Unique Source of Forex

Covered Interest Arbitrage

i = one-year interest rate on (Eurocurrency ) deposits denominated i* = one-year interest rate on (Eurocurrency) deposits denominated in the foreign currencye = spot price of the home currency in terms of the foreign currencyf = one-year forward price of the home currency in terms of the foreign curre[...]

by Stock Specialist ~ Wednesday, November 18, 2009 0 comments

Historical Background

The Eurodollar market arose in the 1950s. The Soviet Union had large amounts of dollars from their oil sales. They did not want to hold them in the United States because of fears that the US would freeze them. They found European banks that would accept their dollars as deposits. It is said that one was a French bank with the cable[...]

by Stock Specialist ~ Tuesday, November 17, 2009 0 comments

Eurocurrency Markets

Eurocurrency refers to deposits in a commercial bank which are denominated in a currency other than the currency issued by the country the bank is resident in. For example, a bank deposit denominated in dollars in a bank located in London is a Eurodollar deposit. It does not matter whether the bank is Barclays or an American [...]

by Stock Specialist ~ Monday, November 16, 2009 0 comments

The Timing of the Contract

At time zero: All of the details of the contract were worked outAt time zero plus two months and two days: The exchange is carried o[...]

by Stock Specialist ~ Sunday, November 15, 2009 0 comments

Example of a Forward Contract

Frank Dollar, the foreign exchange manager at the Big American Automobile Company was informed that the BAAC is importing parts from Japan at a cost of 600 million yen, to be paid upon delivery in two months time. To protect the BAAC from exchange rate fluctuations, Frank Dollar arranged to purchase 600 million yen forward from[...]

by Stock Specialist ~ Saturday, November 14, 2009 0 comments

Types of Contracts

Spot contracts -- a price and quantity are agreed upon. The two currencies are typically exchanged two business days later.Forward contracts -- a fixed price contract made today for delivery of a certain amount of a currency at a specified future date. The specified date is the settlement date and the agreed price is the forward[...]

by Stock Specialist ~ Friday, November 13, 2009 0 comments

We can find cross rates with spreads

In European form: The Swiss franc is 1.5020 – 1.5088 and the Swedish krona is 10.0025 – 10.0075. Find the kronar/franc cross rates.The dealer will buy 1 Swiss franc for 1/1.5088 dollars. He will buy 1/1.5020 dollars for 10.0025/1.5088 = 6.6294 kronar. So, he will buy 1 Swiss franc for 6.6294 kronar.The dealer will sell one Swiss[...]

by Stock Specialist ~ Thursday, November 12, 2009 0 comments

The Spread

Foreign exchange dealers quote two rates: the rate at which they will buy the currency and the rate at which they will sell the currency.Example: A newspaper may report that the Swiss franc had a central rate of 1.5024 francs /$ and a bid/offer spread of 020 – 028. This means that the two exchange rates were 1.5020 and 1.5028. The[...]

by Stock Specialist ~ Wednesday, November 11, 2009 0 comments

Learn how to compute cross rates

Suppose you are given exchange rates for currencies A and B in terms of currency C and that you are told to find the price of currency B in terms of currency A (or equivalently, units of currency A / currency B).First, find the exchange rates for A and B in the form: units of A / units of C and units of B / units of C.Then: units[...]

by Stock Specialist ~ Tuesday, November 10, 2009 1 comments

Another example:

The Bhutan ngultrum is trading at 39.3020 Ngultrums per dollar.The Mauritania ouguiya is trading at 251.620.The cross rate is ngultrums / ouguiya = (ngultrums /$) / (ouguiya /$) = 39.3020/ 251.620 = .1561[...]

by Stock Specialist ~ Sunday, November 8, 2009 0 comments

To find what the cross rate must be:

Suppose the pound is quoted at 2.0000 dollars per pound.Suppose that the euro is quoted at 1.3000 euros per dollarThen, euros / pound = (euros /dollar) / (pounds/dollar) = 1.3000/.5000 = 2.6[...]

