Mortgage
A cardinal principal of sound banking is to ensure safety of funds lent by a banker to his customers. A Banker lends his funds to persons of means, engaged in some business, trade, industry or in any profession or vocation. The first and the most important criterion to judge safety of funds is the capacity of the borrower himself to repay the amount of the loan after having achieved success in the productive activity for which the loan is taken. Hence, the banker relies primarily on the character, capacity and capital of the borrower in ensuring the safety of his funds. The viability of the project and the honesty and capability of the borrower ensure to a large extent the safety of funds lent by the banker, But the banker can hardly afford to take any risk in this regard and hence reliance is placed on the tangible assets owned by the borrower. In case of default by the borrower in repaying the loan, the banker's interest are safeguarded if he possesses a charge or right over a tangible asset of the borrower. Loans with such rights conferred upon the banker are called secured advances.
Secured advances are those advances which provide absolute safety to the banker by means of a charge created on the tangible assets of the borrower in favour of the banker. In such cases, the banker gets certain rights in the tangible assets over which a charge is created.
There are several mode of creating a charge, e.g. lien, pledge, hypothecation and mortgage.
Mortgage is a mode of secured loan, by which a customer offers immovable property such as land or building as security for a loan, charge thereon is created by means of mortgage. Section 58 of the Transfer of Property Act 1882, defines mortgage as "the transfer of an interest in specific for the immovable property for the purpose of securing the payment of money, advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability". The transferor is called 'Mortgage' ; the transferee 'Mortgagee', the principal money and interest thereon, the payment of which is secured are called the 'mortgage money' and instrument, if any, by which the transfer is effected is called a "Mortgage Deed".
Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
Banking
Bank is a commercial or state institution that provides financial services, including issuing money in form of coins, banknotes or debit cards, receiving deposits of money, lending money and processing transactions. A commercial bank accepts deposits from customers and in turn makes loans based on those deposits. Some banks (called Banks of issue) issue banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches.
Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is granted by bank regulatory authorities which provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank. Banks have influenced economies and politics for centuries. The primary purpose of a bank was to provide loans to trading companies. Banks provide funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Commercial lending today is a very intense activity, with banks carefully analysing the financial condition of its business clients to determine the level of risk in each loan transaction. Banking services have expanded to include services directed at individuals and risk in these much smaller transactions are pooled.
A bank generates a profit from the differential between what level of interest it pays for deposits and other sources of funds, and what level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). However, lending activities still provide the bulk of a commercial bank's income.
The name bank derives from the Italian word banco, desk, used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth.[citation needed]
A cardinal principal of sound banking is to ensure safety of funds lent by a banker to his customers. A Banker lends his funds to persons of means, engaged in some business, trade, industry or in any profession or vocation. The first and the most important criterion to judge safety of funds is the capacity of the borrower himself to repay the amount of the loan after having achieved success in the productive activity for which the loan is taken. Hence, the banker relies primarily on the character, capacity and capital of the borrower in ensuring the safety of his funds. The viability of the project and the honesty and capability of the borrower ensure to a large extent the safety of funds lent by the banker, But the banker can hardly afford to take any risk in this regard and hence reliance is placed on the tangible assets owned by the borrower. In case of default by the borrower in repaying the loan, the banker's interest are safeguarded if he possesses a charge or right over a tangible asset of the borrower. Loans with such rights conferred upon the banker are called secured advances.
Secured advances are those advances which provide absolute safety to the banker by means of a charge created on the tangible assets of the borrower in favour of the banker. In such cases, the banker gets certain rights in the tangible assets over which a charge is created.
There are several mode of creating a charge, e.g. lien, pledge, hypothecation and mortgage.
Mortgage is a mode of secured loan, by which a customer offers immovable property such as land or building as security for a loan, charge thereon is created by means of mortgage. Section 58 of the Transfer of Property Act 1882, defines mortgage as "the transfer of an interest in specific for the immovable property for the purpose of securing the payment of money, advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability". The transferor is called 'Mortgage' ; the transferee 'Mortgagee', the principal money and interest thereon, the payment of which is secured are called the 'mortgage money' and instrument, if any, by which the transfer is effected is called a "Mortgage Deed".
Insurance
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
Banking
Bank is a commercial or state institution that provides financial services, including issuing money in form of coins, banknotes or debit cards, receiving deposits of money, lending money and processing transactions. A commercial bank accepts deposits from customers and in turn makes loans based on those deposits. Some banks (called Banks of issue) issue banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches.
Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is granted by bank regulatory authorities which provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank. Banks have influenced economies and politics for centuries. The primary purpose of a bank was to provide loans to trading companies. Banks provide funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Commercial lending today is a very intense activity, with banks carefully analysing the financial condition of its business clients to determine the level of risk in each loan transaction. Banking services have expanded to include services directed at individuals and risk in these much smaller transactions are pooled.
