MCP Forex - Chintan (MBA05002028)

7/31/2019 MCP Forex - Chintan (MBA05002028)

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K.L.E.SOCIETYSINSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

VIDYANAGAR, HUBLI 580031

(Recognized by AICTE, New Delhi and Affiliated to Karnataka University, Dharwad)

A Project Report on

FOREX: Detailed Study, Risks, Risk Management &its Perception of Investors in Hubli City

Undertaken at

Altos Trade, Club Road, Hubli.

Submitted in partial fulfillment of the requirement of award of

Masters Degree in Business Administration of Karnataka University, Dharwad

Submitted By

Mr. Chintan. P. Netrakar

Seat No. MBA05002028

Institute Guide Company Guide

Prof. Mona Agarwal Mr. Ashok Sai

Faculty Finance, Team Manager,

KLESS IMSR HUBLI. Altos Trade, Hubli.

KLE Societys Institute of Management Studies and Research 1


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K.L.E.SOCIETYSINSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

VIDYANAGAR, HUBLI 580031

(Recognized by AICTE,

New Delhi and Affiliated to

Karnataka University,

Dharwad)

Certificate

This is to certify that Mr. Chintan. P. Netrakar of MBA 4th Semester

Exam No. MBA05002028 has successfully completed his project work for a

period of four months from 04th December 2006 to 16th April 2007.

Institute Guide Director

Prof. Mona Agarwal Dr. M. M Bagali

Faculty Finance, Director,KLESS IMSR HUBLI. KLES IMSR HUBLI.



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Declaration

I, Chintan. P. Netrakar here by declare that the project title FOREX: Detailed

Study, Risks, Risk Management & its Perception of Investors in Hubli City submitted

in partial fulfillment of the requirement for the award, the degree of Master Of Business

Administration by Karnataka University, Dharwad is my original work and is not

submitted elsewhere for the award of my any degree or diploma.

Date: 23-05-2007 Chintan. P. N

Place: Hubli M.B.A 4th Sem



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ACKNOWLEDGEMENT

The Satisfaction that accompany the successful completion of any task would be

incomplete without mentioning of the people who made it possible. So with gratitude I

acknowledge who served as a Beacon Light and crowned my efforts with success.

I express my profound sense of gratitude to my project co-ordinator and external

guide for my project,Mr. Ashok Sai, Team Manager, Altos trade Bangalore for giving me

this opportunity to take up this study and his support, encouragement and valuable timely

advice.

My special thanks to my InstituteDirector Dr. M. M. Bagaliwho was kind enough

in providing all the facilities and helped me in completing my project.

I extend my sincere thanks to my internal guide Prof. Mona Agarwalwho guided

me throughout the project.

I am greatly thankful to Karnatak University, Dharwad for giving practical

knowledge about the industrial sector by including summer internship program for two

months as a part of curriculum in the MBA course.

I would fail in my duty if I cant remember the encouragement given by my parents

in my endeavor. I just say, I love my parents



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Contents

Sl. No. ParticularsPage

No.

1. Executive Summary 1

2. Forex in India 4

3. Altos Profile 84. Forex 13

5. Questionnaire 58

6. Analysis & Findings 61

7. Recommendations 69

8. Conclusion 71



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Introduction

The present study and exercise includes the study of FOREX, the risks involved

and managing risks. This serves as guidelines to the investors while investing in FOREX. It

also includes a survey that reveals the perception of the investors regarding FOREX

trading.

Topic:

FOREX: Detailed Study, Risks, Risk Management & its Perception of Investors

in Hubli City.

Need For the Study:

FOREX plays a very important role in the International Market as India has opened

up its economy. Its role in the international trade effects a lot to the Indian economy as

there is fluctuations in the exchange rates.

My study on FOREX is to have a thorough knowledge on its trading, the risks that

are involved in its trading and also the tools that are used to hedge these risks. The study

also includes the research for the scope of FOREX trade in HUBLI city.

Objectives:

1. To have a detailed study of FOREX trade.

2. To study the Risks involved in it.

3. To know the tools used to hedge the risks.

4. To know the perception of investors towards FOREX.

Data Collection

Primary and Secondary data collection.



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Mode of Data Collection

Primary data:

Collection of data from the investors in various investments through questionnaire. Secondary data:

Secondary data will be collected from the various books on FOREX, Journals,

Magazines and Internet; Manuals and Magazines provided by the organization.

Period of Study

The study is been conducted for 4 months i.e. from 4th December 2007 to 16th April

2007.



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FOREX in INDIA



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Market players in forex became active in the seventies, consequent upon the

collapse of Bretton Woods Agreement. However, India was somewhat insulated since

stringent exchange controls prevailed and banks were required to undertake only cover

operations and maintain a square or near square position at all times. In 1978, the RBI

allowed banks to undertake intra-day trading in foreign exchange and as a consequence, the

stipulation of maintaining `square' or `near square' position was to be complied with only

at the close of business hours each day. This perhaps marks the beginning of forex market

in India. As opportunities to make profits began to emerge, the major banks started quoting

two-way prices against the rupee as well as in cross currencies and gradually, trading

volumes began to increase.During the period, 1975-92 the exchange rate regime in India

was characterised by daily announcement by the RBI of its buying and selling rates to

Authorised Dealers (ADs) for merchant transactions. Given the then prevalent RBIs

obligation to buy and sell unlimited amounts of the intervention currency arising from the

banks merchant purchases, its quotes for buying/selling effectively became the fulcrum

around which the market was operated. The RBI performed a market-clearing role on a

day-to-day basis, which naturally introduced some variability in the size of reserves.

Incidentally, certain categories of current and capital account transactions on behalf of the

Government were directly routed through the reserves account.

The 1990s marked significant changes in the currency regime in India and in the

development of the foreign exchange market. The exchange rate of the rupee, which was

pegged to an undisclosed basket of currencies, was partially floated in March, 1992 and

fully in March, 1993. The unification of the exchange rate was instrumental in developing a

market-determined exchange rate of the rupee, based on demand and supply in the forex

market. It was also an important step in the progress towards current account convertibility,

which was achieved in August, 1994 when India accepted obligations under Article VIII of

IMFs Articles of Agreement. A further impetus was provided in the form of the

appointment of an Expert Group on Foreign Exchange Markets in India which submitted its

report on June 27, 1995. The Sodhani Committee, as it has been popularly known, made

recommendations which had far reaching consequences for the development in general, and

deepening & widening, in particular, of the Indian forex market. Almost a decade has

passed since then, and it was felt that it would be appropriate to take stock of the

developments which have occurred, and to chart out the path for the future.



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Accordingly, as a part of the continuing efforts aimed at liberalising and developing

the Forex market in India, Governor appointed an Internal Technical Group on Forex

Markets to undertake a comprehensive review of measures initiated by Reserve Bank so far

and identify areas for further liberalization /relaxation of restrictions along with a medium-

term framework in relation to issues regarding capital account liberalisation. The members

of the Group were drawn from DEIO, IDMD, FED, DBOD and DEAP

The Indian Forex market is made up of banks authorised to deal in foreign

exchange, known as Authorised Dealers (ADs), foreign exchange brokers, money changers

and customers - both resident and non-resident, who are exposed to currency risk. It is

predominantly a transaction-based market with the existence of underlying forex exposure

generally being an essential requirement for market users.

The Indian forex market has grown manifold over the last several years. Average

daily total turnover has increased from US$3.67 billion in 1996-97 to US$9.71 billion in

2003-04. The normal spot market quote has a spread of 0.50 to 1 paise while swap quotes

are available at 1 to 2 paise spread. The derivatives market activity has shown tremendous

growth as well, especially after the MIFOR (Mumbai Inter-bank Forward Offered Rate)

swap curve evolved in 2000.

