated to the country's level of business activity, gross domestic product (GDP),
and employment levels. The more people there are out of work, the less the public as a
whole will spend on goods and services. Central banks typically have little difficulty adjusting
the available money supply to accommodate changes in the demand for money due to
business transactions.

The speculative demand for money is much harder for a central bank to accommodate but
they try to do this by adjusting interest rates. An investor may choose to buy a currency if the
return (that is the interest rate) is high enough. The higher a countries interest rates, the
greater the demand for that currency. It has been argued that currency speculation can
undermine real economic growth, in particular since large currency speculators may
deliberately create downward pressure on a currency in order to force that central bank to
sell their currency to keep it stable (once this happens, the speculator can buy the currency
back from the bank at a lower price, close out their position, and thereby take a profit).

2. In the absence of government intervention, the main driver of currency fluctuations is the
demand for the currency relative to the demand for other currencies. If many people want to
trade dollars for Indian rupees, the value of the rupee will rise and the dollar will fall. This
happens when there is a greater demand for one country's products, denominated in its
home currency, relative to the demand for another country's products. India, I believe, runs a
large trade surplus with the rest of the world, while the U.S., on the other hand, and runs a
large trade deficit.
There are several factors that can influence this dynamic. A country's central bank can
reduce the money supply by issuing bonds and collecting currency for them. They can
increase the required reserve level that banks must hold, therefore reducing the amount they
can lend. 
On the other hand, the central bank can buy back bonds, injecting more money into the
market, or they can simply start printing more money and buy things, thus getting it into

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circulation. This last tactic usually leads to runaway inflation, since the government often
winds up issuing more money to keep ahead of individuals' perception of its value. 
Other governments can also affect the value of a country's currency, which has happened in
the case of the U.S. Since the U.S. dollar is the world's de facto reserve currency (the one
that most international transactions are done in), it is in the interest of many countries to
keep large stocks of U.S, currency on hand, and to keep the value of the dollar stable. This
allows the U.S. to float more of its debt on world markets without suffering the ill effects of
devaluing its currency.

3. Supply & Demand

Supply: If countries are inflating their currency, there will be more available on
international markets and it will not be as valuable. This will additionally cause lower
interest rates in the domestic market.

Demand: If investment opportunities are poor in the domestic economy, currency will
not be as valuable internationally.

4. Currency fluctuation or rather the value of a currency is determined by various

factors depending upon what time frame, we are looking at. Short term values are
determined by immediate supply and demand you may find during pre election time
the rupee will appreciate because lot of funds from abroad will get converted to
Indian currency .In the medium term it is the country's export /import and capital
flows that will determine the value. In the long term it is the confidence of people in
the country's policies, the stability of the system of government, its credibility etc
which determines the value of a currency. Dollar enjoyed the reserve currency status
because of this factor.
5. The value of a local currency is its value in real terms. i.e., its purchasing power in
the international market. For example what you can buy by, say Rs. 100.If you can
buy items worth US $2 then the value of Rupee is 1/50 American Dollar. Similar is
the case with other currencies.

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MARKET PARTICIPANTS
According to research data

53% of the forex deals are arranged between dealers or banks;

33% are between a dealer (a bank) and a fund manager or other non- banking
financial institutions;

14% involves a dealer and a non financial company.

BANKS
The largest part of forex market belong to the banks. They cater both to the majority
of commercial turnover and large amounts of speculative trading every day. Daily
turnover of one large bank may reach billions of dollars. And only the small part of
trading this trading is undertaken on behalf of customers. The rest trading banks
arrange for their own account.

Today large banks have moved on to electronic systems such as EBS, the Chicago
mercantile exchange, Bloomberg and Trade book(R).

COMMERCIAL COMPANIES
Commercial companies that seek foreign exchange to pay for goods or services are
important part of forex market. Comparing with banks or speculators, commercial
companies trade fairly small amount. Besides there trade usually have little short
term impact on currency’s exchange rates. But sometimes multinational companies
can have unpredictable impact on market rates. Especially when market participants
do not know about very large positions, covered due to little known exposures.

CENTRAL BANKS
National central banks are one of the most important participants of foreign
exchange market. There purpose is to control money supply, inflation and interest
rates. Usually they have official or unofficial target rates for their currencies. Usually
their substantial foreign exchange reserves as a stabilization market tool. One of the
best stabilization strategies, used by central banks, is to buy while the exchange rate
is the loosest and to sell when the rate is high. In such a way central banks may get
a good profit. Nevertheless, central banks are more protected then other market

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participants, as they don’t go bankrupt if they make large losses. At the same time
there is no convincing evidence that central banks do not make a profit trading.

INVESTMENT MANGEMENT FIRMS

Their main activity is managing large accounts on behalf of customers such as

pension funds, endowments etc. Investment managers usually use the forex market
to facilitate transactions in foreign securities. Especially if an investment
management firm is specialized in foreign equities, it will need to buy and sell foreign
currencies in the spot market in order to pay for purchases. 
However some investment management firms have speculative specialist currency
overlay units. They manage client's currency exposures with the aim of generating
profits as well as limiting risk. But the number of this type of investment
management firms is comparatively small.

COMPANY PROFILE
Religare Securities Limited (RSL), a 100% subsidiary of Religare Enterprises Limited
is a leading equity and securities firm in India. The company currently handles
sizeable volumes traded on NSE and in the realm of online trading and investments;
it currently holds a reasonable share of the market. The major activities and offerings
of the company today are Equity Broking, Depository Participant Services, Portfolio
Management Services, International Advisory Fund Management Services,
Institutional Broking and Research Services. To broaden the gamut of services
offered to its investors, the company offers an online investment portal armed with a
host of revolutionary features.

 RSL is a member of the National Stock Exchange of India, Bombay Stock

Exchange of India, Depository Participant with National Securities Depository
Limited and Central Depository Services (I) Limited, and is a SEBI approved
Portfolio Manager.

 Religare has been constantly innovating in terms of product and services and
to offer such incisive services to specific user segments it has also started the
NRI, FII, HNI and Corporate Servicing groups. These groups take all the
portfolio investment decisions depending upon a client’s risk / return
parameter.

 Religare has a very credible Research and Analysis division, which not only
caters to the need of our Institutional clientele, but also gives their valuable
inputs to investment dealers.

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The Study
Rationale for Study
It is reasonable to assume that a currency exchange generating high volumes of trade will in
some way deliver tangible benefit to its stakeholders. After all currency exchange imposes
additional costs on participants- membership fees, transaction fees, compliance costs, etc.
However, what type of benefits does currency exchanges deliver? Who gains and who loses?
How specifically have these institutions functioned in developing countries? Has there been a
notable development impact? The definition of development is heavily contested and
conceptually challenging. There is not scope to provide a full or adequate account here.
Whilst definitions vary widely, development approaches typically pursue some mixture of
two broad goals - poverty reduction and economic growth.

Study Aims and Objectives

Aim: To identify, analyze and assess the impacts made by currency futures exchanges in
developing countries on development.

Objectives:

Awareness-raising: to build awareness of the solutions that currency exchanges provide, and
the extent of their track record in doing so, among key national, regional and international
stakeholders – including governments, regulators, the private sector, civil society and the
media.

Knowledge accumulation: to produce a high-quality report that adds to the existing

knowledge base - it will seek to establish within a coherent framework the enduring social
and economic impacts that currency exchanges have made in key markets over time.

Worldwide applicability: to demonstrate the extent to which exchange success in upgrading

currency sectors and fostering development is part of a worldwide phenomenon.

Exchange of information: to share information, experience and perspectives from across the
major developing country regions.

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OFFERINGS

1. EQUITY AND DERIVATIVES

Trading in Equities with Religare truly empowers you for your investment needs. We
ensure you have a superlative trading experience through –

 A highly process driven, diligent approach.

 Powerful Research & Analytics and
 One of the “best-in-class” dealing rooms.

Further, Religare also has one of the largest retail networks, with its presence
in more than 1800* locations across more than 490* cities and towns. This
means, you can walk into any of these branches and connect to our highly
skilled and dedicated relationship managers to get the best services.

The Religare edge

 Pan India footprint.

 Powerful research and analytics supported by a pool of highly skilled research
analysts.
 Ethical business practices.
 Offline/Online delivery models.
 Single window for all investment needs through your unique CRN.

2. DEPOSITORY

RSL provides depository services to investors as a Depository Participant with NSDL

and CDSL.

The Depository system in India links issuers, Depository Participants, Depositories

National Securities Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL) and clearing houses / clearing Corporation of Stock
Exchanges. These facilitate holding of securities in dematerialized form and
securities transactions are processed by means of account transfers.

Our customer centric account schemes have been designed keeping in mind the
investment psychology. With a competent team of skilled professionals, we manage
over 380,000 accounts and have a dedicated customer care centre, exclusively

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trained to handle queries from our customers. With our country wide network of
branches, you are never far from Religare depository services.

Religare’s depository service offers you a secure, convenient, paperless and cost
effective way to keep track of your investment in shares and other instruments over a
period of time, without the hassle of handling physical documents. Your DP account
with us takes care of your depository needs like dematerialization, dematerialisation,
transfer and pledging of shares, stock lending and borrowing.