A bank generates a profit from the differential between what level of interest it pays for deposits and other sources of funds, and what level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). However, lending activities still provide the bulk of a commercial bank's income.
The name bank derives from the Italian word banco, desk, used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth.[citation needed]
Forex Trading
Become educated...
The Foreign Exchange Market is commonly referred to as the "Forex" or "FX" market, and is the largest and most liquid financial market in the world, with a daily turnover of nearly US $2 trillion. By comparison, the New York Stock Exchange average daily dollar volume is around US $56 billion. A true 24-hour market, Forex trading begins in Sydney and in turn opens around the globe as the business day continues, first to Tokyo, then London and New York. Unique among financial markets, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night - in real time. Simply put, Forex is the world currency market. The value of each country's economy is reflected in its currency, so trading FX is like trading the value of countries rather than companies or commodities. It's not new. Currency speculation has been widespread since WWII among the world's banks.
Forex is traded in currency pairs and involves the simultaneous buying of one currency and selling of another, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). Greater than 85% of all daily transactions involve trading of the 7 "Major" currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The best trading opportunities for speculators are with these most commonly traded (most liquid) currency pairs.Retail trading by individuals and organizations attempting to profit from constantly changing currency prices accounts for up to a quarter of Forex volume. Other transactions include currency swaps by major corporations and central banks to convert profits or hedge against currency price movements.Want To Know MoreSign Uphttp://www.forexrx.com/abwatley/
Become educated...
The Foreign Exchange Market is commonly referred to as the "Forex" or "FX" market, and is the largest and most liquid financial market in the world, with a daily turnover of nearly US $2 trillion. By comparison, the New York Stock Exchange average daily dollar volume is around US $56 billion. A true 24-hour market, Forex trading begins in Sydney and in turn opens around the globe as the business day continues, first to Tokyo, then London and New York. Unique among financial markets, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night - in real time. Simply put, Forex is the world currency market. The value of each country's economy is reflected in its currency, so trading FX is like trading the value of countries rather than companies or commodities. It's not new. Currency speculation has been widespread since WWII among the world's banks.
Forex is traded in currency pairs and involves the simultaneous buying of one currency and selling of another, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). Greater than 85% of all daily transactions involve trading of the 7 "Major" currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The best trading opportunities for speculators are with these most commonly traded (most liquid) currency pairs.Retail trading by individuals and organizations attempting to profit from constantly changing currency prices accounts for up to a quarter of Forex volume. Other transactions include currency swaps by major corporations and central banks to convert profits or hedge against currency price movements.Want To Know MoreSign Uphttp://www.forexrx.com/abwatley/
Mobile phone info Ringtones - A phone's personality
As mobile phones define one's personality in the same way ringtone defines mobile phones personality. Ringtone is nothing but the pleasing sound from the mobile instrument indicating an incoming call. It provides a sense of personalization to your mobile phone. Using the same old dull ring tone will never be able to differentiate you in the crowd. But, having a personal ring tone will immediately grab the attention. So ring tones are melodies, tunes, sound, noise your mobile make when an incoming call or message arrives.
Ringtone has become a rage among cell phone users, especially youth. Ringtones have brought around a fresh round of innovations to otherwise monotonous mobile phone market. There is always competition among youth for the ringtones downloaded and put to use. Ringtones show that you're up to date and happening. You can truly display your lifestyle and certainly your musical taste on your sleeve.
There are typically two different types of ringtones: monophonic ringtones and polyphonic ringtones. Monophonic tones are simple tunes, most commonly compatible with today's cell phones. The majority of cell phones previously could only make a single tone at a time. The monophonic tones comprised of a series of sequential tones at different frequencies. Polyphonic tones are played on each and every cellular phone now a days that have the capability of playing up to 16 separate tones at once. The combination of tones creates a harmonic melody. Polyphonic ringtones are more musical than a monophonic ringtone.
New ringtone services are operating in order to offer ringtones for download. These ringtones vary from old numbers to just released songs from latest albums. There also are sound effects, anything from chirping crickets to a rocket blasting off to a galloping horse. Ringtones can either be downloaded from net or can be created by the user. The websites vary in that some allow you to purchase specific ringtones while others offer subscriptions that allow you to download an unlimited number of ringtones. Users often download multiple tones so that they can have different rings for different callers. Software is also available that allow consumers to create their own melodic ringtones. The software runs on a computer, and once the tune is set it can be transferred to the phone via a data cable.