Many policy initiatives have been taken to develop the forex market. ADs have

been permitted to have larger open position and aggregate gap limits, linked to their

capital. They have been given permission to borrow overseas up to 25 per cent of their

Tier-I capital and invest up to limits approved by their respective Boards. Cash reserve

requirements have been exempted on inter-bank borrowings.

Exporters and importers are, in general, permitted to freely cancel and rebook

forward contracts booked in respect of their foreign currency exposures, except in respect

of forward contracts booked to cover import and non-trade payments falling due beyond

one year. They have also been permitted to book forward contracts on the basis of past

performance (without production of underlying documents evidencing transactions at the

time of booking the contract). Corporates have been permitted increasing access to foreign

currency funds. General permission has been given to ADs for approving External

Commercial Borrowings of their customers up to a limit of US $ 500 million; appropriate



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restrictions have been placed on the end-use of such funds. While exchange earners in

select categories such as Export Oriented Units (EOU) are permitted to retain 100 per cent

of their export earnings, others are permitted to retain 50 per cent of their forex receipts in

EEFC accounts. Residents may also enter into forward contracts with ADs in respect of

transactions denominated in foreign currency but settled in Indian rupee. They can hedge

the exchange risk arising out of overseas direct investments in equity and loan. Residents

engaged in export/import trade, are permitted to hedge the attendant commodity price risk

in international commodity exchanges/ markets using exchange traded as well as OTC

contracts.

Non-residents are permitted to hedge the currency risk arising on account of their

investments in India. However, once cancelled, these contracts cannot be rebooked for the

same exposure.



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ALTOS ADVISORY SERVICES

Altos Company started in 1999 and became Public Ltd., in Feb 2000. Altos HO is in

Chennai. The CEO of Altos is Mr. Premanand. And the Vice President is Mr. Manoj

Keshvan. 12 commodities are traded in Altos and 6 Currency. In all over India there are

18 branches. Hubli branch was started in the year 2005. This years annual turnover is Rs.

1,100 Cr Pa.

COMMODITIES IN ALTOS

Silver, Copper, Palladium, Soybean, Wheat, Rice, Corn, Oods, Lumbar, Fresh pork

bellies, Cotton coffee, Orange juice

CURRENCY

Swiss France, Euro, Yen, US Dollar, Pound sterling, Australia Dollar

Actually, its the entire world of commodities. Because thats where the opportunity

is today. Riding on astronomical growth figures of 900 per cent annually, the Indian

commodity trading market has already overtaken the Indian equity market. Trading in sucha booming market requires a player whose expertise, experience and successful track record

will make the key difference to the investors.

Altos is Indias first and only company focusing exclusively on commodity futures

trading, in the Indian and global markets since its inception in 1999. The company has

experience with the volumes and complexities of the global commodity markets giving it

considerable expertise in this challenging area. This, in turn, enables Altos to help investors

like you trade profitably in the nascent Indian commodity futures markets

ACCOUNT OPENING

The client has to open an account with Altos Advisory Services Ltd. by way of

Cheque/Cash/ Demand Draft and has to sign the Risk Disclosure Statement and Agreement

with Altos Advisory Services Ltd. Withdrawals will be honoured by means of A/C Payee

Cheques only. (Address Proof, ID Proof and two photographs of the client is mandatory



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for opening an account) The Client has to fully understand the risks associated with the

trade before he enters into the trade.

BANKING

For efficient clearing, settlement and guarantee system, Altos has an automated

clearing and settlement system with HDFC Bank as its Settlement & Clearing Bank for

maintenance of Clients Margin

MARGIN REQUIREMENT:

Margin requirement is as per exchange norms

Additional Variation Margin will be imposed by the exchange/member based on the

volatility of the market

COMMODITIES TRADED

All commodities are traded on the exchange. The client will be provided with a

daily trading statement via e-mail to apprise him of the status of his accounts after the

previous days trading. Altos will then send original copies of the account statements bycourier to the clients every week. Any position entered by the trader can be intimated to the

respective client as and when the clients requires him to do so, according to the client's own

convenience through the telephone/fax. There is no lock-in period for the margin.

MODUS OPERANDI OF TRADING

Altos provides trading facility through V-Sat Terminal connected to the Exchange.

Trading at Altos is done in an Order Driven Market. Altos set up the trading limit to its

clients. The traders place orders (buy or sell) using the client code assigned to the client and

the orders are placed online and are thrown to the Exchange. Trading is done on

anonymous basis without disclosing the counter party. This provides transparency to the

trading system.

GENERATION OF STATEMENTS



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Altos maintains a separate account for each and every client. The back office

software automatically calculates Initial Margins and M2M (Mark to Market) margins of

the member on a daily basis. The information regarding pay-ins and pay-outs arising in

calculations of positions of members is transferred at the end of trading hours electronically

and Contract notes, Mark to Market Billing, Margin Call (if any) showing the margin

amount, commission charges, number of lots traded, number of open and liquidated

positions are issued to the clients. The client can also take delivery of underlying

commodity that is backed by a Warehouse Receipt System.

Every contract opens and expires on the dates as per the circulars issued by the

exchange. No fresh positions building will be allowed during the delivery period of the

current contract month. The buyer or seller gives delivery intention and pays delivery

margin. The exchange after matching the buyers and sellers notifies them about the delivery

details. The seller can tender warehouse receipt for settlement and warehouse receipt will

be accepted for settlement at the closing price of the previous day. The warehouse receipt

will be collected from the seller by the exchange and passed on to the buyer. The buyer

then issues the warehouse receipt to the warehouse and takes delivery of the goods.

CHARGES APPLICABLE

Warehouse Charges / Storage Charges

Insurance charges

Delivery charges

Sales tax

Penalty charges (upon failure to deliver)

The seller tenders the warehouse receipt to the exchange during the delivery period ofthe current contract month in case he wishes to give delivery. The exchange notifies the

buyer about delivery and the warehouse receipt is issued in favor of the buyer, which is

transferable. On producing this receipt the buyer can take delivery of the commodity from

the warehouse. The buyer has to bear the warehouse charges, insurance charges from the

day on which he receives the notification from the exchange. Warehouse charges differ

from one warehouse to another and also from one location to another. Warehouse accepts

stocks only for specified period and after which if the buyer or seller wishes to keep the

stocks in the warehouse, then he has to revalidate the warehouse receipt.



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FOREX HISTORY



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Forex dates back to ancient times, when traders first began exchanging coins from

different countries and groups. However, the foreign exchange industry itself is the newest

of the financial markets.

In the last hundred years, the foreign exchange market has undergone some dramatic

transformations. In 1944, the postwar foreign exchange system was established as a result

of a multinational conference held at Bretton Woods, New Hampshire. That system

remained intact until the early 1970s.

At this conference, representatives from 45 nations met together to discuss the future

exchange system. The conference resulted in the formation of the International Monetary

Fund (IMF). It also produced an agreement that fixed currencies in an exchange-rate systemwould tolerate one percent currency fluctuations to gold values, or to the U.S. Dollar, which

was established previously as the gold standard. The system of connecting the currencys

value to gold or the U.S. Dollar was called pegging.

In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a

loan in pound sterling because he had intended to use the funds to short the British

currency. Friedman, who had perceived sterling to be priced too high against the dollar,

wanted to sell the currency, then later buy it back to repay the bank after the currency

declined, thus pocketing a quick profit. The bank's refusal to grant the loan was due to the

Bretton Woods Agreement, established twenty years earlier, which fixed national

currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.

