Foreign Exchange Basics

Lesson 2

Workings of the Foreign Exchange Market

Objectives:
To show the workings of the Foreign Exchange
Market
-Market Participants
-Currencies Traded and How
-Where and when does trading take place
-What moves the FX markets and why

Lesson 2-Lesson Plan

What currencies are traded?
Who are the Forex Players?
When do they trade?
Where do they trade?
Why do they trade?
How do they trade?
2

Review
What is the FOREX market?
a global market for trading of
currencies at a fixed exchange rate
'Forex' for short - where you can
potentially profit from the
movement of these currencies.
other terms FOREX, FX, currency
market

What is an Exchange Rate?

The currency exchange rate is the rate at which
one currency can be exchanged for another.
Eg
1 Singapore Dollar = 2.60 Malaysian Ringgit
1 Malaysian Ringgit = 0.38 Singapore Dollar

 always quoted in pairs like the EUR/USD (the

Euro and the US Dollar).
fluctuate based on economic factors like
inflation, industrial production and geopolitical
events. These factors will influence whether you
buy or sell a currency pair.

What Currencies are

Traded?

WHAT IS TRADED
Symbol

Country

Currency

% daily share

USD

United States

Dollar

87%

EUR

Euro zone
members

Euro

33.4%

JPY

Japan

Yen

23%

GBP

Great Britain

Pound

11.8%

AUD

Australia

Dollar

8.6%

CHF

Switzerland

Franc

5.2%

CAD

Canada

Dollar

4.6%

NZD

New Zealand

Dollar

2.0%

SGD[#14]

Singapore

Dollar

1.4%

Trading Volume of FX & Stocks

BIS-Triennial Central Bank Survey 2013

https://www.bis.org/publ/rpfx13fx.pdf

Major Pairs
Currencies traded in
pairs
MAJOR CROSSES
USD/JPY
USD/CHF
USD/SGD
EUR/USD
AUD/USD
GPB/USD

Crosses
MINOR CROSSESAny currency pair that does not include US$
EG
CHF/JPY
EUR/GBP
EURAUD
EUR/CHF
AUD/SGD
AUD/JPY

About 34% in market share

10

Pairs

Transactions in FX always involve 2 currencies

Buy one currency, sell the other currency
At a fixed exchanged rate
Eg Buying USD/SGD ,
Buy US Dollar and sell Singapore Dollar

11

Understanding Forex Quotes

http://www.youtube.com/watch?v=8VFapv2-94Y

12

Exchange Rates

1Apr2014

Symbo
l

USD

AUD

KRW

SGD

USD

1.0832

1072.6

1.2654

AUD

0.9235

990.91

1.1683

KRW
1000

0.9319

1.01

1.179

SGD

0.798

0.856

848.189

1
13

WHAT IS TRADED
Symbol

Country

Currency

% daily share

USD

United States

Dollar

87%

EUR

Euro zone
members

Euro

33.4%

JPY

Japan

Yen

23%

GBP

Great Britain

Pound

11.8%

AUD

Australia

Dollar

8.6%

CHF

Switzerland

Franc

5.2%

CAD

Canada

Dollar

4.6%

NZD

New Zealand

Dollar

2.0%

SGD[#14]

Singapore

Dollar

1.4%

14

Market Share of Currency Pairs

15

Trading Volume by Country

16

*Bank of International Settlements(BIS) 2013

Who are the Major FX

players?

17

18

Major Banks
Inter-Bank(Professional / Wholesale)
All Banks (Investment, Merchant, Commercial,
Central) trade with one another
Activity of these banks determines supply and
demand
Sets the exchange rates of the currencies
Special rates
Eg DBS, UOB, MAS
19

1) Central Banks

Major Government Body eg MAS

Does not specifically announce desired level of currency
Take action if currency moves out of preferred range
Able to move exchange rates through trading activities
due to their size
How?
Open market ie inter- bank market buying and selling
Rumours
Jaw-boning eg Bank of Japan, 1985 Plaza Accord

http://www.swfinstitute.org/swfs/temasek-holdings/
20

Central Bank Chairmans

USA- Federal Reserve Bank (FED)
Janet Yellen
European Union- European Central Bank(ECB)
Mario Draghi
Singapore Monetary Authority of Singapore
Tharman Shanmugaratnam

21

2) Investment, Merchant, Commercial

Banks

Investment Banks Customers Government,

corporations, individuals
Creation of capital for their customers
Raise capital underwriting , mergers and
acquisitions, trading currencies for the bank etc
Give advice to clients regarding buying investment
services eg stock IPO, private share offerings
Rarely provide financing
Trade for their own account
eg JP Morgan, DBS, Goldman Sachs
Temasek-ING deal

22

Merchant Bank
Medium to Small scale companies
Provide financing through share ownership instead
of loans
Advisory services for mergers and acquisitions
Provide advice to business planning to expand for
bigger market share
Eg Citibank, Coutts, ANZ, Islamic Bank of Asia, JP
Morgan, Mitsusbishi UFJ
23

Commercial Banks

Accept deposits
Internet banking
Letter of credit
Safe deposit boxes
Sales of insurance or unit trust
Provide loans

Eg DBS , UOB, POSB

24

If You had $10,000 , which method of investment will

you invest in your money in ? Why?
Method of Investment
1. Deposits

1.