by Stock Specialist ~ Saturday, November 7, 2009 0 comments

Example of Triangular Arbitrage

Suppose the pound is quoted at 2.0000 dollars per pound.Suppose that the euro is quoted at 1.3000 euros per dollarSuppose that the pound is quoted at 2.5000 euros per poundTrade 1 dollar for 1.3 euros. Trade 1.3 euros for 1.3/2.5 = .52 pounds. Trade for more than 1 dollar and make a prof[...]

by Stock Specialist ~ Friday, November 6, 2009 0 comments

Triangular Arbitrage

Opportunities for triangular arbitrage arise when direct quotations (exchange rates in terms of the dollar - this is another sense of this word) and cross-rate quotations (two other currencies against each other) allow for profit making. This entails using one currency to buy a second, a second currency to buy a third, and a third[...]

by Stock Specialist ~ Thursday, November 5, 2009 0 comments

Def. An exchange rate is the price of one currency in terms of another.

A complication is that there are two ways to express any exchange rate.Direct quote: the number of units of home currency necessary to buy one unit of foreign currency - the home currency price of foreign currencyIndirect quote: the number of units of foreign currency necessary to buy one unit of home currency - the foreign currency[...]

by Stock Specialist ~ Wednesday, November 4, 2009 0 comments

The dollar is the most important currency

Many central banks hold the bulk of their reserves in the form of dollars; many central banks conduct much of their intervention in dollars; many international transactions are done using dollars; many contracts are invoiced in dollars.The dollar is the major “vehicle” currency: if a dealer wants to trade Swiss francs for Mexican[...]

by Stock Specialist ~ Tuesday, November 3, 2009 0 comments

Central Banks

Central Banks intervene in the foreign exchange market to influence the value of their currency.Many central banks serve as the primary banker for their government and for other public enterprises.Some central banks (for example, the Federal Reserve Bank of New York) act as agent for other central banks.Some central banks actively[...]

by Stock Specialist ~ Monday, November 2, 2009 0 comments

Market Makers

A market maker for a currency is a dealer who regularly quotes the rates at which he is willing to buy and to sell that currency.During normal hours, he creates a two-sided market for its customers. He is willing (within reason) to both buy and sell at the rates he quotes.He makes a profit from the spread; that is the difference[...]

by Stock Specialist ~ Sunday, November 1, 2009 0 comments

Foreign Exchange Dealers

The market is made up of 2000 foreign exchange dealers. These are mostly commercial banks and investment banks. They trade with customers and with each other.They are linked through telephones, computers and other electronic means.There are about 100 – 200 market-making banks that account for the bulk of the trading.The dealers[...]

by Stock Specialist ~ Saturday, October 31, 2009 0 comments

London is the largest market

London’s size as a financial centre is partially due to its historical importance and it relative lack of regulation.London benefits from its proximity to major Eurocurrency markets.London benefits from its time zone: London’s morning overlaps with late trading in the Far East and London’s afternoon overlaps with New York.Most of[...]

by Stock Specialist ~ Friday, October 30, 2009 0 comments

It is a 24-hour market

The business day opens in Wellington, New Zealand, followed by Sydney, Tokyo, Hong Kong and Singapore.A few hours later, trading begins in Bahrain.Late in the Tokyo day, markets open in Europe.In the early afternoon in Europe, markets open in the United States.In the mid to late afternoon in New York, markets open in the Asia-Pacific[...]

by Stock Specialist ~ Thursday, October 29, 2009 0 comments

Reasons for the Changes

The fall in 2001 was due to: the introduction of the euro, consolidation in the banking sector, mergers in the corporate sector.The recent rise is more difficult to explain in terms of fundamenta[...]

by Stock Specialist ~ Wednesday, October 28, 2009 0 comments

From a 1998 publication by the NY Fed:

Individual trades of $200 – 500 million are not uncommon.Quoted prices change as often as 20 times a minute.It is estimated that the world’s most active exchange rates can change 18,000 times a d[...]

by Stock Specialist ~ Tuesday, October 27, 2009 0 comments

The Foreign Exchange Market

The foreign exchange market is by far the largest and most liquid financial market in the world.It is many times larger than the next largest market: the US government securities market.Despite its size and importance of the foreign exchange market, it is largely unregulated. No international organization supervises it; no international[...]

by Stock Specialist ~ Monday, October 26, 2009 0 comments

Theory #4: Expectations theory of forward rates

Main idea:The forward rate equals expected spot exchange rateWith risk, the forward rate may not equal the spot rateIf Group 1 predominates, then E(s€/$) < f€/$ If Group 2 predominates, then E(s€/$) > f[...]

by Stock Specialist ~ Sunday, October 25, 2009 0 comments

Example of capital market equilibrium

Fisher condition in U.S. and France: (1 + r$(Real)) = (1 + r$) / (1 + i$) (1 + r€(Real)) = (1 + r€) / (1 + i€)If real rates are equal, then the Fisher condition implies: The difference in interest rates is equal to the expected difference in inflation ra[...]

by Stock Specialist ~ Saturday, October 24, 2009 0 comments

Theory #3: The Fisher condition

Main idea: Market forces tend to allocate resources to their most productive uses So all countries should have equal real rates of interestRelation between real and nominal interest rates: (1 + rNominal) = (1 + rReal)(1 + i ) (1 + rReal) = (1 + rNominal) / (1 + i[...]

by Stock Specialist ~ Friday, October 23, 2009 0 comments

Evidence on interest rate parity

Does interest rate parity hold?Which way will funds flow?How will this affect exchange rates?Evidence on interest rate parityGenerally, it holdsWhy would interest rate parity hold better than PPP?Lower transactions costs in moving currencies than real goodsFinancial markets are more efficient than real goods mark[...]

by Stock Specialist ~ Thursday, October 22, 2009 0 comments

Interest rate parity

Main idea: Either strategy gets you the 100,000€ when you need it.This implies that the difference in interest rates must reflect the difference between forward and spot exchange ra[...]

by Stock Specialist ~ Wednesday, October 21, 2009 0 comments

Example of a forward market transaction

Suppose you will need 100,000€ in one yearThrough a forward contract, you can commit to lock in the exchange ratef$/€ : forward rate of exchangeCurrently, f$/€ = 1.19854 Þ 1 € buys $1.19854 Þ 1 $ buys 0.83435 €At this forward rate, you need to provide $119,854 in 12 mont[...]

by Stock Specialist ~ Tuesday, October 20, 2009 0 comments

Theory #2: Interest rate parity

Main idea: There is no fundamental advantage to borrowing or lending in one currency over anotherThis establishes a relation between interest rates, spot exchange rates, and forward exchange ratesForward market: Transaction occurs at some point in futureBUY: Agree to purchase the underlying currency at a predetermined exchange[...]

by Stock Specialist ~ Monday, October 19, 2009 0 comments

What is the evidence?

The Law of One Price frequently does not hold.Absolute PPP does not hold, at least in the short run.See The Economist’s Big McCurrenciesThe data largely are consistent with Relative PPP, at least over longer perio[...]

by Stock Specialist ~ Sunday, October 18, 2009 0 comments

Relative PPP

Absolute PPP:For PPP to hold in one year: P€ (1 + i€) = E(s€/$) · P$ (1 + i$), or: P€ (1 + i€) = s€/$ [E(s€/$)/s€/$ )] · P$ (1 + i$)Using absolute PPP to cancel terms and rearranging:Relative PPP:Relative PPPMain idea – The difference between (expected) inflation rates equals the (expected) rate of change in exchange rat[...]