The history of the FOREX Market as it exists today begins before 1971 when the

FOREX market departed from The Bretton Woods Accord to reflect a radical change in

Universal fixed exchange rates. After World War Two, the Bretton Woods Accord wasintroduced to the FOREX market to stabilize the devastated world economy.

The Agreement was finally abandoned in 1971 and the US dollar would no longer be

convertible into gold.

After the Bretton Woods Accord came the Smithsonian agreement in December of

1971. This agreement was similar to the Bretton Woods Accord but allowed for greater

fluctuation band for the currencies. In 1972, the European community tried to move away



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from their dependency on the dollar. West Germany, France, Italy, the Netherlands,

Belgium and Luxemburg established the European Joint Float. This agreement was similar

to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency

values.

Both agreements made mistakes similar to the Bretton Woods Accord and, by 1973,

collapsed. The collapse of the Smithsonian agreement and the European Joint Float in 1973

signified the official switch to the free-floating system. This occurred by default as there

were no new agreements to take their place. Governments were now free to peg their

currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was

officially mandated.

Europe tried, in a final effort to gain independence from the dollar, by creating the

European Monetary System in July of 1978. This, like all of the earlier agreements, failed

in 1993.

Important milestones in the history of Forex

The Gold Standard

Money was invented when barter was no longer an adequate means of trade, seeing that

actual goods could quickly lose value, were subject to value discrepancies, and could many

times not easily be divided (Morris, 4). Money, on the other hand, could function as a

medium of exchange, a unit of accounting, and a store of value (Ethier, 402). The original

form of money was typically something that had value in itself, such a precious metal. The

metal itself, usually gold or silver (Eichengreen, 9), was valuable, both because of its

scarcity and its inherent usefulness.

By the nineteenth century, both coins and paper money were in popular use. Under the

famous "Gold Standard," currencies were not directly valued in terms of each other.

Instead, each currency had a certain, the rate at which the currency could be exchanged for

gold. This in turn produced an effective exchange rate between any two currencies.

In 1900, for example, the mint parity for the U.S. dollar was $20.67, while that of the

British pound was 3 pounds, 17 shillings, 10 pence. To exchange U.S. dollars for British



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pounds, one would divide $20.67 by 3.17.10, which produces $4.86 per pound after

adjusting for the fact that U.S. gold coins had a somewhat greater gold content than did

British coins (Aliber, 34).

Paper money could then be used in place of the precious metal. A citizen could carry

paper money while the central bank would, in which more money left the country than

came in, there would be less U.S. dollars in circulation.

Because central banks have large control over the interest rates, the rates at which banks

borrow and lend money, they soon found that they did not have to passively wait for gold

flows to be restored. In a trade deficit scenario, with gold supplies leaving the country, a

central bank could raise interest rates which would make domestic savings more attractive.

Floating Exchanges Systems

Under a floating exchange system, on the other hand, currencies are not valued in terms

of gold - they are valued in terms of other currencies.

In the early 20th century, two world wars brought about social upheavals, rapid

inflation, and the destruction of the setting which made the gold standard operable.Between the wars, many countries elected to temporarily abandon the gold standard and opt

for floating exchange systems until their economies returned to the point at which in light

of the fact that, if a currency drifted too far outside its band and could not be contained by

central bank intervention, the country was allowed to adjust its peg by setting a new

exchange price.

There were three aspects of the system that were in conflict: constant exchange rates,

autonomous domestic economic policies, and increasing international capital mobility. The

existence of Bretton Woods did not stop states from using domestic economic policy

(manipulating interest rates, for example, as under the gold standard) for domestic reasons,

whatever their long-term effects on the exchange rate. Capital mobility simply makes the

effects of domestic economic policies on the exchange rate happen sooner than they

otherwise would.

With the instability brought about by the Vietnam War, central banks finally began toconvert their dollars to gold. To halt the loss of gold, in 1971 Nixon "closed the gold



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window" by refusing to provide gold to foreign dollar holders (Eichengreen, 133). In 1974

the Bretton Woods System of adjustable pegs was officially abandoned and the Jamaica

Agreement basically allowed the presence of any exchange system a country chooses

(Aliber, 52).

Exchange Systems Today

There are several exchange systems a country can currently choose from. A free

floating exchange system, as mentioned earlier, would simply allow the market to

determine the price of a currency. Trade surpluses and deficits, domestic investments

versus foreign investments, and domestic taxation policies, to name a few factors affecting

the exchange rate, would all be allowed to occur whatever their effects on the currency.

A pegged exchange rate, on the other hand, would function exactly as the gold standard

did a century beforehand, except that a country would its currency to the price of another

currency, usually the U.S. dollar. If there is a balance of payments deficit, for example the

central bank will buy the appropriate amount of the domestic currency in exchange for its

foreign currency reserves, thereby returning the price of the currency to its peg but at the

same time depleting the size of its reserves.

Some countries practice by, while remaining officially free-floating, sometimes

intervening in their currency rates in order to suite domestic interests - increasing

(revaluing) their exchange rate before an oil shipment, for example (Luca, 17). Other

countries, for example Brazil before its turn to a free floating system, peg their currencies

to the U.S. dollar or some other currency but allow the rate to float within a certain band

similar to the Bretton Woods adjustable peg system.

The FOREX Market, often considered to be the playground of governmental institutions

operating under the agency of central banks, expanded its horizons in recent years to

include corporations, hedge funds, and speculators and most recently with the dot com

boom and the expansion of the world wide web, now the private investors have been

afforded the lucrative opportunity to be a part of the action.

The appeal of The FOREX Market is one of non-stop, twenty four hour a day trading

for the five business days of the week. The first tentative steps towards a global economy



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have created a fast moving liquid market facilitating a wide variety of transaction options.

Combine this with the ability to make money in both winning and losing markets and you

will see why The FOREX Market is considered by some to be the fastest developing most

lucrative business opportunity open to the savvy investor who has the skill, intelligence,

acumen and backing to create substantial profits.

The FOREX Market provides a number of ways for investors to get in on the global

high stakes action. From the spot market to spread betting, options, contracts for difference

and futures, these are just some of the ways FOREX can turn a modest portfolio with

moderate potential, into a heavy hitting enterprise totaling far in excess of what it once was.

The BIS or Bank of International Settlements estimated in a recent survey that over

$1,200,000,000.00 is exchanged everyday on The FOREX Market. Currently industry

analysts think the market is not living up to its 1978 potential of $1,490,000,000.00 and still

view this as an attainable goal for the FOREX Market of the future.

Foreign Exchange

A forex rate of exchange is the price of one currency in terms of another currency. It is

the means by which banks are able to trade foreign currencies in exchange for Australian

dollars.

Banks quote prices at which they will buy and sell foreign currency. These prices are

based on prices that are quoted in the major wholesale foreign exchange markets and can

change constantly throughout the day, depending on market forces.

Every currency has a unique three-character International Standardization Organization

(ISO) code. The ISO codes are based on the 2-letter country code, plus a third characterderived from the name of the currency (e.g. GBP represents the Great Britain Pound and

USD the United States Dollar)

Every currency pair is expressed as two ISO codes separated by a division symbol (e.g.

GBP/USD), the first representing the "base currency and the second the "quote currency

(also known as "counter" or "secondary" currency).

GBP/USD



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Base Currency/Quote Currency

The exchange rate is usually displayed to the right of the currency pair

GBP/USD = 1.6545

This denotes that one unit of the British Pound (the base currency) can be exchanged for

1.6545 US dollars (the quote currency). If you are buying the base currency, it specifies

how much you have to pay in the quote currency to obtain one unit of the base currency. If

you are selling the base currency, the exchange rate is telling you how much you get in the

quote currency for one unit of the base currency.

