Unique Source of Forex

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[...]

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Conclusions and Concerns (3)Main Concerns

Financial Markets – Risk of contagionDevelopment of an appropriate risk free yield curveCorporate bond marketsIssues relating to derivatives – knowledge concentration and capacity buildingTransparency – Some issues in fiscal transparency; Need to strengthen data collection agenc[...]

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Conclusions and Concerns (2)Main Concerns

Macro economy – Fiscal DeficitAgricultural GrowthSusceptibility to international commodity price movementsInstitutions – Emerging liquidity concernsCorporate governance in co-operative sector Health of rural co-operativesFunding constraints for NBFCsLack of timely data to gauge household indebtednessStress TestingLack of database,[...]

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Conclusions and Concerns (1)Summary of Assessment

Financial Sector – Has expanded; acquired greater depth and vibrancyMacro economy – Short-term - Uncertainty; Medium-term - high growth sustainableBanks – Healthy and Robust Financial Markets – Resilient and fairly liquidFinancial Infrastructure – Robust Transparency – Significant improveme[...]

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CFSA and Advisory Panels – Some Differences

Regulatory IndependencePanel view : Issues regarding independence of SEBI and IRDACFSA view: Regulatory independence adequate Review of Legislation Panel view : Review of RBI Act neededCFSA view : Requires to be viewed in a more comprehensive mannerRole of HLCCFMPanel view : Further formalisation and institutionalisationCFSA view:[...]

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Accounting and Auditing

Ian MackintoshExercise caution while developing country specific and sector specific accounting standardsImportant to give functional independence to AASBN.P. SardaDetermining the role of the Quality Review Board to review and improve the quality of audit service is requi[...]

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Peer Reviewers’ Comments (3)

Bankruptcy LawsThomas BaxterIndian insolvency regime remains an enigmaSpecial Insolvency regime for banks complement access to credit facilities of central bank and deposit insuranceFiscal TransparencyVito TanziBetter classification of expenditure central to fiscal policyRelevant fiscal target should be GFD and not revenue deficitRelatively[...]

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Peer Reviewers’ Comments (2)

Assessment of BCPEric RosengrenUrgent need to improve co-ordination between regulatory agenciesLoLR should have the ability to assess solvency and liquidity risks facing institutionsReport should elaborate on aspects relating to Central Government’s role in operation of PSBs – whether it interferes with the regulatory role of RBICorporate[...]

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Financial Stability Assessment and Stress Testing

V. SundararajanPlausible shocks and vulnerabilities arising out of domestic macroeconomic and external sectors should be systemically linked to stress scenariosGrowing use of purchased funds need analysis of second round contagion effectsAndrew ShengCreation of secondary mortgage market Setting up of Government sponsored secondary[...]

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Transparency and Development Issues (4) Making Financial Inclusion Work

Rangarajan Committee on financial inclusionExploit synergies between local and national level financial institutionsFinance consumption and household expenditureScale-up IT initiativesBiometric smart cards in rural areasDevelopment of mobile bankingIncentivise BCsUrban poorDilute KYC no[...]

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Transparency and Development Issues (3) Assessment of Data Dissemination Standards

Major Gaps:Need for proper legal and institutional support for CSOIIP data - need to adjust basket of commodities and weights assignedMultiple agencies in collection of labour dataWPI – outdated weig[...]

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Transparency and Development Issues (2) Assessment of Fiscal Transparency

Significant improvement following FRBM Act and Fiscal Responsibility LegislationsMajor Gaps/Issues:Functional overlap by Central Government on issues relating to State Government like health and agricultureMode of calculating FD does not capture off-budget items separately –augmented FD requiredNeed for accrual-based accounting[...]

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Transparency and Development Issues (1)Assessment of Transparency in Monetary and Financial Policies

Major Gaps/Issues:Need for review of legislations- overhaul of legislations not requiredOperational independence of RBIStrengthening TACMP – requires ongoing reviewSeparation of debt management from monetary management – Chairman’s dissentPrice index for measuring inflation – WPI/CPI deb[...]