Some technical websites declare that the cell phone of tomorrow will replace the MP3 players of today. This will be possible once a dual use battery is invented that can hold a sufficiently long enough charge. The power would last more than a few hours and could be easily recharged. The technicians declare that memory capabilities must be enhanced so that the user can download and store hundreds and thousands of songs. This isn't that far off, in fact an MP3 player being replaced by a cell phone is considered possible within 5 years according to most technical websites. The development has started and there's no looking back. Consumers spent nearly $3.5 billion last year to download 30-second polyphonic renderings of popular songs. Thousands of ringtones are available to suit the personality and mood of the user.
Cell phone antennae- Is it a health hazard
There is growing consensus that cell phone antennas may be harmful to humans due to the huge volume of electromagnetic waves that get concentrated around it during the receipt and placing of calls. This danger is even further aggravated by cellular manufacturers who place the internal antennas close to the earpiece.
Mobile phones are basically radio sets and therefore emit energy radio signals that can penetrate the body and cause harm.
There have been several commissions on the study of the effect of mobile phone on the human body and the most pronounced has been The Stewart Report which suggested that radio waves indeed penetrate human bodies from mobile phone antennas and specially recommended that children who obviously have softer skulls be extra careful and use the device sparingly. The report further went on to state that the brain cells of children are not as fully developed as those of adults and can therefore be at greater risk as they absorb the radiation more than fully hardened adult skulls.
These hazards may exist but cell phones have become part of everyday living like cars and cannot be dispensed with. In the light of this fact, doing away with our phones may not be a practical approach to solving the health hazards issue. Rather we can adopt some habits to mitigate the effects of the radiation.
Children should not use cell phones for long calls. They should sue land lines instead so as to minimize the length of contact with the radiation emitted by the device.
Consumers should buy phones with low specific absorption rate (SAR). Mobile phones should be kept away from the body as much as possible. They can be put in the purse or bag and only brought into contact with the body when there is the need to make or receive a call.
Users should try to keep their conversations short.
If possible, SMS messages can be sent instead of calls so that there is less contact with the body especially around the skull area.
Keep switching between both ears so that one particular ear does not absorb the full brunt of the radiation all the time.
Radiation emission is at the highest when the phone is trying to connect so keep the phone away from the skull till you see the call fully connected.
Weak signal results in higher radiation so avoid making calls in areas where reception is poor as the device will try to boost its power to get you a connection and resultantly bombard you with more radiation.
We cannot do away with cellular devices looking at the convenience they have ushered consumers in. Nevertheless, we can adopt some helpful attitudes to minimize the harmful effects this technology is bringing to mankind.
Cell phone bugs
There are a couple of different ways that cell phone bugs can be used. There are fairly inexpensive low-tech cell phone bugs, and there are more expensive and much more rewarding, devices that can be used to hear what you need to hear, but that others might try to keep from you.
The first category of cell phone bugs is not really a cell phone at all. It merely looks like a cell phone. It can receive calls, and it will call you automatically, but this phone is not meant to be carried with you. This bug is meant to be “forgotten” or “charging” at the home or office. It plugs into a splitter that shares a phone jack with a regular phone. When a call is made, you can listen in to both ends of the conversation by use of your bug. The bug will even call you when the subject places a call so that you can listen in.
One of the cell phone bugs that require you to take a more active role in listening is a cell phone that is equipped to pick up transmissions by cell phones around it. Cell phone calls are among the easiest to intercept, as the sound is carried on frequencies right through the air. All you have to do is be in the vicinity of your subject and then dial in to your cell phone bug. It looks as though you are talking on your cell phone, but really you are listening in on a conversation.
Finally, the most advanced of cell phone bugs let you listen in, even if you are on the other side of the country — or even the other side of the world. This type of bug works like a regular cell phone. Give it to your subject, and then you can listen in to what she or he is doing whenever you want. The phone has a standard number, that anyone can call, and a secret number that only you know. When you call the secret number, a microphone is activated and you can listen in, not only to conversations held on the phone, but also to what is going on in the same room as the cell phone.
These devices are innocuous and common. They look like what everyone today has and seems to need. You cannot go wrong when you get the information you need using cell phone bugs.Forex Trader's Bill of Rights
The Forex Trader’s Bill of Rights (2005) is a non-fiction book about the foreign currency trading market, published by OANDA_Corporation. It is primarily a call to arms for currency traders to call for greater transparency and accountability within the market. The overleaf provided with the printed version of the book states: “Big banks and confederated brokerages have overcomplicated forex: trading costs are inflated, unnecessary risk abounds, and the system is grossly unfair.” Essentially, the book elaborates on this premise, detailing ways in which traders are being unfairly treated and encouraging them to take action.
OANDA is a company that provides currency trading tools for investors, travelers, and businesses. As such, there is an unavoidable marketing aspect to this publication. However, OANDA is not mentioned throughout the book. There has been a clear effort to maintain a relatively neutral point of view. The back cover does state “OANDA is a leading provider of online currency trading…FXTrade…enables all currency investors to change the way forex trading is done”.