by Stock Specialist ~ Saturday, October 17, 2009 0 comments

Absolute PPP

If the price of the basket in the U.S. rises relative to the price in Euros, the U.S. dollar depreciates:May 21 : s€/$ = P€ / PUS = 1235.75 € / $1482.07 = 0.8338 €/$May 24: s€/$ = 1235.75 € / $1485.01 = 0.83215 [...]

by Stock Specialist ~ Friday, October 16, 2009 0 comments

Absolute PPP

Extension of law of one price to a basket of goodsAbsolute PPP examines price levelsApply the law of one price to a basket of goods with price P€ and PUS (use upper-case P for the price of the basket): where P€ = Si (wFR,i · p€,i ) PUS = Si (wUS,i · pUS,i[...]

by Stock Specialist ~ Thursday, October 15, 2009 0 comments

The Law of One Price

Example: Price of wheat in France per bushel (p€) = 3.45 € Price of wheat in U.S. per bushel (p$) = $4.15S€/$ = 0.83215 (s$/€ = 1.2017)Dollar equivalent priceof wheat in France = s$/€ x p€ = 1.2017 $/€ x 3.45 € = $4.15Þ When law of one price does not hold, supply and demand forces help restore the equal[...]

by Stock Specialist ~ Wednesday, October 14, 2009 0 comments

Theory #1: Purchasing power parity

The Law of One PriceA commodity will have the same price in terms of common currency in every countryIn the absence of frictions (e.g. shipping costs, tariffs,..)ExamplePrice of wheat in France (per bushel): P€Price of wheat in U.S. (per bushel): P$S€/$ = spot exchange r[...]

by Stock Specialist ~ Saturday, October 10, 2009 0 comments

The Foreign Exchange Market - Four theories

Theory #1: Purchasing power parityTheory #2: Interest rate parityTheory #3: The Fisher conditionTheory #4: Expectations theory of forward ra[...]

by Stock Specialist ~ Thursday, October 8, 2009 0 comments

The Foreign Exchange Market - Definitions

r$ : dollar rate of interest (r¥, rHK$,…)i$ : expected dollar inflation ratef€/$ : forward rate of exchanges€/$ : spot rate of exchange“Indirect quote”: s€/$ = 0.83215 Þ 1 $ buys 0.83215 €“Direct quote”: s$/€ = 1.2017 Þ 1 € buys $1.2[...]

by Stock Specialist ~ Wednesday, October 7, 2009 0 comments

The Foreign Exchange Market...

Some basic questionsWhy aren’t FX rates all equal to one?Why do FX rates change over time?Why don’t all FX rates change in the same direction?What drives forward rates – the rates at which you can trade currencies at some future da[...]

by Stock Specialist ~ Monday, October 5, 2009 0 comments

The Foreign Exchange Market

Some currency rates as of May 21, 2004:Per U.S. dollar: Brazil (Real) 3.1939 Mexico (Peso) 11.5754 Japan (Yen) 112.2839 Indonesia (Rupiah) 89066 South Africa (Rand) 6.7295 United Kingdom (Pound) 0.5[...]

by Stock Specialist ~ Sunday, October 4, 2009 0 comments

Foreign Exchange Markets

The foreign exchange (FX) market Basic questions and definitionsFour theories - Purchasing Power Parity - Interest Rate Parity - Fisher condition for capital market equilibrium - Expectations theory of forward ra[...]

by Stock Specialist ~ Thursday, October 1, 2009 2 comments

FX Quant Advisors - Tactical Asset Allocation Fund

Managed Accounts ProgramTactical Asset Allocation Fund - Five-year proven track record (average over 50% per year) True diversification – non-correlated to traditional asset classes (stocks, bonds, real estate). Alternative asset class yields higher risk-adjusted rate of return (MPT)Managed account funds held at JP MorganChase[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