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Financial Infrastructure (7)Depositor Protection

Independence of Deposit Insurance and Credit Guarantee Corporation (DICGC) (recommended by Advisory Panel)Increase flat-rate premiumInvolvement of DICGC in resolution process- delink settlement of DICGC claims from liquidation proc[...]

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Financial Infrastructure (6)Assessment of Bankruptcy Law Principles

Major Gaps:Implementation of bankruptcy laws – poor- average 10 years to complete liquidation proceedings – ‘Doing Business Report’- World BankAmendment to the Companies Act still pending – Setting up of NCLTIssues relating to Competition Amendment Act, 2007Lack of a Central Registry for recording security intere[...]

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Financial Infrastructure (5)Business Continuity Management

Ease of operations during crisesAreas for strengtheningHuman Resources managementBusiness continuity processes of vendorsOutsourcing riskSuccession plann[...]

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Financial Infrastructure (4)Payment and Settlement

Payment & Settlement Act of 2007 fills a major gapSub-optimal utilisation of electronic payment infrastructure Delays in collection of outstation chequesFinancial resources with CCIL need strengthen[...]

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Financial Infrastructure (3)Accounting and Auditing

More autonomy for Accounting Standards BoardNeed to develop sector-specific guidanceIssues in auditing about convergence with ISAsNeed to give functional independence to A[...]

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Financial Infrastructure (2)Markets and Liquidity

Large capital movementsVolatility in overnight ratesStrengthen government cash managementAsset liability management of banksIssues related to market integrity—participatory notesTerm liquidity facility not required at this st[...]

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Financial Infrastructure (1)Regulatory Infrastructure

Multiple roles of regulatorsConsistent with financial developmentNeeds effective coordinationPrinciples vs. Rules-based: complementaryDevelop supervision of financial conglomeratesLegislation, a new Act?Develop Self -Regulatory Organisations?Regulatory independencePanels have raised some issuesBut CFSA considered adequ[...]

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Financial Markets (8) Compliance With IOSCO

Despite high compliance, some gaps remainEquities Market: Responsibilities and operational independence of regulator; inspection and surveillance powers; capital and prudential requirements for market intermediariesForeign Exchange Market: Operational independence and accountability of regulator; co-operation and detection of manipulation[...]

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Financial Markets (6)Other Market Segments

Need to develop corporate bond marketDevelop credit risk transfer mechanismBut with appropriate checks and balancesCapacity building in financial institutions with regard to securitisation and credit derivati[...]

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Financial Markets (5)Money Market

Liquid marketIncreased share of repo and CBLONeed for active interest rate futures marketBeing re-introducedDevelopment of term money marketDevelopment of short-end yield curve necessaryUnder examination in TAC GroupDevelopment of the repo mar[...]

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Financial Markets (4)Equity Market

Significant improvement in market and settlement infrastructureFunctions in robust regulatory environmentVery high compliance with IOSCO PrinciplesRisk management by market participantsStrengthening of inter-exchange surveillanceNeed to improve IPO processes Setting up of Central Integrated Platf[...]

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Financial Markets (3)Sovereign Debt Market

Significant growth in volume and liquidityFurther diversification of investor base neededForeign investor participation: proceed with careIncrease in tradable assets desirableLarge proportion parked in HTM categ[...]

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Financial Markets (2)Foreign Exchange Market

Fastest growing market globallyTotal annual turnover increased from USD 1.3 trillion during 1997-98 to USD 12.3 trillion during 2007-08Derivatives: High growth in forward marketForex futures introduced in 2008 Need for monitoring and regulationCustomer appropriateness and product suitabil[...]