Your demat account is safe and absolutely secure in our hands, every debit
instruction is executed only after its authenticity is established. Our hi-tech in-house
capabilities cater to the needs of software maintenance, database administration,
network maintenance, backups and disaster recovery. This extra cover of security
has gained the trust of our clients.

3. PORTFOLIO MANAGEMENT SERVICES

Religare offers PMS to address varying investment preferences. As a focused

service, PMS pays attention to details, and portfolios are customized to suit the
unique requirements of investors.

Religare PMS currently extends six portfolio management schemes, viz Monarque,
Panther, Tortoise, Elephant, Caterpillar and Leo. Each scheme is designed keeping
in mind the varying tastes, objectives and risk tolerance of our investors.

OUR SCHEMES

Monarque

At Religare, we understand ‘those who reign’ have truly inimitable needs and
objectives and deserve an equivalently matchless partner to provide your wealth the

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care it deserves to grow and be preserved. Monarque is a portfolio structured to
provide higher returns by taking aggressive positions across sectors and market
capitalizations. Monarque is ideally suitable for investors with "High Risk High
Return" appetite.

Panther

The Panther portfolio aims to achieve higher returns by taking aggressive positions
across sectors and market capitalizations. It is suitable for the “High Risk High
Return” investor with a strategy to invest across sectors and take advantage of
various market conditions.

Tortoise

The Tortoise portfolio aims to achieve growth in the portfolio value over a period of
time by way of careful and judicious investment in fundamentally sound companies
having good prospects. The scheme is suitable for the “Medium Risk Medium
Return” investor with a strategy to invest in companies which have consistency in
earnings, growth and financial performance.

Elephant

The Elephant portfolio aims to generate steady returns over a longer period by
investing in Securities selected only from BSE 100 and NSE 100 index. This plan is
suitable for the “Low Risk Low Return” investor with a strategy to invest in blue chip
companies, as these companies have steady performance and reduce liquidity risk
in the market.

Caterpillar

The Caterpillar portfolio aims to achieve capital appreciation over a long period of
time by investing in a diversified portfolio. This scheme is suitable for investors with a
high risk appetite. The investment strategy would be to invest in scrip’s which are
poised to get a re-rating either because of change in business, potential fancy for a
particular sector in the coming years/months, business diversification leading to a
better operating performance, stocks in their early stages of an upturn or for those
which are in sectors currently ignored by the market.

23 | P a g e
Leo

Leo is aimed at retail customers and structured to provide medium to long-term

capital appreciation by investing in stocks across the market capitalization range.
This scheme is a mix of moderate and aggressive investment strategies. Its aim is to
have a balanced portfolio comprising selected investments from both Tortoise and
Panther. Exposure to Derivatives is taken within permissible regulatory limits.

The Religare Edge

We serve you with a diligent, transparent & process driven approach and ensure that
your money gets the care it deserves.

No experts, only expertise. PMS brought to you by Religare with its solid reputation
of an ethical and scientific approach to financial management. While we offer you the
services of a dedicated Relationship Manager who is at your service 24x7, we do not
depend on individual expertise alone. For you, this means lower risk, higher
dependability and unhindered continuity. Moreover, you are not limited by a
particular individual’s investment style.

No hidden profits. We ensure that a part of the broking at Religare Portfolio

Management Services is through external broking houses. This means that your
portfolio is not churned needlessly. Using more broking firms gives us access to a
larger number of reports and analysis, enabling us to make better, more informed
decisions. Furthermore, your portfolio is customized to suit your investment
objectives.

Daily disclosures. Religare Portfolio Management Services gives you daily updates
on your investment. You can pinpoint where your money is being invested, 24x7,
instead of waiting till the end of the month to keep track.

No charge till you profit*.So sure are we of our approach to Portfolio Management
that we do not charge you for our services, until your investments start showing
profit. With customized investment options Religare Portfolio Management Services
invites you to invest across five broad portfolios to suit your investment needs.

24 | P a g e
CURRENCY FUTURES

Benefits of Currency Futures

 High Liquidity.
 Extended trading hours - 9 am to 5 pm.
 Opportunities to reap benefits owing to a highly dynamic market.
 Small lot size of only US $1000 with low exchange specified margins.

Currency Futures is best suited for-

 SMEs / Individuals involved in Imports/Exports.

 Corporate/ Institutions involved in Imports/Exports and anybody else who has
foreign currency exposure

RESEARCH
We at Religare believe in providing independent research for clients to make
investment decisions, with strict emphasis on self-regulation, avoiding possible
conflict of interest in objectivity.

Our Research Products

 Fundamental Research

 Technical Research

 Daily Reports

 Intraday trading tech calls

 Intraday Derivative call

 Directional F&O calls

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 CHAPTER 1

CURRENCY TRADING

WHAT IS CURRENCY TRADING?

Trading is about speculating on the value of one currency versus another. The key words in
the last sentence are speculating and currency. We think that looking at currency trading
from two angles- or two dimensions. On the other hand, it’s speculation, pure and simple,
just like buying an individual stock, or any other financial security, in hope that it will make a
profitable return. On the other hand, the securities you are speculating with are the
currencies of various countries. Viewed separately, that means that currency trading is both
about dynamics of market speculation, or trading, and the factors that affect the value of
currencies. If we put them together we can get the largest, most dynamic and exciting
financial market in the world.

SPECULATING AS AN ENTERPRISE
Speculating is all about taking on financial risk in the hope of making a profit. But it’s not
gambling and it’s not investing. Gambling is about playing with money even when you know
the odds are stacked against you. Investing is about minimizing risk and maximizing return,
usually over a long time period. Speculating, or active trading, is about taking calculated
financial risks to attempt to realize a profitable return, usually over a very short time
horizon.

To be a successful trader in any market requires

 Dedication ( in terms of both time and energy)

 Resources ( technological and financial)
 Decisiveness
 Perseverance
 Knowledge

CURRENCY AS THE TRADING VEHICLE

The forex market is the largest financial market in the world, at least in terms of daily
trading volumes. The forex market is unique in many respects. The volumes are indeed,

26 | P a g e
huge, which means that liquidity is ever present. It also operates around the clock six days a
week, giving traders access to market any time they need it.

Few trading restrictions exist- no trading limits up or down, no restrictions on position sizes,
and no requirements on selling a currency pair short. Selling a currency pair short means
you are expecting the price to decline. Because of the way currencies are quoted and
because currency rates move up and down all the time, going short is as common as being
long.

Most of the action takes place in the major currency pairs, which pit the US dollar (USD)
against the currencies of the EUROZONE (the European countries that have adopted the
euro as their currency), Japan, Great Britain, and Switzerland. There’s also plenty of trading
opportunities in the minor pairs, which see the U.S. dollar traded against the Canadian,
Australian, and New Zealand dollars. On the top of that, there’s cross- currency trading,
which directly pits two non- USD currencies, against each other, such as the Swiss franc
against the Japanese yen. Altogether, there are anywhere from 15 to 20 different currency
pairs, depending on which forex brokerage you deal with.

Most individual traders trade currencies via the internet through a brokerage firm. Online
currency trading is typically done on a margin basis, which allows individual traders to trade
in larger amounts by leveraging the amount of margin on deposit.

The leverage, or margin trading ratios, can be very high, sometimes as much as 200:1 or
greater, meaning a margin deposit of $ 1,000 could control a position size of $ 200,000. But
trading on margin carries its own rules and requirements and is backdrop against which all
your trading will take place. Leverage is a two- edged sword, amplifying gains and losses
equally, which makes risk management the key to any successful trading strategy.

Before you ever start trading, in any market, make sure you are only risking money that you
can afford to lose, what’s commonly called risk capital. Risk management is the key to any
successful trading plan. Without a risk- aware strategy, margin trading can be an extremely
short- lived endeavour. With a proper risk plan in place, you stand a much better chance of
surviving losing trades and making winning ones.

WHAT AFFECTS CURRENCY RATES?

In a word- information. Information is what drives every financial market, but the forex
market has its own unique roster of information inputs. Many different cross- currencies are
at play in the currency market at any given movement. After all, the forex market is setting

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the value of one currency relative to another, so at the minimum, you are looking at the
themes affecting two major international economies.

FUNDAMENTALS DRIVE THE CURRENCY MARKET

Fundamentals are the broad grouping of news and information that reflects the
macroeconomic and political fortunes of the countries whose currencies are traded. Most of
the time when you hear someone talking about the fundamentals of a currency, he’s
referring to the economic fundamentals. Economic fundamentals are based on:

 Economic data reports

 Interest rate levels
 Monetary policy
 International trade flows
 International investment flows

There are also political and geopolitical fundamentals. An essential element of any
currency’s value is the faith or confidence that the market places in the value of the
currency. If political events, such as an election or scandal, are seen to be undermining the
confidence in a nation’s leadership, the value of its currency may be negatively reflected.