Trading Strategy and Money Management Principals

Trading Advisor utilizes technical analysis of the Forex markets as the primary determinant of its trading strategy. Technical analysis operates on the theory that market prices at any given point in time reflect all known factors affecting supply and demand for a particular market. Technical analysis is of particular concern in[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

The Trading Advisor

The Trading Advisor for the Tactical Asset Allocation Fund is FX Quant Advisors (“FXQA”) – FXQA is a subsidiary of Protrade Capital Group, LLC., a California limited liability company. FXQA provides FX advisory and asset management services to institutional and high net-worth clients. The Managing Director and Trading Advisor of[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FX Quant Advisors - Managed Account Features & Benefits

Professional management Leverage and low investment requirements Optimal "per trade" risk management Broad Diversification Access to International markets Non-correlated to traditional equity and fixed income markets Potential profits in both rising and falling markets Liquidity – month-to-month Transparency[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

Why Managed Forex

Forex markets have many important advantages over other investment alternatives: Forex markets are highly liquid and trade 24 hours a day around the world.Forex markets offer leverage without interest expense. An equivalent amount of money can control significantly more value than futures or stocks. Forex markets are traded globally,[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FOREX = Controlled Risk

Perception = Higher leverage capability implies Forex most “risky” investment vehicleReality = no other trading market (stocks, futures) offers the ability to CONTROLRISK as well as FOREX market:FOREX Trades 24hrs/day/6days/week – means no price gaps, stop-loss orders ALWAYS workingLIQUID - $1.5 – 4 trillion/day turnover – INSTANT[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

Forex vs. Stocks

Forex- Open 24 Hours, 6 Days a Week- Superior Market Liquidity- Profit Potential in both rising and falling markets- No commission fees- Increased leverageStocks- Open Limited Hours- Limited Liquidity- Profit in rising markets- Commission fees- Limited lever[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FX Market - Overview

FX market more than 40x US stock marketFX market has no physical location or central ExchangeOperates through an electronic network of banks, corporations, institutional investors and individualsTrades filled in secondsForex market operates on a 24-hour basis, spanning from one zone to another across the major global financial[...]

by Stock Specialist ~ Thursday, October 1, 2009 1 comments

Features and Advantages of the FOREX market

LARGEST and most LIQUID investment market in the world ($1.5 - 4 trillion per day – 50x larger than US stock market) LIQUIDITY – trades 24 hours/day and 5.5 days/week LEVERAGE –100:1 on invested $ - $1,000 controls $100,000FASTER LEARNING CURVE – 15-20 currency pairs vs. 40,000 stocksCONTROLLED RISK – 24 hour market means no price[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FX Quant Advisors - The Current Investment Environment

U.S. stock market – high-volatility, non-trending market environment makes trading success difficult for S-T AND L-T investors/traders. Recession likelihood & mid-low single-digit returns makes L-T risk/reward unfavorable for this asset class.Inflation soaring – unofficial estimates now over 10%/year! Mutual Fund investor return[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FX Quant Advisors - Philosophy

IT IS ABSOLUTELY NECESSARY TO HAVE AN EDGE... "You can't win without an edge, even with the world's greatest discipline and money management skills. If you could, then it would be possible to win at roulette (over the long run) using perfect discipline and risk control. Of course, that is an impossible task because of the laws[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

FX Quant Advisors

The Current Investment Environment About the FOREX market – Features & AdvantagesTrading Styles & MethodologiesManaged Account Program – Features & BenefitsAbout FX Quant AdvisorsHow to Open An Acco[...]

by Stock Specialist ~ Thursday, October 1, 2009 0 comments

Conclusions and Concerns (4)Main Concerns

Delay in bankruptcy proceedings and credit dispute resolutionTime taken for winding up proceedings is highest in the worldImprovement in effective enforcement of creditor rights requiredFaster resolution of stressed assets of financial intermediariesRegulation of financial conglomerates and holding companiesRole of SROsRegulatory[...]