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E. Financial Markets

Financial Markets (1)Regulation and SupervisionSystemic stabilityImportance of markets other than equity marketIOSCO Principles extended to: G-Sec markets; Forex Markets; Money MarketsResults: Generally satisfact[...]

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Financial Institutions (10)An Assessment of Insurance

Significant growth in size, penetration and diversified productsComfortable solvency and capital adequacyBut gaps/issues remainIncrease supervisory powers of IRDA Group-wide supervision – effective policy to be put in placeRisk ManagementFurther requirement of skilled professionals – actuaries, treasury manag[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (9)An Assessment of Insurance

The level of compliance of the Insurance Sector to IAIS Core Principles AssessmentObservedNumber of Principles - 5Largely ObservedNumber of Principles - 13Partly ObservedNumber of Principles - 10Not ObservedNumber of Principles -[...]

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Financial Institutions (8)Non-Bank Financial Services

NBFCs are key players in financial marketsCorporate bond market development would ease funding constraintsDevelopment of regulatory structure for financial conglomeratesPrudential regulations of NBFCs strengthened – some way to goHousing finance: growing and important segment National Housing Price Index, Housing Starts Index a[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (7) Risk Management and Governance

Conservative risk management mattersCounter-cyclical prudential measures by RBIOff-balance sheet items: Better accounting, disclosureCapital charge if reliance on purchased liquidity beyond a thresholdConsolidation Encourage market-based consolidationCo-operative and rural banks need better governanceDual control: improve corporate[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (6) New Competition Act: Some Issues

Power of Competition Commission to regulate combinationAny combination required to be notified to CommissionMaximum period of wait 210 daysRBI may be able to give sanction only after getting order of Commission or wait for 210 daysDelays the processPossibility of regulatory conflict as order of any statutory authority not binding[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (5)Banking For The 21st Century

Capacity Building:Training Succession PlanningLateral RecruitmentImproved remuneration – but discourage excessive risk takingCorporate Governance: Improve governance in PSBsRoadmap for foreign banks – A well-considered approach within the WTO no[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (4)Commercial Banks Oversight

Government ownership poses dilemmas Possibility of conflicts of interest minimized through even-handed regulationNewer instrumentsThrough selective dilution of government equityCapital augmentation of PSBs is a challenge, but could be managed through a variety of ways Amalgamation where commercial synergies ex[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (3)Basel Core Principles: A Compliance Summary

Major Gaps:All Institutions: Risk management (for commercial banks the level of compliance is comparatively lower in respect of banking groups); home-host country regulationCommercial Banks: Exposure to related parties; non-compliance in respect to interest rate risk in banking book for which guidelines have since been issuedRural[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Financial Institutions (1)Regulation and Supervision

Inherent linkages across institutionsInter-bankBank and non-banksBasel Core Principles not applicable to:Co-operative Sector; Regional Rural Banks;NBFCs; HFCsBut, Assessment done for health checkResults: Generally satisfact[...]

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Stability Assessment and Stress Testing (9)The Way Forward

In Sum:Commercial Banking System – Broadly SoundCan withstand significant shocks from large potential changesPossible Next Steps:Need to strengthen liquidity managementStress Testing by individual banksPeriodic scenario testing by RBISetting up of a Financial Stability U[...]

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Stability Assessment and Stress Testing (8)Liquidity Risk Management

Gradual, growing dependence on purchased liquidity Increase in illiquid parts of banks’ balance sheetsGreater reliance on volatile liabilities for asset gro[...]

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Stability Assessment and Stress Testing (6)Interest rate risk

Calculates the erosion in accounting capital due to unit increase in interest rateHigher the DoE (duration of equity), greater the sensitivity of banks capital to interest rate shocksThe annualised yield volatility is estimated at 244 bpsGiven a DoE of 8.1 years, a 244 bps shock implies an erosion of 20 per cent of capital and reserves.=>[...]

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Stability Assessment and Stress Testing (5)Credit Risk

Concerns about credit risk remain muted at present Need for close monitoring of such risks in the current scena[...]