Gathering and interpreting all this information is just part of a currency trader’s daily
routine, which is one reason why we put dedication at the top of our list of successful trader
attributes.

UNLESS IT’S THE TECHNICALS THAT ARE DRIVING THE CURRENCY MARKET
The term technical’s refers to technical analysis, a form of market analysis most commonly
involving chart analysis, trend- line analysis, and mathematical studies of price behaviour,
such as momentum or moving averages.

We don’t know of too many traders who don’t follow some form of technical analysis in
their trading. Even the stereotypical seat-of- the-pants, trade-your-gut-traders are likely to
at least be aware of technical price levels identified by others. If you have been an active
trader in other financial markets, chances are, you have been engaged in some technical
analysis or at least heard of it.

Technical analysis is especially important in the forex market because of the amount of
fundamental information hitting the market at any given time. Currency traders regularly

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apply various forms of technical analysis to define and refine their trading strategies, with
many people trading on technical indicators alone.

FINDING YOUR TRADING STYLE

What do you mean by trading style? Basically it boils down to how you approach currency
trading in terms of

 Trade timeframe: how long you hold a position? Are you looking at short- term trade
opportunities (day trading), trying to capture more significant shifts in currency
prices over days or weeks, or something in between?

 Currency pair election: are you interested in trading in all the different currency
pairs, or are you inclined to specialize in only one or two?

 Trade rationale: are you fundamentally or technically inclined? Are you considering
creating a systematic trading model? Are you a trend follower or a breakout trader?

 Risk appetite: how much are you prepared to risk and what are your return
expectations?

PLANNING THE TRADE

Whatever trading style, you ultimately choose to follow, you won’t get very far if you don’t
establish a concrete trading plan and stick to it. Trading plans are what keep small bad
trades from becoming big bad trades and what can turn small winners. More than anything,
though, they are your road map, helping you to navigate the market after the adrenaline
and emotions start pumping, no matter what the market throws your way.

We are not telling you that trading is any easier than any other financial market speculation.
But we can tell you that trading with a plan will greatly improve your chances of being a
successful in the forex market over time. Most important, we want to caution you that
trading without plan is a surf ire recipe for disaster.

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EXECUTING THE TRADE PLAN FROM START TO FINISH
The start of ant trade comes when you step into the market and open up a position. How
you enter your position, how you execute the first step of your trading plan, can be as
important as the trade opportunity itself. After all, if you never enter the position, the trade
opportunity will never be exploited. And probably nothing is more frustrating as a trader
than having pinpointed a trade opportunity, having it go the way you expected, but having
nothing to show for it because you never put the trade on.

The effort and resources you invest in researching, monitoring, and analyzing the market
come to a concrete result when you open a trade. You are now exposed to price fluctuations
and your trading account will register a profit or loss as a result. But that’s just the beginning
of it.

Active trade management is also critical to keeping more of what you make in the market. In
our experience, making money in the forex market is not necessarily the hard part. More
often than not, keeping what you have made is the really hard part.

Exiting each trade is the culmination of the entire process and you are either going to be
pleased with a profit or disappointed with a loss. Every trade ends in either a profit or a loss
(unless you get out at the entry price); it’s just the way the market works. While you trade is
still active, however, you are still in control and you can choose to exit at any time.

Chapter 2

WHAT IS FOREX MARKET?

The forex market is the crossroads for international capital, the intersection through which
global commercial and investment flows have to move. International trade flows, such as
when a Swiss electronics company purchases Japanese- made components, were the
original basis for the development of the forex markets.

Today, however, global financial and investment flows dominate trade as the primary non
speculative source of forex market volume. Whether it’s an Australian pension fund in U.S.
Treasury bonds, or a British insurer allocating assets to the Japanese equity market, or a
German conglomerate purchasing a Canadian manufacturing facility, each cross- border
transaction passes through the forex market at some stage.

More than anything else, the forex market is a trader’s market without equal. It’s a market
that’s open around the clock six days a week, enabling traders to act on news and events as
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they happen. It’s a market where half-billion- dollar trades can be executed in a matter of
seconds and may not even move prices noticeably. Try buying or selling a half- billion of
anything in another market and see how prices react.

GETTING INSIDE THE NUMBERS

Average daily currency trading volumes exceed $2 trillion per day. It’s about 10 to 15 times
the size of daily trading volume on the entire world’s stock market combined. That $2-
trillion-a- day number, which you may have seen in the financial press or other books on
currency trading, actually overstates the size of what the forex market is all about- spot
currency trading.

TRADING FOR SPOT

Spot refers to the price where you can buy or sell currencies now, as in “on the spot”. If you
are familiar with stock trading, the price you can trade at is essentially a spot price.
Technically, the term refers to the nearest settlement date on which a transaction can be
made and is primarily meant to differentiate spot, or cash, trading from futures trading, or
trading for some future delivery date. The spot currency market is normally traded for
settlement in two business days.

The bank for international settlements (BIS), the international supervisory body for banks
around the world, surveys forex market volumes every three years. The 2004 BIS survey (the
most recent available) revealed a daily spot-trading volume of about $620 billion, with
another $100+ billion in estimated gaps due to reporting. The rest of the volume that makes
up the $2 trillion figure is comprised of swap and outright forward currency trading (trades
made for settlement dates other than spot).

SPECULATING IN CURRENCY MARKET

While commercial and financial transactions in the currency markets represent huge
nominal sums, they still pale in comparison to amounts based on speculation. By far the vast
majority of currency trading volume is based on speculation- traders buying and selling for
short- term gains based on minute-to-minute, hour-to-hour, and day-to-day price
fluctuations.

Estimates are that upwards of 90 percent of daily trading volume is derived from
speculation (meaning, commercial or investment-based FX trades account for less than 10

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percent of daily trading volume). The depth and breadth of the speculative market means
that the liquidity of the overall forex market is unparalleled among global financial markets.

The bulk of spot currency trading, about 75 percent by volume, takes place in the so-called
“major currencies”, which represent the world’s largest and most developed economies.
Trading in the major currencies is largely free from government regulation and takes place
outside the authority of any national or international body.

GETTING LIQUID WITHOUT GETTING SOAKED

Liquidity refers to the level of market interest- the level of buying and selling volume-
available at any given movement for a particular asset or security. The higher the liquidity,
or the deeper the market, the faster and easier it is to buy or sell a security.

From a trading perspective, liquidity is a critical consideration because it determines how

quickly prices move between trades and over time. A highly liquid market like forex can see
large trading volumes transacted with relatively minor price changes. An illiquid, or thin
market will tend to see prices move more rapidly on relatively lower trading volumes. a
market that only trades during certain hours( futures contracts, for example) also represents
a less liquid, thinner market.

AROUND THE WORLD IN A TRADING DAY

The forex market is open and active 24 hours a day from the start of business hours on
Monday morning in the Asia Pacific Time zone straight through to the Friday close of
business hours in New York. At any given movement, depending on the time zone, dozens of
global financial centres- such as Sydney, Tokyo, or London- are open, and currency trading
desks in those financial centres are active in the market.

In addition to the major global financial centres, many financial institutions operate 24-
hour-a-day currency trading desks, providing an ever-present source of market interest. It
may be a U.S. hedge fund in Boston that needs to monitor currencies around the clock, or it
may be a major international bank with a concentrated global trading operation in one
financial sector.

Currency trading doesn’t even stop for holidays when other financial markets, like stocks or
futures exchanges, may be closed. Even though it’s a holiday in Japan, for example, Sydney,
Singapore, and Hong Kong may still be open. It might be the fourth of July in the United
States, but if it’s a business day, Tokyo, London, Toronto, and other financial centres will still
be trading currencies.

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THE OPENING OF THE TRADING STOCK

There is no officially designated starting time to the trading day or week, but for all intents
the market action kicks off when Wellington, New Zealand, the first financial centre west of
the international dateline, opens on Monday morning local time. Depending on whether
daylight saving time is in effect in your own time zone, it roughly corresponds to early
Sunday afternoon in North America, Sunday evening in Europe, and very early morning in
Asia.

The Sunday open represents the starting point where currency markets resume trading after
the Friday close of trading in North America( 5 p.m. eastern time). This is the first chance for
the forex market to react to news and events that may have happened over the weekend.
Prices may have closed New York trading at one level, but depending on the circumstances,
they may start trading at different levels at the Sunday open.

As a trading consideration, individual traders need to be aware of the weekend gap risk and
know what events are scheduled over the weekend. There’s no fixed set of potential events
and there’s never any way of ruling out what may transpire, such as a terror attack, a
geopolitical conflict, or a natural disaster.

TRADING IN ASIA-PACIFIC SESSION

Currency trading volumes in the Asia- pacific session account for about 21 percent of total
daily volume, according to the 2004 BIS survey. The principal financial trading centers are
Wellington, New Zealand, Sydney, Australia, Tokyo, Japan, Hong Kong and Singapore.

The overall trading direction for the NZD, AUD, and JPY can be set for the entire session
depending on what news and data reports are released and what they indicate.