The smallest increment by which a currency can move is called a pip (similar to

point in equity trading). The last two decimal places measure the pip movement of a

currency. For instance, in the example above, 45 represents the pips. If, in the same

example, the GBP/USD appreciated to 1.6560, you would say it moved up (or rose) 15

pips. Or, if it depreciated to 1.6541 you would say is fell (or moved down) 4 pips.

There are 3 major groups of factors that influence on exchange rate development:

Fundamental Factors

Fundamental trading strategies consist of macro-economic strategic assessments; these

criteria often include the economic condition of the currencys country of origin, the

countrys monetary policy, and other "fundamental" elements.

Typically, on the world markets, the US economy has the greatest influence. Fully 80%

of financial operations conducted in world markets are transacted in dollars. This causes thedollar rise or fall against all other currencies. The fundamental factors affecting world

markets are:

Gross national product

The level of real percentage

The level of unemployment

Inflation

An index of industrial production



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Therefore, the common rule for a trader is to orient to the expectations and moods of the

majority of investors in the market. Exchange rate movement tendency can be analyzed by

reading publications, studying reviews of market situation in information systems such as

Reuters, Bridge (Dow Jones), and CQG. Following the publication of the leading economic

indicators, the market will inevitably begin to move. A traders primary task is to

participate in such movement, which invariably will be lead by the majority in the market.

The axiom is - dont miss the boat.

Technical Factors

Technical analysis is a field of market analysis, which supposes that market has a

memory and consists primarily of a variety of technical aspects, each of which can be

interpreted to generate buy and sell signals or to predict market direction.

During the past few years, in response to rapid growth of electronic analytical devices

such as those offered by Reuters, Bridge (Dow Jones), CQG and others, greater numbers of

traders make their decisions according to the technical analysis, which regularly increases

its influence on any real rate movement.

Technical analysis is a method for price forecasting based on historical market

movement studies. For the last 30 years, studies in the field of technical analysis have

proven themselves a science with its own philosophical system and set of operative axioms.

Aside from the fundamental and technical factors

Insuperable circumstances acts of nature (earthquakes, a tsunami, a typhoon,

flooding, etc.)

Political events war, political scandals, terrorist acts, etc

Political speeches

Currency interventions by central banks.

One of the main forex terms is forex spread.



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As with other financial commodities, there is a buying (offer or ask) and a selling

(bid) exchange rate. The difference is known as the bid-offer spread or the spread.

The forex spread is written in a particular format. For example, GBP/USD = 1.5545/50

means that the bid price of GBP is 1.5545 USD and the offer price is 1.5550 USD. The

spread in this case is 5 points.

Every purchase of the base currency implies a sale of the secondary currency. Likewise,

sale of the base currency implies the simultaneous purchase of the secondary currency. For

example, when I sell GBP/USD, I am selling GBP and buying USD. Similarly, when I buy

GBP I am simultaneously selling USD.

We can express this equivalence by inverting the GBP/USD exchange rate and rotating

the bid and offer reciprocals to derive the USD/GBP rate. For example, if GBP/USD =

1.5545/50 then

USD/GBP = 1/1.5550 (bid)/(1/1.5545 (offer) = 0.6431/33

The basic unit of trading for private investors is known as a lot which represents

100,000 units of the base currency. Some brokers permit trading in mini-lots.

The purchase of a single lot of GBP/USD at 1.5852 implies 100,000 GBP bought at

158,520 USD.

The sale of a single lot of GBP/USD at 1.5847 entails the sale of 100,000 for 158,470

USD.

The spot forex trading spread is how brokers make their money. Wider spreads will

result in a higher asking price and a lower bid price. The end result is that you have to pay

more when you buy and get less when you sell, which makes it more difficult to realize a

profit.

Brokers generally don't earn the full spread, especially when they hedge client positions.

The spread helps to compensate for the market maker for taking on risk from the time it

starts a client trade to when the broker's net exposure is hedged (which could possibly be at

a different price).



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Spot forex trading spreads are important because they affect the return on your trading

strategy in a big way. As a trader, your sole interest is buying low and selling high (like

futures and commodities trading). Wider spreads means buying higher and having to sell

lower. A half-pip lower spread doesn't necessarily sound like much, but it can easily mean

the difference between a profitable trading strategy and one that isn't profitable.

The tighter the spread is the better things are going to be for you. However tight spreads

are only meaningful when they are paired up with good execution. Quality of execution

will decide whether you actually receive tight spreads. A good example of this is when your

screen shows a tight spread, but your trade is filled a few pips to your disadvantage or is

mysteriously rejected.

Spread policies change a great deal from broker to broker, and the policies are often

difficult to see through. This certainly makes comparing brokers much more difficult. Some

brokers actually offer fixed spreads that are guaranteed to remain the same regardless of

market liquidity. But since fixed spreads are traditionally higher than average variable

spreads, you are paying an insurance premium during most of the trading day so that you

can get protection from short-term volatility.

Other brokers offer traders variable spreads depending on market liquidity. Spreads are

tighter when there is good market liquidity but they will widen as liquidity dries up. When

it comes to choosing between fixed and variable rates, the choice depends on your

individual trading pattern. If you trade primarily on news announcements that you hear, you

may be better off with fixed spreads. But only if quality of execution is good.

Some brokers have different spreads for different clients based on their accounts. For

example; those clients that have larger accounts or those who make larger trades mayreceive tighter spreads, while the clients that are referred by an introducing broker might

receive wider spreads in order to cover the costs of the referral. Some offer the same

spreads to everyone.

Problems can come up when you are trying to learn about a company's spread policy

because this information, along with information on trade execution and order-book depth

is rather difficult to get. Because of this, many traders get caught up in all of the promises



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they hear, and take a broker's words at face value. This can be dangerous. The only real

way to find out is to try out various brokers or talk to those who have.

In summary, the spread is the difference between the price that you can sell currency at

( Bid ) and the price you can buy currency at ( Ask ). The spread on majors is usually 5 pips

under normal market conditions.

A pip is the smallest unit by which a cross price quote changes. When trading forex you

will often hear that there is a 5-pip spread when you trade the majors. This spread is

revealed when you compare the bid and the ask price, for example EURUSD is quoted at a

bid price of 0.9875 and an ask price of 0.9880. The difference is USD 0.0005, which is

equal to 5 "pips".

On a contract or position, the value of a pip can easily be calculated. You know that the

EURUSD is quoted with four decimals, so all you have to do is the cancel-out the four

zeros on the amount you trade and you will have one pip. Thus, on a EURUSD 100,000

contract, one pip is USD 10. On a USDJPY 100,000 contract, one pip is equal to 1000 yen,

because USDJPY is quoted with only two decimals.

Forex Macroeconomic indicators

An economic indicator is simply any economic statistic, such as the unemployment

rate, GDP, or the inflation rate, which indicate how well the economy is doing and how

well the economy is going to do in the future.

Economic (business) indicators allow analysis of current and predicted economic

performances. Economic indicators include various indices, earnings reports, and economic

summaries, such as unemployment, housing starts, Consumer Price Index (a measure for

inflation), industrial production, bankruptcies, Gross Domestic Product, retail sales, stock

market prices, money supply changes, etc.

Economic indicators are reports released by the government or a private organization

that detail a country's economic performance. Economic reports are the means by which a



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country's economic health is directly measured, but do remember that a great deal of factors

and policies will affect a nation's economic performance.

These reports are released at scheduled times, providing the market with an indication

of whether a nation's economy has improved or declined. The effects of these reports are

comparable to how earnings reports, SEC filings and other releases may affect securities. In

forex, as in the stock market, any deviation from the norm can cause large price and volume

movements.