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Stability Assessment and Stress Testing (4) Stress Testing

What is Stress Testing Techniques to assess vulnerability of the financial system in the face of shocks; identifies how portfolios respond to changes in key economic variables: e.g., interest rates, credit qualityCoverage of stress tests Credit risk Market/interest rate risk Liquidity riskOpen positions in foreign exchange much[...]

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C. Stability Assessment and Stress Testing

Stability Assessment and Stress Testing (1) Main Findings Financial InstitutionsCommercial Banks: financially robustNBFCs and HFCs: healthy financial indicators Some financing concernsUCBs and RRBs: improvements in financials governance concernsRural Co-operative Sector significant weaknes[...]

by Stock Specialist ~ Monday, September 28, 2009 0 comments

Macroeconomic Outlook and Vulnerabilities (2)Pressing Challenges

Need for revival of growth in agricultureAddress restoration of the fiscal reform pathContinuation of financial sector consolidation and developmentAddress the infrastructure deficitComplement bank financing with bond market developmentInsurance and pension reformsFCAC desirable, but with concomitant macroeconomic and market de[...]

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Macroeconomic Outlook and Vulnerabilities

Macroeconomic Outlook and Vulnerabilities (1)The Growth StoryGrowth in recent period contributed by several factorsHigh domestic demandProductivityCredit growthHigh levels of savings and investmentCurrent global financial crisis: shift from benign outlook to one of uncertainty8 %+ growth sustainable in the medium-term due to high[...]

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Background and Timing (3)The Process

Benefits Composition of CFSA: ownership and commitmentRegulatory cooperation: GoI, RBI, SEBI, IRDA, other agenciesInvolvement of experts: advisory panelsPeer reviews: ImpartialityLearning and capacity-building: involvement of professionalsExecutionComplex issues – approach with humilityBroad directions instead of specifics in the[...]

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Background and Timing (2)Overview of Self-Assessment

Approach and MethodologyPillar I Macro-prudential surveillance and financial stability analysisPillar II Legal and institutional frameworks reviewPillar III International financial standards and codes: assessment and status of implementat[...]

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The FSAP and Self-Assessment

A. Background and TimingBackground and Timing (1)The Story So FarIMF-WB FSAP in 2001, self-assessment of international standards and codes in 2002, reviewed again in 2005Set up CFSA in 2006India among the first country to undertake comprehensive and holistic self-assessment of financial sectorPost-crisis, emphasis by the G[...]

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FSAP

Part I: The FSAP and Self-AssessmentA. Background and TimingB. Macroeconomic Outlook and VulnerabilitiesC. Stability Assessment & Stress TestingPart II: Lessons and Issues from the AssessmentD-F. Financial Institutions, Markets and InfrastructureG. Transparency and Developmental IssuesPart III: Transparent ReportingH. Peer[...]

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Financial Sector Assessment

What is an FSAP?The Financial Sector Assessment Program is an IMF-World Bank initiative A comprehensive health check of the financial system A review of strengths, vulnerabilities and weaknesses Measures compliance with international financial standards and codes Initiated after the1997 Asian financial cri[...]

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‘Structural sensitivity analysis’

Alter assumptions about market clearingAlter assumptions about property rightsAlter assumptions about macroeconomic closuree.g. Adjustment to equilibrium through domestic tax system vs. adjustments through accommodating international capital flo[...]

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Institutional issues

Trees may be cut (or planted) to establish property rights over land.In open access forests (non-commercial), opportunity cost of forest is set by ag. land values and clearing costs.In commercial forestry, timber harvesting/replanting also depends on property rights.Will an increase in timber prices promote or retard tree-felling[...]

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Land degradation

Hard to measure, and problems of aggregation.Can use information on erosion rates by crop, together with land use data, to build ‘baseline’ data set. Then erosion changes can be inferred from changes in land useProduction externalities: technical ‘regres[...]