In addition news from China, such as interest rate changes and official comments or
currency policy adjustments, may also be released. Occasionally as well, late speakers from
the United States, such as Federal Reserve officials speaking on the West Coast of the
United States, may offer remarks on the U.S. economy or the direction of U.S. interest rates
that affect the value of the U.S. dollar against major currencies.

For individual traders, overall liquidity in the major currency pairs is more than sufficient,
with generally orderly price movements. In some most liquid, non- regional currencies, like
GBP/USD or USD/CAD, price movements may be more erratic or nonexistent, depending on
the environment.

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TRADING IN THE EUROPEAN/ LONDON SESSION
About midway through the Asian trading day, European financial centers begin to open up
and the market gets into its full swing. European financial centers and London account for
over 50 percent of total daily global trading volume, according to the 2004 BIS survey.

The European session overlaps with half of the Asian trading day and half of the North
American trading session, which means that market interest and liquidity is at its absolute
peak during this session. Asian trading centers begin to wind down in the late- morning
hours of the European session and North American financial centers come in a few hours
later, around 7 a.m.

KEY DAILY TIMES AND EVENTS

 Expiry options
Currency options are typically set to expire either at the Tokyo expiry (3 p.m. Tokyo
time) or the New York expiry (10 a.m.). The New York option expiry is the most
significant one, because it tends to capture both European and North American
option market interest. When an option expires, the underlying option ceases to
exist. Any hedging in the spot market that was done based on the option being alive
suddenly needs to be unwound, which can trigger significant price changes in the
hours leading up to and just after the option expiry time.
The amount and variety of currency option interest is just too large to suggest any
single way that spot prices will always react around the expiry ( there may not even
be any significant option interest expiring on many days), but you should be aware
that option-related interest is most in evidence around the daily expiries.

 Setting the rate at currency fixings

There are several daily currency fixings in various financial centres, but the two most
important are the 8:55 a.m. Tokyo time and the 4 p.m. London time fixings. A
currency fixing is a set time each day where the prices of currencies for commercial
transactions are set, or fixed.
From a trading standpoint, these fixings may see a flurry of trading in a particular
currency pair in the run-up (generally 15 to 30 minutes) to the fixing time that
abruptly ends exactly at the fixing time. A sharp rally in a specific currency pair on
fixing-related buying, for example, may suddenly come to an end at the fixing time
and see the price quickly drop back to where it was before.

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  Squaring up the currency future markets
The Chicago mercantile exchange (CME), one of the largest future markets in the
world, offers currency futures through its international Monetary Market (IMM)
subsidiary exchange. Daily currency futures trading close each day on the IMM at 2
p.m. central time (CT), which is 3 p.m.ET. Many futures traders like to square up or
close any open positions at the end of each trading session to limit their overnight
exposure or for margin requirements.

The 30 to 45 minutes leading up to the IMM closing occasionally generates a flurry of

activity that spills over into the spot market. Because the amount of liquidity in the
spot currency market is at its lowest in the New York afternoon, sharp movements in
the futures markets can drive the spot market around this time. There’s no reliable
way to tell if or how the IMM close will trigger a move in the New York afternoon
spot market, so you just need to be aware of it and know that it can distort prices in
the short term.

THE U.S. DOLLAR INDIEX

The U.S. dollar index is a futures contract listed on the New York Board of Trade
(NYBOT) and Dublin- based financial instruments exchange (FINEX) futures
exchanges. The dollar index is an average of the value of the U.S. dollar against a
basket of six other major currencies, but it’s heavily weighted toward European
currencies.

The exact weightings of other currencies in the U.S. dollar index are
 Euro: 57.6 percent
 Japanese yen: 13.6 percent
 British pound: 11.9 percent
 Canadian dollar: 9.1 percent
 Swedish krona: 4.2 percent
 Swiss franc: 3.6 percent

The European currency share of the basket- Euro zone, United Kingdom, Sweden,
and Switzerland- totals 77.3 percent.

CURRENCIES AND OTHER FINANCIAL MARKETS

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 As much as we like to think of the forex market as the be-all and end-all of financial
trading markets, it doesn’t exist in vacuum. There are some markets like gold, oil,
stocks, and bonds.

GOLD
Gold is commonly viewed as a hedge against inflation, an alternative to the U.S.
dollar, and as a store of value in times of economic or political uncertainty. Over the
long term, the relationship is mostly inverse, with a weaker USD generally
accompanying a higher gold price, and a stronger USD coming with a lower gold
price. However, in the short run, each market has its own dynamics and liquidity,
which makes short-term trading relationships generally tenuous.
Overall, the gold market is significantly smaller than the forex market, so if we were
gold traders, we would sooner keep an eye on what’s happening to the dollar, rather
than the other way around. With that noted, extreme movement in gold prices tend
to attract currency traders attention and usually influence the dollar in a mostly
inverse fashion.

OIL
A lot of misinformation exists on the internet about the supposed relationship
between oil and the USD or other currencies, such as CAD or JPY. The idea is that,
because some countries are oil producers, their currencies are positively (or
negative) affected by increases (or decreases) in the price of oil. If the country is an
importer of oil (and which countries aren’t today?)

The best way to look at oil is an inflation input and as a limiting factor on overall
economic growth. The higher the price of oil, the higher inflation is likely to be and
the slower an economy is likely to grow. The lower the price of oil, the lower
inflationary pressures are likely (but not necessarily) to be.

STOCKS
Stocks are micro economic securities, rising and falling in response to individual
corporate results and prospects, while currencies are essentially macroeconomic
securities, fluctuating in response to wider- ranging economic and political
developments. As such there is a little intuitive reason that stock markets should be
related to currencies. Long term correlation studies bear this out, with correlation
coefficients of essentially zero between the major USD pairs and U.S. equity markets
over the last five years.
The two markets occasionally intersect, though this is usually only at the extremes
and for very short periods.

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 BONDS
Fixed income or bond markets have a more intuitive connection to the forex market
because they are both heavily influenced by interest rate expectations. However,
short term market dynamics of supply and demand interrupt most attempts to
establish a viable link between the two markets on a short term basis. Sometimes
the forex market reacts first and fastest depending on shifts in interest rate
expectations. At other times, the bond market more accurately reflects changes in
interest rate expectations, with the forex market later playing catch-up
(Because it takes longer to turn a bigger ship around).

GETTING STARTED WITH THE TRADING ACCOUNT

For newcomers to currency trading, the best way to get handle on what currency
trading is all about is to open a practice account at any online forex brokers. Most
online brokers offer practice accounts to allow you to experience the real- life price
action of the forex market. Practice accounts are funded with “virtual money, so you
are able to make trades with no real money at stake and gain experience in how
margin trading works.
Practice accounts give you a great chance to experience the minute-to-minute price
movements of the forex market. You all be able to see how prices change at
different times of the day, as well as how various currency pairs may differ from each
other.
How the forex market really moves, you can
 Start trading in real market conditions without any fear of losing money.
 Experiment with different trading strategies to see how they work.
 Gain experience using different orders and managing open positions.
 Improve your understanding of how margin trading and leverage work.
 Start analyzing charts and following technical indicators.

Chapter3

Who trades currencies?

Meet the players

The forex market is regularly referred to as the largest financial market in the world based
on trading volumes. But this massive market was unknown and unavailable to most
individual traders and investors until the start of this decade. That leaves a lot of the people
in the dark when it comes to exactly what the currency market is: how it’s organized, who’s
trading it, and why.

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THE INTERBANK MARKET IS “THE MARKET”
When people talk about the “currency market”, they are referring to the interbank market,
whether they realize it or not. The interbank market is where the really big money changes
bands. Minimum trade sizes are one million of the basic currency, such as euro 1 billion of
EUR/USD or $ 1 million of USD/JPY. Much large trades of between $10 million and $100
million are routine and can go through the market in a matter of seconds. Even larger trades
and orders are a regular feature of the market. For the individual trading FX online, the
prices you see on your trading platform are based on the prices being traded in the
interbank market. The sheer size of interbank market is what helps makes it such a great
trading market, because investors of every size are able to act in the market, usually without
significantly affecting prices. It’s one market where we would say size really doesn’t matter.
We have seen spot traders be right with million-dollar bets, and sophisticated hedge funds
be wrong with half-billion-dollar bets.

GETTING INSIDE THE INTERBANK MARKET

So what is the interbank market and where did it come from? The forex market originally
evolved to facilitate trade and commerce between nations. The leading international
commercial banks, which financed international trade through letters of credit and bankers
acceptances, were the natural financial institutions to act as the currency exchange
intermediary. They also had the foreign branch network on the ground in each country to
facilitate the currency transfers needed to settle FX transactions.

Currency futures markets operate alongside the interbank market, but they are definitely
the tail being waged by the dog of the spot market. As a market currency futures are
generally limited by exchange-based trading hours and lower liquidity than is available in
the spot market.

BANK TO BANK AND BEYOND

The interbank market is a network of international banks operating in financial centers
around the world. The banks maintain trading operations to facilitate speculation for their
own accounts, called proprietary trading or just prop trading in short, and to provide
currency trading services for their customers. Bank’s customers can range from corporations
and government agencies to hedge funds and wealthy private individuals.