These are the most important economic indicators for any country:

1. Interest rate decision

2. Retail sales

3. Inflation (consumer price or producer price)

4. Unemployment

5. Industrial production

6. Business sentiment surveys

7. Consumer confidence surveys

8. Trade balance

9. Manufacturing sector surveys

Depending on the current state of the economy, the relative importance of these releases

may change. For example, unemployment may be more important this month than trade or

interest rate decisions. Therefore, it is important to keep on top of what the market is

focusing on at the moment.

Various indicators are released by government and academic sources. They are reliable

measures of economic health and are followed by all sectors of the investment market.

Indicators are usually released on a monthly basis but some are released weekly.

Two of the most important fundamental indicators are interest rates and international

trade. Other indicators include the Consumer Price Index (CPI), Durable Goods Orders,

Producer Price Index (PPI), Purchasing Manager's Index (PMI), and retail sales.

There are 28 major indicators used in the United States. Indicators have strong effects

on financial markets so FOREX traders should be aware of them when preparing strategies.



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Up-to-date information is available on many websites and many FOREX brokers supply

this information as part of their trading service.

Most economic indicators can be divided into leading and lagging indicators.

Leading indicators are economic factors that change before the economy starts to follow

a particular pattern or trend. Leading indicators are used to predict changes in the economy.

The leading indicators consist of the following economic indicators:

average workweek of production workers in manufacturing;

average weekly claims for state unemployment;

new orders for consumer goods and materials;

vendor performance contracts and orders for plant and equipment;

new building permits issued;

change in manufacturers' unfilled ;

durable goods;

change in sensitive materials prices.

Lagging Indicators are economic factors that change after the economy has already

begun to follow a particular pattern or trend.

That is, economic indicators are useful tools that allow you to assess the overall strength

and likely direction of the economy. These indicators can also have a significant impact on

financial markets, and it is important for you as a trader to understand and monitor them.

Here is a brief description of some of the more important and widely used economic

indicators. These are a few that I follow closely, but there are many others. While these

indicators tend to have the most direct impact on the financial futures markets, they are

important to watch for their economic implications, no matter what markets you trade.

Forex fundamental indicators glossary

Gross Domestic Product (GDP)

The GDP is considered the broadest measure of a country's economy, and it represents

the total market value of all goods and services produced in a country during a given year.



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Since the GDP figure itself is often considered a lagging indicator, most traders focus on

the two reports that are issued in the months before the final GDP figures: the advance

report and the preliminary report. Significant revisions between these reports can cause

considerable volatility. The GDP is somewhat analogous to the gross profit margin of a

publicly traded company in that they are both measures of internal growth.

Retail Sales

The retail-sales report measures the total receipts of all retail stores in a given country.

This measurement is derived from a diverse sample of retail stores throughout a nation. The

report is particularly useful because it is a timely indicator of broad consumer spending

patterns that is adjusted for seasonal variables. It can be used to predict the performance ofmore important lagging indicators, and to assess the immediate direction of an economy.

Revisions to advanced reports of retail sales can cause significant volatility. The retail sales

report can be compared to the sales activity of a publicly traded company.

Industrial Production

This report shows the change in the production of factories, mines and utilities within a

nation. It also reports their 'capacity utilizations', the degree to which the capacity of each

of these factories is being used. It is ideal for a nation to see an increase of production while

being at its maximum or near maximum capacity utilization. Traders using this indicator

are usually concerned with utility production, which can be extremely volatile since the

utilities industry, and in turn the trading of and demand for energy, is heavily affected by

changes in weather. Significant revisions between reports can be caused by weather

changes, which in turn, can cause volatility in the nation's currency.

Consumer Price Index (CPI)

The CPI is a measure of the change in the prices of consumer goods across over 200

different categories. This report, when compared to a nation's exports, can be used to see if

a country is making or losing money on its products and services. Be careful, however, to

monitor the exports - it is a focus that is popular with many traders because the prices of

exports often change relative to a currency's strength or weakness.



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Some of the other major indicators include the purchasing managers index (PMI),

producer price index (PPI), durable goods report, employment cost index (ECI), and

housing starts. And don't forget the many privately issued reports, the most famous of

which is the Michigan Consumer Confidence Survey. All of these provide a valuable

resource to traders, if used properly.

Balance of payments

This analysis is based on the balance of payments 1) of a given country. The internal

situation determines the volume of imports and the economic situation abroad determines

that of exports. To this is added capital movements which depend on the difference

between interest rates. Overseas trade and capital movements together determine the supplyand demand for currencies on the market and therefore their price (exchange rate).

1) The balance of payments is made up of the value of all economic transactions (trade

balance, services, capital yield) undertaken in one year between a given country and

overseas.

In contrast to fundamental analysis, technical analysis only takes into consideration rate

trends of the past. The predictions are based solely on historic rates. Its aim is to collect

information relating to supply and demand conditions on the foreign exchange markets by

means of an appropriate chart or calculation. Technical analysis is carried out by means of a

graphic representation of indicators in chronological order. It can also be used for exchange

rates, interest and share prices. It provides important indicators for the study of a market.

Past price trends and the extrapolation of certain historic rates enable forecasts to be made.

The presentation of a rate trend starts with the selection of data. On the foreign

exchange market, the rates change several times a minute, so that you are faced with a

considerable flow of data. The selection of data is determined by the objective analysis of

charts. The forex trader must be able to obtain a sound appreciation of rate trends in the

space of one day. In addition, entering rates within a few minutes may take on great

importance for him. On the other hand, it is the responsibility of the head of the financial

department of a company to study the long-term trend; it is generally sufficient for him to

know the prices at the end of the day or even at the end of the week.



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Interest Rates

Can have either a strengthening or weakening effect on a particular currency. On the

one hand, high interest rates attract foreign investment which will strengthen the local

currency. On the other hand, stock market investors often react to interest rate increases by

selling off their holdings in the belief that higher borrowing costs will adversely affect

many companies.

Stock investors may sell off their holdings causing a downturn in the stock market and

the national economy. Determining which of these two effects will predominate depends on

many complex factors, but there is usually a consensus amongst economic observers of

how particular interest rate changes will affect the economy and the price of a currency.

International Trade

Trade balance which shows a deficit (more imports than exports) is usually an

unfavourable indicator. Deficit trade balances means that money is flowing out of the

country to purchase foreign-made goods and this may have a devaluing effect on the

currency. Usually, however, market expectations dictate whether a deficit trade balance is

unfavourable or not. If a county habitually operates with a deficit trade balance this has

already been factored into the price of its currency. Trade deficits will only affect currency

prices when they are more than market expectations.

Durable Goods Orders

Durable Goods Orders are a measure of the new orders placed with domestic

manufacturers for immediate and future delivery of factory hard goods. Monthly percent

changes reflect the rate of change of such orders. Levels of, and changes in, durable goods

order are widely followed as an indicator of factory sector momentum. Durable Goods

Orders are a major indicator of manufacturing sector trends because most industrial

production is done to order.

Often, the indicator is followed but excludes Defence and Transportation orders because

these are generally much more volatile than the rest of the orders and can obscure the more

important underlying trend. Durable Goods Orders are measured in nominal terms and

therefore include the effects of inflation. Therefore the Durable Goods Orders should be



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compared to the trend growth rate in PPI to arrive at the real, inflation-adjusted Durable

Goods Orders. Rising Durable Goods Orders are normally associated with stronger

economic activity and can therefore lead to higher short-term interest rates that are often

supportive to a currency at least in the short term.