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Deforestation & land degradation

Commercial and non-comm’l deforestation: does timber have market value? Non-comm’l deforestation is driven by search for land, and responds to changes in the marginal valuation of land in agricultural production... … although institutional setting also matt[...]

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Environmental analysis in GE

Most AGE models constructed for more general analytical purposes: environmental structure is added later Given uncertainty about env. variables and valuations this may be appropriate! Industrial emissions: ‘side calculations’Natural resource degradationQuestions about institutio[...]

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Open access to natural capital

Addressing env. damages and natural resource depletionPigovian taxes (Bovenberg & Goulder, AER 1996)Private purchase of abatement services Public provision of abatement or clean-up servicesQuotas or limits on resource use or emissions (command & contr[...]

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Schematic social accounts - Social accounting matrix

Schematic social accountsSocial accounting matrix‘Standard’ national accounts ignore environment Assumptions: Property rights on resources No externalities No non-marketed amenity val[...]

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Data

Social accounting matrix: base year data Input-output accounts of industries Factor markets, household incomes & expenditures Trade and final demand Taxes and G. expenditures Micro and macro balanceElasticities Estimated (see www.aae.wisc.edu/coxhead/apex ), or more commonly ‘guesstimate[...]

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Features of Johansen models

Parameter values are shares and elasticitiesQuick checks:Homogeneity & ‘balance’ of underlying data base.Solution is by matrix inversionEntire model is a system of linear equationsExamples of Johansen-style models:ORANI (Australian economy)GTAP (international agricultural trade)Models in OEE, Ch.[...]

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Solving the model: the ‘Johansen’ AGE structure

First-order approximations to changes in variable valuesModels solved in proportional (percentage) changes of variables, or ‘hat calculus’.Advantages: Models are linear in variablesParameter values are intuitive and accessible (shares from SAM, elasticities from other sources)Simulation results are additive in separate sho[...]

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Other features

Can add in: Intermediate inputs Products distinguished by source (domestic, imported) Different kinds of labor Many sources of final demand Trade and transport ‘margins’ Tariffs, taxes, and other policies … e[...]

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Closure rules and decisions

Other closures are possible ‘Neoclassical’ closure has all domestic prices flexible Alternatives: e.g. fix wages, allow unemployment in labor market. These choices reflect our beliefs or observations about the real wor[...]

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Closure

No. of equations must match endog. vars.In (5.1)-(5.8): 4N + F + FN + M + 1 eqns.But we have 5N + 2F + FN + 2 variables.Must choose N - M + F + 1 exog. varsDeclare V exog; (N - M) elements of P, and f.Now (5.1)-(5.8) solves for Y, W, R, X, D, S and U as endogenous variables. Endogenous: income, factor prices, quantities produced[...]

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An N-good, F-factor economy

General structureEquilibrium conditionsClosure rules and decisi[...]

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Overview of AGE models

Describe Walrasian equilibria in fairly detailed manner--sufficient to support policy claimsToo large to be solved analytically; must use numerical solutions insteadBut structure and results depend on same theoretical foundationsAdvantages and disadvantages of si[...]

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Pros and cons of AGE modeling

Importance of economy-wide mechanisms and implicationsIntractability of higher-dimension analytical modelsOpportunities for ‘structural sensitivity analysis’X LimitationsTime is usually not explicitly taken into accountMicro details such as risk/uncertainty or credit market imperfections usually ignoredaggregations can mask important[...]

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8 Applied GE modeling of economy & environment

Rationales Basics of applied GE models Incorporating environmental issuesMain source: OEE Ch. 5.Additional: Shoven & Whalley, JEL 1984; Ginsburgh & Keyzer, Structure of applied general eq. models (MIT Press, 1997); Coxhead, World Development 28(1), 20[...]