TRADING IN INTERBANK MARKET

The interbank market is an over-the-counter (OTC) market, which means that each trade is
an agreement between the two counterparties to the trade. There are no exchanges or

38 | P a g e
guarantors for the trades, just each bank’s balance sheet and the promise to make payment.
The bulk of spot trading in the interbank market is transacted through electronic matching
services, such as EBS and Reuters Dealing. Electronic matching services allow traders to
enter their bids and offers into the market, hit bids ( sell at the market), and pay offers ( buy
at the market). Price spreads vary by currency pair and change throughout the day
depending on market interest and volatility.

The matching systems have pre-screened credit limits and a bank will only see prices
available to it from approved counterparties. Pricing is anonymous before deal, meaning
you can’t tell which bank is offering or bidding, but the counterparties names are made
known immediately after a deal goes through. The rest of the interbank trading is done
through currency brokers, referred to as voice brokers to differentiate them from the
electronic ones. Traders can place bids and offers with these brokers the same as they do
with the electronic matching services. Prior to the electronic matching services, voice
brokers were the primary market intermediaries between banks.

STEPPING ONTO A CURRENCY TRADING FLOOR

Interbank trading rooms are staffed by a variety of different market professionals and each
has a different role to play. The typical currency trading room has

 Flow traders: sometimes called execution traders, these are the market makers,
showing two-way prices at which to buy or sell, for the bank’s customers. If the
customer makes a trade, the execution trader then has to cover the resulting deal in
the interbank market, hopefully at a profit. These traders are also responsible for
watching and executing customer orders in the market. These are the traders who
are generating most of the electronic prices and price action.

 Proprietary traders: these traders are focused on speculative trading for the bank’s
own account. Their strategies can run the gamut from short term day trading to
longer-term macroeconomic bets.

 Forward traders: are active in the forward currency market, which refers to trades
made beyond the normal spot value date. The forward market is essentially an
interest rate differential market, where the interest rates of the various currencies
are traded.

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  Options traders: they manage the bank portfolio or book of outstanding currency
options. They hedge the portfolio in the spot market, speculate for the bank’s own
account with option strategies, and provide pricing to the bank’s customers on
requested option strategies.

 Sales staff: The sales staff acts as the intermediary between the trading desk and
the bank’s customers. They advise the bank’s customers on market flow, as well as
who’s buying and selling; recommend spot and option trading strategies; and
execute trades between the bank and its customers.

HEDGERS AND FINANCIAL INVESTORS

The forex market sits at the crossroads of global trade and international finance and
investing. Whether it’s a U.S. conglomerate managing its foreign affiliate’s balance
sheets or a German mutual fund launching an international stock fund, they all have
to go through the forex market at some point.

Financial transactors are important to the forex market for several reasons:
 Their transactions can be extremely sizeable, typically hundreds of millions
or billions.
 Their deal is frequently one-time events.
 They are generally not price sensitive or profit maximizing.

HEDGING YOUR BETS

Hedgers come in all shapes and sizes, but don’t confuse them will hedge funds. Hedging
is about eliminating or reducing risk. In financial markets, hedging refers to a transaction
designed to insure against an adverse price move in some underlying asset. In the forex
market, hedgers are looking to insure themselves against an adverse price movement in a
specific currency rate.

1. Hedging for international trade purposes

Trade related hedging regularly comes into the spot market in two main forms:
 At several of the daily currency fixings.
 Mostly in USD/JPY, where Japanese exporters typically have large amounts
of USD/ JPY to sell.

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 2. Hedging for currency options.

GLOBAL INVESTMENT FLOWS

One of the reasons forex market remain as lightly regulated as they are is that no developed
nation wants to impose restrictions on the flow of global capital. International capital is the
lifeblood of the developed economies and the principal factor behind the rapid rise of
developing economies like China, Brazil, Russia, and India. The forex market is central to the
smooth functioning of international debt and equity markets, allowing investors to easily
obtain the currency of the nation they want to invest in.

Cross brokers with mergers and acquisitions

Mergers and acquisitions activity is becoming increasingly international and shows no sign
of abating. International firms are now involved in a global race to gain and expand market
share and cross- border acquisitions are frequently the easiest and fastest way to do that.
When a company seeks to buy a foreign business, there can be a substantial foreign
exchange implication from the trade.

SPECULATORS
Speculators are market acquisitions who are involved in the market for one reason only: to
make money. In contrast to hedgers, who have some form of existing currency market risk,
speculators have no currency risk until they enter the market. Hedgers enter the market to
neutralize or reduce risk. Speculators embrace risk taking as a means of profiting from long-
term or short-term price movements.

Speculators are what really make a market efficient. They add liquidity to the market by
bringing their views and, most important, their capital into the market. That liquidity is what
smoothes out price movements, keeps trading spreads narrow, and allows a market to
expand. In the forex market, speculators are running the show. Conventional market
estimates are that upwards of 90 percent of daily trading volume is speculative in nature. If
you are trading currencies for your own account, welcome to the club. If you are trading to

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hedge a financial risk, you can thank the specs for giving you a liquid market and reducing
your transaction costs.

HEDGE FUNDS
Hedge funds are type of leveraged fund, which refers to any number of different forms of
speculative asset management funds that borrow money for speculation based on real
assets under management. For instance a hedge fund with $100 billion under management
can leverage those assets to give them trading limits of anywhere from $500 million to $ 2
billion. Hedge funds are subject to the same type of margin requirements as you or we are,
just with whole lots of zeros involved.

The other main type of leveraged fund is known as commodity trading Advisor (CTA). A CTA
is principally active in futures markets. But because the forex market operates around the
clock, CTAs frequently trade spot FX as well. The major difference between the two types of
leveraged funds comes down to regulation and oversight. CTAs are regulated by the
Commodity Futures Trading Commission (CFTC), the same governmental body that
regulates retail FX firms. As a result, CTAs are subject to raft of regulatory and reporting
requirements. Hedge funds, on the other hand, remain largely unregulated. What’s
important is that they all pursue similarly aggressive trading strategies in the forex market,
treating currencies as a separate asset class, like stock or commodities.

GOVERNMENTS AND CENTRAL BANKS

National governments are routinely active in forex market, but not for purposes of
attempting to realign or shift the values of the major currencies. Instead, national
governments are active in the forex market for routine funding of government operations,
making transfer payments, and managing foreign currency reserves. The first two functions
have generally little impact on the day-to-day forex market.

CURRENCY RESERVE MANAGEMENT

It refers to how national governments develop and invest their foreign currency reserves.
Foreign currency reserves are accumulated through international trade. Countries with large
trade surpluses will accumulate reserves of foreign currency over time. Trade surpluses arise

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when a nation exports more than it imports. Because it is receiving more currency for its
exports than it is spending to buy imports, foreign currency balances accumulate.

The problem is one of perception and also prudent portfolio management:

1. The perception problem stems from the continuing growth of U.S. deficits, which
equates to your continually borrowing money from a bank.
2. The portfolio-management problem arises from the need to diversify assets in the
name of prudence.

BANK FOR INTERNATIONAL SETTLEMENTS

The bank for international settlements is the central bank for central banks. Located in
Basel, Switzerland, the BIS also acts as the quasi government regulator of the international
banking system. It was BIS that established the capital adequacy requirements for banks
that today underpin the international banking system. As the bank to national governments
and central banks, the BIS frequently acts as the market intermediary of those nations
seeking to diversify their currency reserves. By going through the BIS, those countries can
remain relatively anonymous and prevent speculation from driving the market against them.

THE GROUP OF SEVEN

The group of seven, or G7, is composed of the seven largest developed economies in the
world: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
The G7 is the primary venue for the major global powers to express their collective will on
relative currency values and the need for any adjustments. For forex markets, the big guns
of the G7 are the hottest game in town. Depending on circumstances, currency values may
be on the agenda for these meetings and the communiqué, the official statement issued at
the end of each gathering, may contain an explicit indication for a desired shift among the
major currencies. If currencies are not a hot- button topic, the G7 will include a standard
boilerplate statement that currencies should reflect economic fundamentals and that
excessive currency volatility is undesirable. The power of G7 statements lies in the
perception that all the participants are in agreement with what is contained in the
communiqué. Most important, it is seen as giving the market a green light to carry out the
G7’s expressed wishes. If the G7indicates that a recently weak currency is not reflecting
fundamentals, for example, it’s a signal to the market that the G7 would like to see that
currency appreciate.

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 Chapter 4
The mechanics of currency trading

BUYING AND SELLING SIMULTANEOUSLY

The biggest mental hurdle facing newcomers to currencies, especially trader’s
familiar with other markets, is getting their head around the idea that each currency
trade consists of a simultaneous purchase and sale. In the stock market, for instance,
if you buy 100 shares of Google, it’s pretty clear that you now own 100 shares and
hope to see the price go up. When you want to exit that position, you simply sell
what you bought earlier. But in currencies, the purchase of one currency involves the
simultaneous sale of another currency. This is the exchange in foreign exchange. To
put it another way, if you are looking for a dollar to go higher, the question is “higher
against what?” the answer has to be the other currency. In relative terms, if the
dollar goes up against another currency, it also means that the other currency has
gone down against dollar.