Current Account Balance

The current account figures are released quarterly and are a wider measure of the

balance of payments than the trade balance. The figures include elements such as trade in

services and investment income as well as the trade in goods. Also included, are direct

investment inflows. A widening deficit illustrates the trade problems and increases the

dependency on capital inflows to the US. Wider deficits will increase the dollars riskprofile. A high deficit will tend to weaken the dollar. Usually, a sustained annual deficit

above 5.0% of GDP is a serious warning sign for a currency.

Employment Cost Index (ECI)

Payroll employment is a measure of the number of jobs in more than 500 industries in

all states and 255 metropolitan areas. The employment estimates are based on a survey of

larger businesses and counts the number of paid employees working part-time or full-time

in the nation's business and government establishments.

Jobless Claims

Definition: This report indicates how many new claims for jobless benefits were filed

by unemployed workers in the latest week. The figures are prepared on a state-by-statebasis by government agencies and are then aggregated. The number of continuing claims

are also released. There are problems with seasonal adjustments and the 4-week moving

average is normally the more important figure in determining the underlying trend.

Non-farm Payrolls

Each month the Bureau of Labour Statistics estimates the number of people employed

in the US through a sample of companies. As the name suggests, the agricultural sector is



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excluded. Replies from companies are taken and the non-farm payroll figure is the

difference in total compared with the previous month. The report is normally released on

the first Friday of the month.

The report is seasonally adjusted to smooth out to produce a smooth series. There is a

breakdown of employment in different sectors of the economy. Also included, are figures

on weekly hours and earnings. An average or neutral monthly employment increase is in

the region of +200,000 given that the US working population is consistently rising by

around 150,000 a month. Payroll growth of 150,000 is, therefore, needed just to keep pace

with higher number of workers. A negative figure, i.e. lower employment, suggests that the

US economy is in recession. A figure above 400,000 indicates a very strong economy.

Availability: First Friday of the month at 8:30 am EST. Data for prior month.

Frequency: Monthly

PMI Index

The PMI report is equivalent to the ISM reports in the US.

Producer Price Index (PPI)

The Producer Price Index (PPI) measures the average price of a fixed basket of

capital and consumer goods at the wholesale level. There are three primary publication

structures for the PPI: industry, commodity, and stage-of-processing. Its important to

monitor the PPI excluding food and energy prices for its monthly stability. This is referred

as the core PPI and gives a clearer picture of the underlying inflation trend. Changes in

the core PPI are considered a precursor of consumer price inflation. Inflationary pressure is

generated when the core PPI posts larger-than-expected gains.

Availability: Around the 11th of each month at 8:30am EST. Data for month prior.

Frequency: Monthly



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Payroll Employment

Payroll employment is a measure of the number of people being paid as employees by

non-farm business establishments and units of government. Monthly changes in payroll

employment reflect the net number of new jobs created or lost during the month and

changes are widely followed as an important indicator of economic activity. Payroll

employment is one of the primary monthly indicators of aggregate economic activity

because it encompasses every major sector of the economy.

It is also useful to examine trends in job creation in several industry categories because

the aggregate data can mask significant deviations in underlying industry trends. Large

increases in payroll employment are seen as signs of strong economic activity that couldeventually lead to higher interest rates that are supportive of the currency at least in the

short term. If, however, inflationary pressures are seen as building, this may undermine the

longer term confidence in the currency.

Housing Starts and Building Permits

A measure of the number of residential units on which construction is begun each

month. Importance: Its used to predict the changes of gross domestic product. While

residential investments represents just four percent of the level of GDP, due to its volatility,

it frequently represents a much higher portion of changes in GDP over relatively short

periods of time.

Availability: Around the 16th of the month at 8:30 am EST. Data for month prior.

Frequency: Monthly

Forex macroeconomic indicators groups

An economic indicator (or business indicator) is a statistic about the economy.

Economic indicators allow analysis of economic performance and predictions of future

performance.

Economic indicators include various indices, earnings reports, and economic

summaries, such as unemployment, housing starts, Consumer Price Index (a measure for



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inflation), industrial production, bankruptcies, Gross Domestic Product, retail sales, stock

market prices, and money supply changes.

Economic indicators are primarily studied in a branch of macroeconomics called

"business cycles". The leading business cycle dating committee in the United States of

America is the National Bureau of Economic Research.

The Bureau of Labor Statistics is the principal fact-finding agency for the U.S.

government in the field of labor economics and statistics.

Economic Indicators can be leading, lagging, or coincident which indicates the timing

of their changes relative to how the economy as a whole changes.

Leading

Leading economic indicators are indicators which change before the economy

changes. Stock market returns are a leading indicator, as the stock market usually begins to

decline before the economy declines and they improve before the economy begins to pull

out of a recession. Leading economic indicators are the most important type for investors as

they help predict what the economy will be like in the future. Leading indicators are

economic indicators which tend to change before the general economic activity.

Examples:

New business formation

New building permits

Stock prices

Initial state unemployment insurance claims Change in sensitive materials prices

Change in credit outstanding

Vendor performance

Average work week hours

Change in inventories

Contracts and orders for plant and equipment

New orders for consumer goods and materials

Money supply (M2)



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Lagged

A lagged economic indicator is one that does not change direction until a few quarters

after the economy does. The unemployment rate is a lagged economic indicator as

unemployment tends to increase for 2 or 3 quarters after the economy starts to improve.

Lagging indicators trail behind the general economic activity.

Examples:

Labor costs (%)

Ratio of consumer installment credit to personal income

Average prime rate charged by banks

Average duration of employment (weeks)

Ratio of inventories to sales

Commercial and industrial loans outstanding

Gross National Product

Money supply

Federal budget deficit or surplus

Foreign exchange rates

U.S. trade balance (imports and exports)

Producer price indexes for major commodity groups (PPI)

Consumer price index for urban consumers (CPI)

Unemployment rate (civilian labor force)

Personal income per capita (by region and state)

Income by households

Average weekly hours of work

Average weekly earnings

U.S. gold prices

U.S. silver prices

Price at well of crude petroleum

Price of regular gasoline

Coincident



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A coincident economic indicator is one that simply moves at the same time the

economy does. The Gross Domestic Product is a coincident indicator. Coincident indicators

are indicators which occur at the same time as the economic activity.

Examples:

Payroll

Industrial production

Employees on nonagricultural payrolls

Personal income

ManufacEagle Tradersg and trade sales

The time difference between the indicator and the economic activity is called lead time

or lag time.

To understand economic indicators, we must understand the ways in which economic

indicators differ. There are three major attributes each economic indicator has:

Relation to the Business Cycle / Economy

Economic Indicators can have one of three different relationships to the economy:

Procyclic

A procyclic (or procyclical) economic indicator is one that moves in the same direction

as the economy. So if the economy is doing well, this number is usually increasing,

whereas if we're in a recession this indicator is decreasing. The Gross Domestic Product

(GDP) is an example of a procyclic economic indicator.

Countercyclic

A countercyclic (or countercyclical) economic indicator is one that moves in the

opposite direction as the economy. The unemployment rate gets larger as the economy gets

worse so it is a countercyclic economic indicator.

Acyclic



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An acyclic economic indicator is one that has no relation to the health of the economy

and is generally of little use. The number of home runs the Montreal Expos hit in a year

generally has no relationship to the health of the economy, so we could say it is an acyclic

economic indicator.

Many different groups collect and publish economic indicators, but the most important

American collection of economic indicators is published by The United States Congress.