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Research & Development

Establish Labs to perform ground breaking resear[...]

by Stock Specialist ~ Thursday, September 17, 2009 0 comments

Services

ForexOptionsCommoditiesOverseas MarketsCapital ManagementMacroeconomic Outl[...]

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Advantages of premium membership

Access to all robotsEmail alerts on currency trends and major economic newsSupport and comprehensive trainingAutomatic updates for the subscribed rob[...]

by Stock Specialist ~ Thursday, September 17, 2009 0 comments

Neural Traders Robots

BreakEA – to capture break outs for GBPUSD on M15.MacPro – Based on macd and a few other indicators to trade EURUSD, GBPUSD and NZDUSD hourly.AIRobot – Artifical intelligence enabled EURUSD short term trader. XPIPS – Maritangle Strategy on EURUSD [...]

by Stock Specialist ~ Thursday, September 17, 2009 0 comments

Technical Indicators

Moving AveragesStochasticWilliam's Percentage RangeADXATRMacd[...]

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Risk Management

Golden rule: Risk no more than 3% per trade.Keep greed and fear in cont[...]

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Mathematical Foundation

ProbabilityExpectat[...]

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Trading Strategies

ScalpingMomentumBreakoutSwingCarry Trad[...]

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Technical and Fundamental Analysis

Technical analysis: based on indicators such as moving averages, volumeoversold and undersold conditions etcFundamental analysis: based on news and economic events, speeches by Key personalities such as fed chairman, ECB chairman e[...]

by Stock Specialist ~ Thursday, September 17, 2009 0 comments

Automated vs Manual Trading

Manual trading can be effective for people who want to be in controland have the right trading discipline.Automated trading consists of translating a trading strategy into an Automated agent or Expert Advisor for [...]

by Stock Specialist ~ Thursday, September 17, 2009 0 comments

The Forex Market - Brokers and Tools

MT4 (fxdd / alpari)FXCM's trading stationAv[...]

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Time Zones

AsianEuropeanNewy[...]

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Understanding the trading lingo

PipsSpreadStopLossTrailingStopTakePro[...]

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The Forex Market - Leverage – the power to profit even from small volatility

Daily currency fluctuations are usually very small. Most currency pairs move less than one cent per day, representing a less than 1% change in the value of the currency. This makes foreign exchange one of the least volatile financial markets around. Therefore, many currency traders rely on the availability of enormous leverage to[...]

by Stock Specialist ~ Wednesday, September 16, 2009 0 comments

The Forex Market

The foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets around. Until recently, forex trading in the currency market had been the domain of large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. The emergence of the internet has changed[...]

by Stock Specialist ~ Tuesday, September 15, 2009 0 comments

Foreign Exchange Definitions

Value Rate – is the date of settlement for the foreign exchange transactionsBid price – the price the dealer is willing to buy a currency atOffer price/ ask price – is the price the dealer sells currency forSpread – is the difference between the buy and sell price from[...]

by Stock Specialist ~ Monday, September 14, 2009 0 comments

Foreign Exchange - Balance of Payments

B of P – is a record of the value of all economic transactions between residents of a countryConsists of the following accounts: Merchandise Trade Bal. Services Unilateral Transfers + Current Accou[...]

by Stock Specialist ~ Monday, September 14, 2009 0 comments

Foreign Exchange Definitions

Convertibility – the degree that one currency can be exchanged for another one without difficultyHard Currency – is a currency that is convertible and is supported by a strong economySpot Rate – an exchange rate quoted for immediate delivery or within 2 business daysForward Rate – an[...]

by Stock Specialist ~ Monday, September 14, 2009 0 comments

Demand for the Dollar ($)

Investment CurrencyReserve CurrencyTransaction CurrencyInvoice CurrencyIntervention Curre[...]