CURRENCIES COME IN PAIRS

Forex markets refer to trading currencies by pairs, with names that combine the two
different currencies being traded against each other, or exchanged for one another.
Additionally, forex markets have given most currency nicknames or abbreviations,
which reference the pair and not necessarily the individual currencies involved.
The U.S. dollar’s central role in the forex markets stems from a few basic factors:
1. The U.S. economy is the largest national economy in the world.
2. The U.S. dollar is the primary international reserve currency.
3. The U.S. dollar is the medium of exchange for many cross-border transactions.
4. The United States has largest and most liquid financial markets in the world.
5. The United States is a global military superpower, with a stable political system.

MAJOR CURRENCY PAIRS

The major currency pairs all involve the U.S. dollar on one side of the deal. The
designations of the major currencies are expressed using international

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 standardization organization (ISO) codes for each currency. Currency names and
nicknames can be confusing when you are following the forex market or reading
commentary and research.

MAJOR CROSS CURRENCY PAIRS

Although the vast majority of currency trading takes place in the dollar pairs,
cross –currency pairs serve as an alternative to always trading the U.S. dollar. A
Cross- currency pair, or cross or crosses for short, is any currency pair that does
not include the U.S. dollar. Cross rates are derived from respective USD pairs but
are quoted independently and usually with a narrower spread than you could get
by trading in the dollar pairs directly. Crosses enable traders to more directly
target trades to specific individual currencies to take advantage of news or
events. For example, your analysis may suggest that the Japanese yen has the
worst prospects of all the major currencies going forward, based on interest
rates or the economic outlook.
Cross trades are especially effective when major cross- border mergers and
acquisitions are announced. If a UK conglomerate is buying a Canadian utility
company, the UK Company is going to need to sell GBP and buy CAD to fund the
purchase. The key to trading on M&A activity is to note the cash portion of the
deal. If the deal is all stock, then you don’t need to exchange currencies to come
up with the foreign cash.
The most actively traded crosses focus on the three major non-USD currencies
(namely EUR, JPY, and GBP) and are referred to as euro crosses, yen crosses and
sterling crosses. The remaining currencies (CHF, AUD, CAD, and NZD) are also
traded in cross pairs.

PROFIT AND LOSS

Profit and loss (P &L) is how traders measure success and failure. You don’t want
to be looking at the forex market as some academic or thrill- seeking exercise.
Real money is made and lost every minute of every day. If you are going to trade
currencies actively, you need to get up close and personal with P&L.
A clear understanding of how P&L works is especially critical to online margin
trading, where your P&L directly affects the amount of margin you have to work
with.

MARGIN BALANCES AND LIQUIDATIONS

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 When you open an online currency trading account, you will need to pony up
cash as collateral to support the margin requirements established by your
broker. That initial margin deposit becomes your opening margin balance and is
the basis on which all your subsequent trades are collateralized. Unlike futures
markets or margin- based equity trading, online forex brokerages do not issue
margin calls. Instead, they establish ratios of margin balances to open positions
that must be maintained at all times.

UNREALIZED AND REALIZED PROFIT AND LOSS

Most online forex brokers provide real-time mark-to-market calculations
showing your margin balance. Mark-to-market is the calculation that shows you
unrealized P&L based on where you could close your open positions in the
market at that instant. Depending on your broker’s trading platform, if you are
long the calculation will typically be based on where you could sell at that
movement. If you are short, the price used will be where you can buy at that
movement. Your margin balance is the sum of your initial margin deposit, your
unrealized P&L, and your realized P&L.
Realized P&L is what you get when you chose out a trade position, or a position
of a trade position. If you close out the full position and go flat, whatever you
made or lost leaves the unrealized P&L calculation and goes into your margin
balance. If you only close a portion of your open positions, only that part of
trade’s P&L is realized and goes into the trading balance. Your unrealized P&L will
continue to fluctuate based on the remaining open positions and so will your
total margin balance.

UNDERSTANDING ROLLOVERS AND INTERSET RATES

One market unique to currencies is rollovers. A rollover is a transaction where an
open position from one value date (settlement date) is rolled over into the nest
value date. Rollovers represent the intersection of interest-rate markets and
forex markets.

CURRENCY IS MONEY, AFTER ALL

Rollover rates are based on the difference in interest rates of the two currencies
in the pair you are reading. That’s because what you are actually trading is good
old-fashioned cash. That’s right: currency is cold, hard cash with a fancy name.
When you are long a currency (cash), it’s like having a deposit in the bank. If you
are short currency (cash), it’s like having borrowed a loan. Just as you would
expect to earn interest on a bank deposit or pay interest on a loan, you would

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 expect an interest gain/ expense for holding a currency position over the change
in value.
The catch currency in currency trading is that if you carry over an open position
from one value date to the nest, you have two bank accounts involved. Think of
it as one account with a positive balance (the currency you are long) and one
with a negative balance (the currency you are short). But because your accounts
are in two different currencies, the two interest rates of the different countries
will apply.

The difference between the interest rates in the two countries is called the
interest-rate differential. The larger the interest-rate differential, the larger the
impact from rollovers. The narrower the interest- rate differential, the smaller
the effect from rollovers. So how do interest rates get turned into currency
rates? After all, interest rates are in percent and currency rates are, well, not in
percent. The answer is that deposit rates yield actual returns, which are netted,
producing a net cash return. That net cash return is then divided by the net
position size, which gives you the currency pips, which is rollover rate.

UNDERSTANDING CURRENCY PRICES

Now we are getting down to the brass tasks of actually making trades in the forex
market. Before we get ahead of ourselves, though, it’s critical to understand
exactly how currency prices work and what they mean to you as a trader. Keep in
mind that different online forex brokers use different formats to display prices on
their trading platforms. A thorough picture of what the prices mean will allow
you to navigate different broker’s platforms and know what you are looking at.

Bids and offers

When you are in the front of your screen and looking at an online forex broker’s
trading platform, you will see two prices for each company pair. The price on the
left-hand side is called the bid and the price on the right hand side is called the
offer (some call this the ask). Some brokers display the prices above and below
each other, with the bid o the bottom and the offer on the top. The easy way to
tell the difference is that the bid price will always be lower than the offer price.
The price quotation of each bid and offer you see will have two components: the
big figure and the dealing price.

SPREADS
A spread is the difference between the bid price and the offer price. Most online
brokers utilize spread- based trading platforms for individual traders. In one
sense you can look at the spread as the commission that the online brokers
charge for executing your trades. So even if they say you are commission free,

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 they may be earning difference when one trader sells at the bid price and
another trader buys at the offer price. Another way to look at the spread is that
it’s the compensation the broker receives for being the market-maker and
providing a regular two-way market.

EXECUTING A TRADE
There are two main ways of executing trades in the FX market: live trades and
orders. If you are an adrenaline junkie, don’t focus only on the “ live dealing”
section- the orders section gives you a plenty of juice to keep you going, too.

TRADING ONLINE

Clicking and dealing

Most forex brokers provide live streaming prices that you can deal on with a
simple click of your computer mouse. On these platforms to execute a trade:
1. Specify the amount of the trade you want to make.
2. Click on the buy or sell button to execute the trade you want.

The forex trading platform will respond back, usually within second or two, to
let you know whether the trade went through:
 If the trade went through, you will see the trade and your new
position appear in your platform’s list of trades.
 If the trade failed because of a price change, you need to start again
from the top.
 If the trade failed because the trade was too large based on your
margin, you need to reduce the size f the trade.

When the trade goes through, you have a position in the market and
you will see your unrealized P&L, begin updating according to market
price fluctuations.

Here are the parameters that you can usually set up in advance:

 Present trade amounts

 Automatic stop-loss orders at a predetermined distance from
the trade- entry price.
 Square buttons

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 Some online brokers advertise narrower trading spreads as a
way to attract traders. If you click-and-deal trade attempts
frequently fail, and the platform then asks if you would like to
make the trade at a worse price, you are probably being re-
quoted.

PHONE TRADING
Placing live trades over the phone is available from most online forex brokers. You need to
find from your broker whether it offers this service and exactly what its procedures are
before you can ready to use it.

To place a trade over the phone, you will need to:

1. Call the telephone number at your broker for placing a trade.

2. When you are connected to a representative, identity yourself by name and give
your trading account number.
3. Ask what the current price is for the currency pair you are trading.
4. If you don’t want the price, say, “NO, thank you”.
5. If you want the price, specify exactly what trade you would like to make.
6. Confirm with your broker exactly what trade you just made.
7. Get the name of the broker’s representative you just made the trade with in case
you have to call back.

ORDERS
Currency traders use orders to catch market movements when they are not in front of their
screens. The forex market is open 24hours a day. A market move is just as likely to happen
while you are asleep or in the shower as it is while you are watching your screen. If you are
not a full-time trader, then you have to probably get a full-time job that requires your
attention when you are at work- at least your boss hopes he has your attention.