Their Economic Indicators are published monthly and are available for download in

PDF and TEXT formats. The indicators fall into seven broad categories:

Total Output, Income, and Spending

o Gross Domestic Product (GDP) [quarterly]

o Real GDP [quarterly]

o Implicit Price Deflator for GDP [quarterly]

o Business Output [quarterly]

o National Income [quarterly]

o Consumption Expenditure [quarterly]

o Corporate Profits[quarterly]

o Real Gross Private Domestic Investment[quarterly]

Employment, Unemployment, and Wages

o The Unemployment Rate [monthly]

o Level of Civilian Employment[monthly]

o

Average Weekly Hours, Hourly Earnings, and Weekly Earnings[monthly]o Labor Productivity [quarterly]

Production and Business Activity

o Industrial Production and Capacity Utilization [monthly]

o New Construction [monthly]

o New Private Housing and Vacancy Rates [monthly]

o Business Sales and Inventories [monthly]

o

Manufacturers' Shipments, Inventories, and Orders [monthly] Prices



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o Producer Prices [monthly]

o Consumer Prices [monthly]

o Prices Received And Paid By Farmers [monthly]

Money, Credit, and Security Marketso Money Stock (M1, M2, and M3) [monthly]

o Bank Credit at All Commercial Banks [monthly]

o Consumer Credit [monthly]

o Interest Rates and Bond Yields [weekly and monthly]

o Stock Prices and Yields [weekly and monthly]

Federal Finance

o

Federal Receipts (Revenue)[yearly]o Federal Outlays (Expenses) [yearly]

o Federal Debt [yearly]

International Statistics

o Industrial Production and Consumer Prices of Major Industrial Countries

o U.S. International Trade In Goods and Services

o U.S. International Transactions

Each of the statistics in these categories helps create a picture of the performance of the

economy and how the economy is likely to do in the future.

Total Output, Income, and Spending

These tend to be the most broad measures of economic performance and include such

statistics as (see above):

The Gross Domestic Product is used to measure economic activity and thus is both

procyclical and a coincident economic indicator. The Implicit Price Deflator is a measure of

inflation. Inflation is procyclical as it tends to rise during booms and falls during periods of

economic weakness. Measures of inflation are also coincident indicators. Consumption and

consumer spending are also procyclical and coincident.

Employment, Unemployment, and Wages



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These statistics cover how strong the labor market is and they include the following (see

above):

The unemployment rate is a lagged, countercyclical statistic. The level of civilian

employment measures how many people are working so it is procyclic. Unlike the

unemployment rate it is a coincident economic indicator.

Production and Business Activity

These statistics cover how much businesses are producing and the level of new construction

in the economy (see above):

Changes in business inventories is an important leading economic indicator as they

indicate changes in consumer demand. New construction including new home construction

is another procyclical leading indicator which is watched closely by investors. A slowdown

in the housing market during a boom often indicates that a recession is coming, whereas a

rise in the new housing market during a recession usually means that there are better times

ahead.

Prices

This category includes both the prices consumers pay as well as the prices businesses

pay for raw materials and include (see above):

These measures are all measures of changes in the price level and thus measure

inflation. Inflation is procyclical and a coincident economic indicator.

Money, Credit, and Security Markets

These statistics measure the amount of money in the economy as well as interest rates

and include (see above):

Nominal interest rates are influenced by inflation, so like inflation they tend to be

procyclical and a coincident economic indicator. Stock market returns are also procyclical

but they are a leading indicator of economic performance.

Federal Finance



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These are measures of government spending and government deficits and debts (see

above):

Governments generally try to stimulate the economy during recessions and to do so they

increase spending without raising taxes. This causes both government spending and

government debt to rise during a recession, so they are countercyclical economic indicators.

They tend to be coincident to the business cycle.

International Trade

These are measure of how much the country is exporting and how much they are

importing (see above):

When times are good people tend to spend more money on both domestic and imported

goods. The level of exports tends not to change much during the business cycle. So the

balance of trade (or net exports) is countercyclical as imports outweigh exports during

boom periods. Measures of international trade tend to be coincident economic indicators.

While we cannot predict the future perfectly, economic indicators help us understand where

we are and where we are going. In the upcoming weeks I will be looking at individual

economic indicators to show how they interact with the economy and why they move in the

direction they do.

International Finance Corporation (IFC)

International finance is the examination of institutions, practices, and analysis of cash

flows that move from one country to another. There are several prominent distinctions

between international finance and its purely domestic counterpart, but the most importantone is exchange rate risk. Exchange rate risk refers to the uncertainty injected into any

international financial decision that results from changes in the price of one country's

currency per unit of another country's currency. Examples of other distinctions include the

environment for direct foreign investment, new risks resulting from changes in the political

environment, and differential taxation of assets and income.



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The level of international trade is a relevant indicator of economic growth worldwide.

Foreign exchange markets facilitate this trade by providing a resource where currencies

from all nations can be bought and sold.

In addition to international trade, there is a second motivation for international financial

activity. Many firms make long-term investments in productive assets in foreign countries.

When a firm decides to build a factory in a foreign country, it has likely considered a

variety of issues. For example: Where should the funds needed to build the factory be

raised? What kinds of tax agreements exist between the home and foreign countries that

may influence the after-tax profitability of the new venture? and many others questions.

The International Finance Corporation (IFC) is the member of the World BankGroup that promotes the growth of the private sector in less developed member countries.

The IFC's principal activity is helping finance individual private enterprise projects that

contribute to the economic development of the country or region where the project is

located. The IFC is the World Bank Group's investment bank for developing countries. It

lends directly to private companies and makes equity investments in them, without

guarantees from governments, and attracts other sources of funds for private-sector

projects. IFC also provides advisory services and technical assistance to governments and

businesses.

In other words, International Finance Corporation (IFC) is the lender known 'round the

world. IFC promotes economic development worldwide by providing loans and equity

financing for private-sector investment. The IFC typically focuses on small and midsized

businesses, financing projects in all types of industries, including manufacturing,

infrastructure, tourism, health, education, and financial services. Established in 1956, the

IFC is part of the World Bank group. Although it often acts in concert with the World Bank

and shares its president, the IFC is legally and financially autonomous. It is owned by

nearly 180 member countries.

The IFC generally operates independently as it is legally and financially autonomous with

its own Articles of Agreement, share capital, management and staff. The IFC has 2,400

staff; 178 members; and lends in 80 countries, with 40 per cent of its investments in the

financial sector. The IFC's worldwide committed portfolio as of financial year 2005 was

$19.3 billion for its own account and $5.3 billion held for participants in loan syndications.



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Money supply definition

Money supply is the total amount of money in an economy at a given time.

The money supply is considered an important instrument for controlling inflation by

those economists who say that growth in money supply will only lead to inflation if money

demand is stable. In order to control the money supply, regulators have to decide which

particular measure of the money supply to target. The broader the targeted measure, the

more difficult it will be to control that particular target. However, targeting an unsuitable

narrow money supply measure may lead to a situation where the total money supply in the

country is not adequately controlled.

The money supply includes:

Notes and coins

Money in a current account in the bank

Money in a savings account

Money in a building society

Money functions

It can be used as a means of exchange or to buy resources

It is a measure of value e.g. 1 mars bar = 40p

It is a store of value e.g. it keeps its value

In order to monitor the money supply, the Federal Reserve System, the nation's central

bank and controller of the monetary policy of the country, uses four measures:

M1 is the base measurement of the money supply and includes currency, coins, demand

deposits, traveler's checks from non-bank issuers, and other checkable deposits.

M2 is equal to M1 plus overnight repurchase agreements issued by commercial banks,

overnight Eurodollars, money market mutual funds, money market deposit accounts,

savings accounts, time deposits less than $100,000.