by Stock Specialist ~ Monday, September 14, 2009 1 comments

Foreign Exchange

What is the foreign exchange rate?What is the foreign exchange market?What is the foreign exchange organization?Who are the participants? - importers/exporters, investors, tourists, banks, dealers, brokers, speculatorsWhy use the foreign exchange markets? - to hedge currency risk, to diversify portfolios, to make mo[...]

by Stock Specialist ~ Monday, September 14, 2009 0 comments

The Foreign Exchange Market - Interest Rates and Exchange Rates

Interest rates reflect expectations of inflation rates; - high interest rates reflect high inflation expectation - Fisher Effect: i = r + I i: “nominal” interest rate in a country r: “real” interest rate I: inflation over the period the funds are to be lent - International Fisher Effect: (S1-S2)/S2 X 100 = i$[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Exchange Rate Forecasting

The efficient market school - Prices reflect all available public informationThe inefficient market school - Prices do not reflect all available public informationApproaches to forecasting - Fundamental analysis Econometric models draw on economic theory to forecast future movements - Technical analysis Extrapolation/interpretation[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Convertibility

Currency convertibility and government policy - Freely convertible: residents/non-residents allowed to purchase unlimited amounts of a foreign currency with the local currency - Not freely convertible: residents/non-residents not allowed to purchase unlimited amounts of a foreign currency with the local currencyCountertrade[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Money Supply and Currency Value

Inflation occurs when the quantity of money in circulation rises faster than the stock of goods and servicesMoney supply growth related to currency valueRelative inflation rates and trends can predict relative exchange rate movementsWhen changes in relative prices in two countries change their currencies’ exchange rate, then the[...]

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Prices and Exchange Rates

The law of one price: - Identical products sold in different countries must sell for one price if their price is expressed in one currency - Assumptions: Competitive markets No transportation costs; no trade barriersPurchasing Power Parity (PPP): - If the law of one price holds for all goods / services, the PPP exchange[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

The Foreign Exchange Market

Minimizes foreign exchange risk (unpredictable rate swings)To do so there are different ways to trade currencies - Spot exchange rates: the day’s rate offered by a dealer/bank - Forward exchange rates: Agreed in advance rates to buy/sell a currency on a future date Usually quoted 30, 90, 120 days in advanceThe[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Currency Conversion In The Foreign Exchange Market

Currency conversion in the foreign exchange market - Is necessary to complete private and commercial transactions across borders - A tourist needs to pay expenses on the road in local currency - A firm Buys/sells goods and services in the other country’s local currency Uses the foreign exchange market to invest[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Foreign Exchange

The foreign exchange market - Is the market where one buys or sells the currency of country A with the currency of country BA currency exchange rate - Is simply the ratio of a unit of currency of country A to a unit of the currency of country B at the time of the buy or sell transact[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

The Foreign Exchange Market

Form and function of the foreign exchange marketDifference between spot and forward ratesDeterminants of currency exchange ratesForeign exchange risk and the exchange marketExchange rate forecastingConvertibility of currenciesCountertrade as convertibility mitigation fac[...]

by Stock Specialist ~ Sunday, September 13, 2009 0 comments

Economic Risk

- How can we capture empirically economic risk?- Empirical literature has tried to estimate the rate of return of a firm as a function of the market rate of return (CAPM) and exchange rate variability- Mixed results- Younger firms more exposed than older firms to the effects of exchange rate variability- Older firms may be[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Economic Risk

- Now, change assumptions. US exports are invoiced in $ and Italian exports in euros. With demand partially elastic, $ export revenues rise With euro pricing unchanged, dollar imports (inputs) now cost more in dollars. US exporter will be looking for cheaper alternatives. If demand is inelastic, dollar imports[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Economic Risk

- Assume a $1 = € 1, products priced at $ 1, 10% depreciation of the dollar, and $ invoicing With $ pricing unchanged, $ depreciation → € 0.91 With demand completely inelastic, $ revenues remain unchanged With demand partially elastic, $ revenues rise $-based inputs do not change in value FCF ri[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Economic Risk