Experienced currency traders also routinely use orders to:

 Implement a trade strategy from entry to exit.

 Capture sharp, short-term price fluctuations.
 Limit risk in volatile or uncertain markets.
 Preserve trading capital from unwanted losses.

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  Maintain trading discipline.
 Protect profits and minimize losses.

TYPES OF ORDERS

1. Take –profit orders

An order used by currency traders specifying the exact rate or number of pips from
the current price point where to close out their current position for a profit. The rate
deemed to be the level where the trader wants to take a profit is sometimes referred
to as the "take-profit point".
As the name suggests, take-profit orders are used to lock in profits in the event the
rate moves in a favourable direction. For example, if you are long a currency pair
position and believe the price will rise to a certain level, but are unsure what it will
do beyond that level, placing a take-profit order at that point will automatically close
out your position allowing you to lock in profit.  
Place a take-profit order at 108.80. Price then rises from 107.40 to 108.80 Take-profit
order automatically executed to sell $100 and buy 10,880 yen 
Profit of 140 yen realized.

2. Limit orders

To avoid buying or selling a stock at a price higher or lower than you wanted, you
need to place a limit order rather than a market order. A limit order is an order to buy
or sell a security at a specific price. A buy limit order can only be executed at the limit
price or lower, and a sell limit order can only be executed at the limit price or higher.
When you place a market order, you can't control the price at which your order will be
filled.

For example, if you want to buy the stock of a "hot" IPO that was initially offered at
$9, but don't want to end up paying more than $20 for the stock, you can place a limit
order to buy the stock at any price up to $20. By entering a limit order rather than a
market order, you will not be caught buying the stock at $90 and then suffering
immediate losses if the stock drops later in the day or the weeks ahead.

3. Stop loss orders

What does stop loss order Mean?

An order placed with a broker to sell a security when it reaches a certain price. It is
designed to limit an investor's loss on a security position.

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 Also known as a "stop order" or "stop-market order".

In other words, setting a stop-loss order for 10% below the price you paid for the
stock would limit your loss to 10%.

It's also a great idea to use a stop order before you leave for holidays or enter a
situation in which you will be unable to watch your stocks for an extended period of
time.

A stop loss is an order to buy (or sell) a security once the price of the security climbed
above (or dropped below) a specified stop price. When the specified stop price is
reached, the stop order is entered as a market order (no limit) or a limit order (fixed or
pre-determined price).

With a stop order, the trader does not have to actively monitor how a stock is
performing. However because the order is triggered automatically when the stop price is
reached, the stop price could be activated by a short-term fluctuation in a security's
price. Once the stop price is reached, the stop order becomes a market order or a limit
order.

4. Trading stop loss orders

A stop loss is an order that is sold automatically if the currency trading venture you
invest in reaches a certain price, preventing more losses to occur. When you place a
stop order, you need to set an exit point, to happen if the trade losses a specific
value. The stop order is basically what it sounds like, it stops your losses and lowers
your risks, and so even if the trading in foreign currency fails to make a profit, your
investment is relatively safe.

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 Chapter 5
Getting to know the major currency pairs
The vast majority of trading volume in the major currency pairs: EUR/USD, GBP/USD,
and USD/CHF. These currency pairs account for about two-thirds of daily trading
volume in the market and are the most watched barometers of the overall forex
market. When you hear about the dollar rise and falling, it’s usually referring to the
dollar against these other currencies.
Even though these four pairs are routinely grouped together as the major currency
pairs, each currency pair represents an individual economic and political
relationship. It’s important to understand of how different pairs rates move. Most
currency trading is very short-term in nature, typically from a few minutes to few
days. This makes understanding a currency pair’s price action a key component of
any trading strategy.

THE BIG DOLLAR: EUR/USD

EUR/USD is by far the most actively traded currency pair in the global forex market.
The same goes for the big banks. Every major desk has at least one, and probably
several, EUR/USD traders. This is in contrast to less liquid currency pairs such as
GBP/USD or AUD/USD, for which trading desks may not have dedicated trader. All
those EUR/USD traders add up to vast amounts of market interest, which increases
overall trading liquidity.

TRADING FUNDAMENTALS OF EUR/USD

EUR/USD is the currency pair that pits the U.S. dollar against the single currency of
Euro zone, the euro. The Euro zone refers to a grouping of countries in the
European Union (EU) that in 1999 retired their own national currencies and adopted

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 a unified single currency. The move to a single currency was the culmination of
financial unification efforts by the founding members of the European Union. In
adopting the single currency, the nations agreed to abide by fiscal policy constraints
that limited the ratio of national budget deficits to gross domestic product among
other requirements.

TRADING EUR/USD BY THE MEMBERS

Standard market convention is a quote EUR/USD in terms of the number of USD per
EUR. For example, a WUR/USD rate of 1.3000 means that it takes $1.30 to buy 1
euro. EUR/USD trades inversely to the overall value of the USD, which means when
EUR/USD goes up, the euro is getting stronger and the dollar weaker. When
EUR/USD goes down, the euro is getting weaker and the dollar stronger. If you
believed the U.S. dollar was going to move higher, you are looking to sell EUR/USD. If
you thought the dollar was going to weaken, you would be looking to buy EUR/USD.

EUR/USD has the euro as the base currency and the U.S. dollar as the secondary or
counter currency. That means
 EUR/USD is traded in amounts denominated in Euros.
 The pip value, or minimum price fluctuation, is denominated in USD.
 Profit and loss accrue in USD.
 Margin calculations in online trading platforms are typically based in USD.

SWIMMING IN DEEP LIQUIDITY

Liquidity in EUR/USD is based on a variety of fundamental sources, such as

 Global trade and asset allocation.

 Central bank credibility.
 Enhanced status as a reserve currency.

WATCHING THE DATA REPORTS

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  European central bank (ECB) interest rate decisions and press conferences after ECB
Central Council meetings.
 Speeches by ECB officials and individual European finance ministers.
 EU-harmonized Consumer price index (CPI), as well as national CPI and Producer
Price Index (PPI) reports.
 Industrial production.
 Retail sales.
 Unemployment rates.

TRADING BEHAVIOR OF EUR/USD

The price action behaviour in EUR/USD regularly exhibits a number of traits that traders
should be aware of:

 Trading tick by tick.

 Fewer price jumps and smaller price gaps.
 Backing and filling.

TACTICAL TRADING CONSIDERATIONS IN EUR/USD

 Deciding whether it’s a U.S. dollar move or a euro move.

 Being patient in EUR/USD.
 Taking advantage of backing and filling.
 Allowing for a margin of error on technical levels.

TRADING USD/JPY BY THE NUMBERS

USD/JPY has the U.S. dollar as the base currency and the JPY as the secondary or counter
currency. This means

 USD/JPY is traded in amounts denominated in USD.

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  The pip value, or minimum price fluctuation, is denominated in JPY.
 Profit or loss accrues in JPY.
 Margin calculations are typically calculated in USD.

IMPORTANT JAPANESE DATA REPORTS

 Industrial production.
 Machine orders.
 Trade balance and current account.
 Retail trade.
 Bank lending.
 Domestic corporate goods price index (CGPI).
 National CPI and Tokyo-area CPI.
 All- industry activity index and tertiary industry activity index.

TACTICAL TRADING CONSIDERATIONS IN USD/JPY

 Actively trading trend-line and price-level breakouts.

 Jumping on spike reversals.
 Monitoring EUR/JPY and other JPY crosses.

TRADING FUNDAMENTALS OF GBP/USD

 GBP/USD is traded in amounts denominated in GBP.

 The pip value, or minimum price fluctuation, is denominated in USD.
 Profit and loss accrue in USD.
 Margin calculations are typically calculated in USD in online trading platforms.

PRICE ACTION BEHAVIOR IN GBP/USD AND USD/CHF

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  Price action tends to be jumpy, even in normal markets.
 Price action tends to see one-way traffic in highly directional markets.
 False breaks of technical levels occur frequently.


TACTICAL TRADING CONSIDERATIONS IN GBP/USD and USD/CHF

 Reducing position size relative to margin.

 Allowing to greater margin of error on technical breaks.
 Being quick on the trigger.
 Picking your spots wisely.

Chapter 6

Minor currency pairs and cross- currency trading

TRADING USD/CAD BY THE NUMBERS

USD/CAD has the USD as the primary currency and the CAD as the counter currency. This
means

 USD/CAD is traded in amounts denominated in USD.

 The pip value, or minimum price fluctuation, is denominated in CAD.
 Profit and loss register in CAD.
 Margin calculations are typically based in USD, so to see how much margin is
required to hold position in USD/CAD its simple calculation using leverage ratio.

TRADING AUD/USD BY THE NUMBERS

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AUD is the primary currency in the pair, and the USD is the counter currency, which means

 AUD/USD is traded in amounts denominated in AUD.

 The pip value is denominated in USD.
 Profit or loss accrues in USD.
 Margin calculations are typically in USD on online trading platforms.

TRADING NZD/USD BY THE NUMBERS

 NZD/USD is traded position sizes denominated in NZD.