M3 is M2 plus institutionally held money market funds, term repurchase agreements,term Eurodollars, and large time deposits.



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L, the fourth measure, is equal to M3 plus Treasury bills, commercial papers, bankers,

acceptances, and very liquid assets such as savings bonds.

In the UK the main measures of money supply are:

M0: Sterling notes and coins in circulation outside the Bank of England including those

held in tills of banks and building societies plus banks' operational deposits with the Bank

of England. Also known as narrow money.

M4: M0 plus all sterling deposits at UK monetary financial institutions held in the M4

private sector. Also known as broad money.

Money supply is important because money is used in virtually all economic

transactions, it has a powerful effect on economic activity. An increase in the supply of

money puts more money in the hands of consumers, making them feel wealthier, thus

stimulating increased spending.

Business firms respond to increased sales by ordering more raw materials and

increasing production. The spread of business activity increases the demand for labor and

raises the demand for capital goods. In a buoyant economy, stock market prices rise and

firms issue equity and debt. If the money supply continues to expand, prices begin to rise,

especially if output growth reaches capacity limits. As the public begins to expect inflation,

lenders insist on higher interest rates to offset an expected decline in purchasing power over

the life of their loans.

Opposite effects occur when the supply of money falls, or when its rate of growth

declines. Economic activity declines and either disinflation (reduced inflation) or deflation

(falling prices) results.

Federal Reserve policy is the most important determinant of the money supply. The

Federal Reserve affects the money supply by affecting its most important component, bank

deposits.

The Federal Reserve requires commercial banks and other financial institutions to hold

as reserves a fraction of the deposits they accept. Banks hold these reserves either as cash in

their vaults or as deposits at Federal Reserve banks. In turn, the Federal Reserve controls



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reserves by lending money to banks and changing the "Federal Reserve discount rate" on

these loans and by "open-market operations."

The Federal Reserve uses open-market operations to either increase or decrease reserves.

To increase reserves, the Federal Reserve buys U.S. Treasury securities by writing a check

drawn on itself. The seller of the Treasury security deposits the check in a bank, increasing

the seller's deposit. The bank, in turn, deposits the Federal Reserve check at its district

Federal Reserve bank, thus increasing its reserves. The opposite sequence occurs when the

Federal Reserve sells Treasury securities: the purchaser's deposits fall and, in turn, the

bank's reserves fall.

Who Trades in FOREX?

The FOREX is made up of about 5,000 trading institutions such as international

banks, central government banks (such as the US Federal Reserve), and commercial

companies and brokers for all types of foreign currency. There is no centralized location of

FOREX; major trading centers are located in New York, Tokyo, London, Hong Kong,

Singapore, Paris, and Frankfurt. All trading is done by telephone or Internet. Businesses use

the market to buy and sell their products in other countries, but most of the activity on the

FOREX is from currency traders who use it to generate profits from small movements in

the market.

Even though there are many huge players in FOREX, it is accessible to the small

investor also. Previously, there was a minimum transaction size and traders were required

to meet strict financial requirements.

With the advent of Internet trading, regulations have been changed to allow large

interbank units to be broken down into smaller lots. Each lot is worth about $100,000 and is

accessible to the individual investor through 'leverage' loans extended for trading.

Typically, lots can be controlled with a leverage of 100:1 meaning that US$1,000 will

allow you to control a $100,000 currency exchange.

The Working of Forex

Currencies are always traded in pairs: the US dollar against the Japanese yen, or the

English pound against the euro. Every transaction involves selling one currency and buying



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another, so if an investor believes the euro will gain against the dollar, he will sell dollars

and buy euros.

The potential for profit exists because there is always movement between

currencies. Even small changes can result in substantial profits because of the large amount

of money involved in each transaction. At the same time, it can be a relatively safe market

for the individual investor. There are safeguards built in to protect both the broker and the

investor, and a number of software tools exist to minimize loss.

You will often hear the term INTERBANK discussed in ForX terminology. This

originally, as the name implies was simply banks and large institutions exchanging

information about the current rate at which their clients or themselves were prepared to buyor sell a currency.

INTER meaning between and Bank meaning deposit taking institutions. The market

has moved on to such a degree now that the term interbank now means anybody who is

prepared to buy or sell a currency.

It could be two individuals or your local travel agent offering to exchange Euros for

US Dollars. You will however find that most of the brokers and banks use centralized feeds

to insure reliability of quote.

The quotes for Bid (buy) and Offer (sell) will all be from reliable sources. These

quotes are normally made up of the top 300 or so large institutions. This insures that if they

place an order on your behalf that the institutions they have placed the order with is capable

of fulfilling the order.

Currency 1989 1992 1995 1998 2001

US Dollar 90 82.0 83.3 87.3 90.4

Euro 37.6

Japanese Yen 27 23.4 24.1 20.2 22.7

Pound Sterling 15 13.6 9.4 11.0 13.2

Swiss Franc 10 8.4 7.3 7.1 6.1

As you can see from the above table over 90% of all currencies are traded against

the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen

(JPY), Pound Sterling (GBP) and Swiss Franc (CHF).



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As currencies are traded in pairs and exchanged one for the other when traded, the

rate at which they are exchanged is called the exchange rate. These four currencies traded

against the US Dollar make up the majority of the market and are called major currencies or

the majors.

As you can see from the above table over 90% of all currencies are traded against

the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen

(JPY), Pound Sterling (GBP) and Swiss Franc (CHF).

As currencies are traded in pairs and exchanged one for the other when traded, the rate at

which they are exchanged is called the exchange rate. These four currencies traded against

the US Dollar make up the majority of the market and are called major currencies or themajors.

The seven categories of forex currencies:

Top currency

This rarified rank is reserved only for the most esteemed of international currencies -

those whose use dominates for most if not all types of cross-border purposes and whose

popularity is more or less universal, not limited to any particular geographic region. During

the era of territorial money, just two currencies could truly be said to have qualified for this

exalted status: Britain's pound sterling before World War I and the U.S. dollar after World

War II.

Patrician currency

Just below the top rank we find currencies whose use for various cross-border purposes,while substantial, is something less than dominant and/or whose popularity, while

widespread, is something less than universal. Obviously included in this category today

would be the euro, as natural successor to the DM; most observers would still also include

the yen, despite some recent loss of popularity. Both are patricians among the world's

currencies.

Elite currency



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In this category belong currencies of sufficient attractiveness to qualify for some degree

of international use but of insufficient weight to carry much direct influence beyond their

own national frontiers. Here we find the more peripheral of the international currencies, a

list that today would include inter alia Britain's pound (no longer a Top Currency or even

Patrician Currency), the Swiss franc, and the Australian dollar.

Plebian currency

One step further down from the elite category are Plebian Currencies - more modest

monies of very limited international use. Here we find the currencies of the smaller

industrial states, such as Norway or Sweden, along with some middle-income emerging-

market economies (e.g., Israel, South Korea, and Taiwan) and the wealthier oil-exporters(e.g., Kuwait, Saudi Arabia, and the United Arab Emirates).

Internally, Plebian Currencies retain a more or less exclusive claim to all the traditional

functions of money, but externally they carry little weight (like the plebs, or common folk,

of ancient Rome). They tend to attract little cross-border use except perhaps for a certain

amount of trade invoicing.

Permeated currency

Included in this category are monies whose competitiveness is effectively compromised

even at home, through currency substitution. Although nominal monetary sovereignty

continues to reside with the issuing government, foreign currency supersedes the domestic

alternative as a store of value, accentuating the local money's degree of inferiority.

Permeated Currencies confront what amounts to a competitive invasion from abroad.

Judging from available evid

MCP Forex - Chintan (MBA05002028)

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