- Value of the firm or value of the project. Us firm sells partly in the US and partly exports to Italy. Cash outflows partly in dollars and partly in euros- Concept of cash flow. Start from net income and adding non-cash items like depreciation and subtracting cash items like expenditures on fixed assets- Free cash flows[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Kelley Instruments

- Pound is functional currency; dollar is reporting currency- $2=£1 at year beginning; $2.2=£1 at year end; $2.1= £1 mid-point- I shall assume that you know accounting sufficiently well to arrive at the solution indicated on page 45 of my text- Let’s concentrate on current method- Income statement: all items are recorded at mid-point[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Translation risk

- US accounting principles allow conversion gains or losses to be shielded from taxation in the current period; these gains or losses are accumulated in a separate account, which are taxed when the investment is sold or liquidated. The idea is that yearly gains or losses may be temporary but long-term ones are not.-[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Types of Forex risk

- Translation risk: multinational co. (MNC) with branches or subsidiaries in different currency areas of the world must report its consolidated financial accounts in a single currency. The conversion creates gains or losses and may have tax consequences. The US has the most elaborate system of accounting to handle the conversion[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Quotes and practices

- Forward one month for the dollar/euro (same date) $1.2887/ €1 - Forward premium at an annual rate (1.2887-1.2862)*1200/1.2862 = 2.3324%- Euro is at a premium, or the dollar is at a discount- Cross rates: these appear in the FT every day and can be computed simply by taking the ratio of two exchange rates E.g., C$/US$[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Quotes and practices

- Direct quote: domestic money/foreign money € 0.7775/$1 (17/8/2006)- Indirect quote: foreign money/domestic money $1.2862/ €1 (same date)- Indirect quote prevails for the euro and the pound - Bid rate: rate at which dealer buys $1.2860/€1- Ask rate: rate at which dealer sells $1.2864/€1- Spread: (ask rate – bid rate)/bid[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Organized exchanges

- Chicago Mercantile Exchange, an offshoot of the Chicago Board of Trade: oldest exchange- Euronext: from the merger of Amsterdam, Brussels and Paris plus acquisition of the London International Financial Futures and Options Exchange- Moscow Interbank Currency Exchange- Tokyo Commodity Exchange- Sydney Futures Excha[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Organized exchanges

- Smaller segment than the OTC market- Have a physical place, rules, and face regulation- Three features Product standardization Clearinghouse collate[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Types of transactions

- Foreign currency options Gives the right but not the obligation to buy or sell a specified quantity of one currency in exchange for another at a specified price within a specified period of time. Differs from the forward in that the owner of the option does not have to execute the transact[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Types of transactions

- Forex swap (two legs) In the first leg there is a swap of one currency for another In the second leg, which occurs in the future, there is a re- exchange, that is the opposite swap The swap can occur with the first leg, say, in one month, and the second in three months- Currency swap (three legs) First: a spot[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Types of transactions

- Spot Outright exchange of one currency for another at the current spot price with a two-day settlement. Currency covers both actual currency and bank deposits. Large transactions are in deposits. Currency for retail- Outright forward Outright exchange of one currency for another at the current market price[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Two components to Forex

- Forex has two components Over-the-counter (OTC) Organized exchanges- OTC is a network of dealers, brokers, and final customers. Low regulation Dealers are mostly commercial and investment banks that buy a currency at a bid price and sell it at an ask price Dealers take a position and thus face a risk of a price[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

Size of the Forex Market

- Largest and most liquid in the world- BIS issues a Triennial Central Bank Survey; latest in 2004 Daily turnover of $1,800 billion $ 621 bn spot transactions $ 208 bn forwards $ 944 currency swaps Dollar 88.7/200 Euro 37.2/200 Yen 20.3/200- Market never sleeps and has its own circadian rhythm Starts in Sydney[...]

by Stock Specialist ~ Saturday, September 12, 2009 0 comments

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