 The pip value is denominated in USD.
 Profit and loss accrues in USD.
 Margin calculations are typically based in USD on margin trading platforms.

CROSS CURRENCY PAIR

A cross currency pair is any currency pair that does not have the U.S. dollar as one of the
currencies in the pairing. For example, one of the most active crosses is EUR/JPY, pitting the
two largest currencies outside the U.S. dollar directly against each other. But the EUR/JPY
rate at any given instant is a function of the current EUR/USD and USD/JPY rates.

The most popular cross pairs involve the most actively traded major currencies, like
EUR/GBP, EUR/GBP, and EUR/CHF. According to the 2004 BIS survey of foreign exchange
market activity, direct cross trading accounted for a relatively small percentage of global
daily volume-less than 10 percent for the major crosses combined.

WHY TRADE THE CROSSES?

Cross pairs represent entirely new sets of routinely fluctuating currency pairs that offer
another universe of trading opportunities beyond the primary USD pairs. Developments in

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the currency market are not always a simple but on what’s happening to the U.S. dollar.
Crosses are the other half of the story, and their significance appears to be increasing
dramatically as a result of electronic trading.

Cross trading offers the following advantages:

 You can pinpoint trade opportunities based on news or fundamentals.

 You can take advantage of interest-rate differentials.
 You can exploit technical trading opportunities.
 You can expand the horizon of trading opportunities.
 You can go with the flow.

CHAPTER 7

CURRENCY FUTURES

DEFINATION OF CURRENCY FUTURES

A futures contract is a standardized contract, traded on an exchange, to buy or sell a

certain underlying asset or an instrument at a certain date in the future, at a specified
price. When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is
termed a “commodity futures contract”. When the underlying is an exchange rate, the
contract is termed a “currency futures contract”. In other words, it is a contract to
exchange one currency for another currency at a specified date and a specified rate in
the future. Therefore, the buyer and the seller lock themselves into an exchange rate for
a specific value or delivery date. Both parties of the futures contract must fulfil their
obligations on the settlement date.

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Currency futures can be cash settled or settled by delivering the respective obligation of
the seller and buyer. All settlements however, unlike in the case of OTC markets, go
through the exchange.

Currency futures are a linear product, and calculating profits or losses on Currency
Futures will be similar to calculating profits or losses on Index futures. In determining
profits and losses in futures trading, it is essential to know both the contract size (the
number of currency units being traded) and also what the tick value is. A tick is the
minimum trading increment or price differential at which traders are able to enter bids
and offers. Tick values differ for different currency pairs and different underlying. For
e.g. in the case of the USD-INR currency futures contract the tick size shall be 0.25paise
or 0.0025 Rupees.

FUTURES TERMINOLOGY
 Spot price: The price at which an asset trades in the spot market. In
the case of USDINR, spot value is T + 2.

 Futures price: The price at which the futures contract trades in the
futures market.

 Contract cycle: The period over which a contract trades. The currency
future contracts on the NSE have one- month, two-month, three-month
upto twelve month expiry cycles. Hence the NSE will have 12 contracts
outstanding at any given point of time.

 Value date/final settlement date: The last business day of the

month will be termed the value date/ final settlement date of each
contract. The last business day would be taken to be the same as that
for inter-bank settlement in Mumbai. The rules for Inter-bank
settlements, including those for’ known holidays’ and ‘subsequently
declared holiday’ would be those as laid down by FEDAI(Foreign
Exchange Dealers Association of India).

 Expiry date: It is the date specified in futures contract. This is the last
day on which contract will be traded, at the end of which it ceases to
exist. The last trading day will be two business days prior to the value
date/final settlement date.

 Contract size: the amount of asset that has to be delivered under one
contract. Also called as a lot size.

 Basis: in the context of financial futures, basis can be defined as the

futures price minus the spot price. There will be a different basis for each

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 delivery month for each contract. In the normal market, basis will be
positive. This reflects that futures prices normally exceed spot prices.

 Cost of carry: The relationship between the spot prices and future
prices can be summarized as the cost of carry. This measures the
storage cost plus the interest that is paid to finance or carry the asset till
delivery less the income earned on the asset. For equity derivatives carry
cost is the rate of interest.

 Initial margin: The amount that must be deposited in the margin

account at the time a futures contract is first entered into is known as
initial margin.

 Marking-to-market: In the futures market, at the end of each trading

day, the margin account is adjusted to reflect the investor’s gain or loss
depending upon the futures closing price. This is called as marking-to-
market.

 Maintenance margin: this is somewhat lower than the initial margin.

This is set to assure that the balance in the margin account never
becomes negative. If the balance in the margin account falls below the
maintenance margin, the investor receives a margin call and is expected
to top up margin account to the initial margin level before trading
commences on the next day.

RATIONALE FOR INTRODUCING CURRENCY FUTURES

Futures markets were designed to solve the problems that exist in forward markets. A
future market is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain place. But unlike forward contracts, the future contracts
are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. A futures contract is
standardized contract with standard underlying instrument, a standard quality and
quality of the underlying instrument that can be delivered, ( or which can be use for
references purposes in the settlement) and a standard timing of such settlement.

The standardized items in a futures contract are:

 Quantity of underlying.

 Quality of underlying.

 The date and month of delivery.

 The units of price quotation and minimum price change.

 Location of settlement.

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The rationale for introducing currency futures in the Indian context has been outlined in
the Report of the Internal Working Group on Currency Futures (Reserve Bank of India,
April 2008) as follows;
The rationale for establishing the currency futures market is manifold. Both residents
and non-residents purchase domestic currency assets. If the exchange rate remains
unchanged from the time of purchase of the asset to its sale, no gains and losses are
made out of currency exposures.

But if domestic currency depreciates (appreciates) against the foreign currency, the
exposure would result in gain (loss) for residents purchasing foreign assets and loss
(gain) for non residents purchasing domestic assets. In this backdrop, unpredicted
movements in exchange rates expose investors to currency risks. Currency futures
enable them to hedge these risks. Nominal exchange rates are often random walks with
or without drift, while real exchange rates over long run are mean reverting. As such, it

is possible that over a long – run, the incentive to hedge currency risk may not be large.
However, financial planning horizon is much smaller than the long-run, which is typically
inter-generational in the context of exchange rates. As such, there is a strong need to
hedge currency risk and this need has grown manifold with fast growth in cross-border
trade and investments flows. The argument for hedging currency risks appear to be
natural in case of assets, and applies equally to trade in goods and services, which
results in income flows and lags and get converted into different currencies at the
market rates.
Empirically, changes in exchange rate are found to have very low correlations with
foreign equity and bond returns. This in theory should lower portfolio risk. Therefore,
sometimes argument is advanced against the need for hedging currency risks. But there
is strong empirical evidence to suggest that hedging reduces the volatility of returns and
indeed considering the episodic nature of currency returns, there are strong arguments
to use instruments to hedge currency risks.

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Conclusion

During this project work I have tried my best to touch each and every aspect which would
affect the business process of the company.

All exchanges generate impacts in the core functions of price discovery, price risk
management and as a venue for investment. Each exchange offers liquid markets, a central
counter party to all but eliminate counter party risk, market data that is freely and
transparently disseminated and futures markets that are well-correlated with spot markets
to enable effective price risk management.

Only two positive impacts were opposed on the basis of experience in the featured markets
to date- that a currency exchange can enable hedging against inflation and quality
improvements generated by the exchange can reduce dependence on imports.

The parameters that decide the price of currency in different exchanges are:

 Volume of currency being traded.

 Demand and supply forces.
 Worldwide demand and supply of a given currency.

The area of facilitating currency is perhaps the area where there is greatest scope for
exchanges to learn from each other's experience.

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These are the main aspects which could be concluded from the responses. On the basis of
these observations some recommendations could be provided to the companies about which I
will be discussing in the next part.

During my training period the work which I have done, has helped me a lot. I understood to
reach any heights you have to start from the scratch. I understand that if you want to be best
in any organization then you have to do your work with full dedication and sincerity.

Recommendations to the Company

After such observations and some conclusions made on the basis of that I would like to
recommend some important points, upon which company should focus and try to grow its
business by tapping the market through making new customers. In this recommendation
part of this project work I am suggesting these points.

First thing which I would like to suggest is the company should focus on its promotional
forces, so that it would be able to convey the product features to the common people. Once
the features will be exposed then only it can make new customers. Through the survey
responses we knew that advertisements are the most affective medium of creating awareness.
So to differentiate our product and to expose our exclusive benefits we need to take it out in
front of the people.

To create awareness about the product we can take several steps such as:

 Arranging various kinds of activities at public gathering.

 Placing the customer facilitating desks at various places.

 Approach to the various offices to get new leads or customer contacts.

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Bibliography

1. http://www.bseindia.com
2. http://www.nseindia.com
3. http://investopedia.com
4. http://www.google.com
5. http://www.currencytradingweb.com

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References
 Books Referred for the study:
Currency Trading for Dummies by Mark Galant and Brian
Dolan
Ncfm Currency Future Module

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