Safe Deposit Box

1.

Insurance

1.

Unit Trust

Income
Earns savings rate of 0.05%
per annum
Earning-0%
Will receive $20,000
At the end of 20years

Or
$40,000 at 55 years
Projected payment of 3.5 %
per year

Expense
0

deposit box rental- $300 per

annum
Yearly payment of $1000 a
year

1% sales fee-one time

1% admin fee per year

No capital guaranteed
1.

Personal Trading in forex

No guarantee

1.

Gold coins worth $8000

No Income
Capital Appreciation

Account deposit of
$5,000
Trading commission of
$10 per trade
0

25

26

Retail Market Makers and ECN

Stock Market Trading Firms with FOREX sections
Enables individuals to trade currencies
Trade through broker or online
Represents 5% of whole FX market in daily trading
turnover
- about $118 Billion *
Eg Kim Eng, Lim and Tan, Philip Stocks

* Forexmagnates.com/retail-Forex-volumes-survey-september 2010

27

Hedge Funds and MNC

Hedge Funds
Money raised by wealthy individuals, pension funds, and
corporations and managed by a fund manager
Buy and sell currency to make profit
Multinational Corporations
Companies that operate in many countries
Hedge currency risk- accounts receivables in foreign
countries
Eg 60 days accounts receivable hedge through currency
Profits translation- transferring of profits from one area of
business to another area
Not speculators

28

Retail Traders
Speculators
Individuals

29

Lesson 2-Lesson Plan

What currencies are traded?
Who are the Forex Players?
When do they trade?
Where do they trade?
Why do they trade?
How do they trade?
30

Trading Hours

31

24 HOUR
6AM

10

11

12

1PM

SYDNEY
TOKYO
LONDON
6PM 7

10

11

12AM

LONDON
32

New York

24 HOUR
6AM

10

11

12

1PM

SYDNEY
TOKYO
LONDON
6PM 7

10

11

12AM

LONDON
33

New York

Where do they trade?

34

STOCK MARKET
SGX
SELLERS

SINGAPORE
EXCHANGE

BUYERS

CENTRALIZED
MARKET
35

FOREX MARKET
DECENTRALIZED MARKET [ECN] 24 HOUR

BANK
1

PHP SUPER
BANK

BANK
2

ECN

$
SHELL

SG-SUPER
BANK 2

SG-SUPER
BANK 1

IDR SUPER
BANK

RETATIL

CHANGER

SMALL
BANKS

ECN

ECN

RETAIL

TOM

KIM
ENG

MARY

36

Why Trade Forex

Advantages

Forex

Stocks

24 Hour Trading
No middlemen
No market
manipulation
Liquidity
Minimal commissions
Leverage

Yes
Yes
Yes

No
No
No

Yes
Yes
Yes

No
N
Yes/No

37

 Why Trade Currencies?

Forex is the world's largest market, with about 5 trillion US
dollars in daily volume and 24-hour market action. Some
key differences between Forex and Equities markets are:
Many firms don't charge commissions you pay only the
bid/ask spreads.
There's 24 hour trading you dictate when to trade and
how to trade.
You can trade on leverage, but this can magnify
potential gains and losses.
You can focus on picking from a few currencies rather
than from 5000 stocks.
Forex is accessible you dont need a lot of money to
get started.

38

As technologies have improved, the

Forex market has become more
accessible resulting in an
unprecedented growth in online
trading. One of the great things
about trading currencies now is that
you no longer have to be a big
money manager to trade this market;
traders and investors like you and I
can trade this market.

39

Leverage
Youtube
What is FX?
http://www.youtube.com/watch?v=h68UkEyC8Ww

What is Leverage
http://www.youtube.com/watch?v=3b0rhQWdmyg

40

Practical
How

41

 FX trading platform
Elements
Prices
Time
Bar Charts
USD/JPY, USD/SGD. AUD/USD
Yahoo.Finance
42

Yahoo.sg
1. Finance (left side)
2. Market Datat > Currencies (Right side)
3. Click USD/SGD
4. Click on chart

43

How to read a bar chart

http://www.youtube.com/watch?v=5ZMc7RMCvKM

44

Next Lesson
What moves the FOREX Market?
-Market forces eg Demand and Supply, Interest
Rate, Government Policies
-Political Turmoil
Practical
-How to read charts
-calculate currency pips
-charts of different trading sessions from Japan,
London and USA
45