The authors believe currency investors have 10 basic rights which are being violated: each short chapter deals with one of these rights. They are:1. The right to immediate, uncensored access to the marketplace2. The right to trade real spot3. The right to know4. The right to trade whenever you want5. The right to equal treatment6. The right to choose and manage risk7. The right to understand cost8. The right to learn – on your own, or through free exchange with other traders9. The right to full disclosure10. The right to pay and receive interest
1) The right to immediate, uncensored access to the marketplace Chapter one argues that when trading traditionally (with banks etc.,) execution and price are affected by who you are (size of your order/ relationship with your market maker etc.), the amount of greed on the part of the market maker, and manual intervention which can delay the trade. The chapter calls for transparency, fairness, and efficiency for traders from market makers.
2) The right to trade real spotChapter two addresses unnecessary delays in settlement of trades, which according to the authors increase risk for investors.
3) The right to knowThe third chapter states that market makers share information based on who you are: in some cases they share information that should not be shared; in other cases they do not share information that should be publicly available. This leads to an unfair advantage.
4) The right to trade whenever you wantThe chapter asserts that market makers may advertise 24 hour trading but they close the books on Friday. However, world events which affect currency price occur on weekends. The argument continues that since the technology for 24/7 trading is available, it should be offered by all market makers.
5) The right to equal treatmentChapter five argues that every trader should be given the same price and spread, and that market makers should not discriminate between traders.
6) The right to choose and manage riskTraders are encouraged to use a market maker who does not require high minimums, lets them trade any amount, and provides immediate settlement as a way of minimizing risk.
7) The right to understand costIt is reasoned that traders have the right to understand spreads, as well as who gets a “cut” and why. This chapter also includes a profitability calculator.
8) The right to learn – on your own, or through free exchange with other tradersThis chapter covers multiple ways to learn about trading, and test new strategies, including trading games offered by online market makers and other sources of Internet information.
9) The right to full disclosureThe book claims that a lack of transparency in pricing, execution, and after the trade needs to addressed. Market makers should publish statistics regarding real spreads and prices and traders should demand that they do this.10) The right to pay and receive interestIt is argued that continuous interest should be introduced, which would make for price flows that are less volatile.
Forex scam
A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to gain an unreasonably high profit by trading in the foreign exchange market, which would be a zero-sum game were it not for the fact that there are brokerage commissions, which technically make forex a "negative-sum" game.
These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,improperly managed "managed accounts", false advertising, Ponzi schemes and outright fraud. It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.
An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"
The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities, can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.
Market participantsTop 10 Currency Traders% of overall volume, May 2006
Source: Euromoney FX survey[3]
Rank Name % of volume1 Deutsche Bank 19.262 UBS AG 11.863 Citigroup 10.394 Barclays Capital 6.615 Royal Bank of Scotland 6.436 Goldman Sachs 5.257 HSBC 5.048 Bank of America 3.979 JPMorgan Chase 3.8910 Merrill Lynch 3.68
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail forex brokers
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market and it has been reported by the CFTC website that unexperienced investors may become targets of forex scams.
Market size and liquidity
The foreign exchange market is unique because of:its trading volume,the extreme liquidity of the market,the large number of, and variety of, traders in the market,its geographical dispersion,its long trading hours - 24 hours a day (except on weekends).the variety of factors that affect exchange rates,
According to the BIS [1], average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as follows:$621 billion in spot transactions$208 billion in outright forwards$944 billion in forex swaps$107 billion estimated gaps in reporting
In addition to "traditional" turnover, $1.26 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [2]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips.
Foreign exchange market
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently exceeds US$ 2 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.
Exchange rate
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.Contents1 Quotations2 Free or pegged3 Nominal and real exchange rates4 Interest rate parity5 Balance of payments model6 Asset market model7 Fluctuations in exchange rates8 Foreign exchange markets9 See also10 External links//
QuotationsAn exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency (also called base currency). For example, in a quotation that says the EUR/USD exchange rate is 1.3 (USD per EUR), the price currency is USD and the unit currency is EUR.Quotes using a country's home currency as the price currency (e.g., 0.50593 = $1 in the UK) are known as direct quotation or price quotation (from that country's perspective) ([1]) and are used by most countries.Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.direct quotation: 1 foreign currency unit = x home currency unitsindirect quotation: 1 home currency unit = x foreign currency unitsNote that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.When looking at a currency pair such as EUR/USD, many times the first component (EUR in this case) will be called the base currency. The second is called the counter currency. For example : EUR/USD = 1.33866, means EUR is the base and USD the counter, so 1 EUR = 1.33866 USD.Currency pair are given with four decimal places except au JPY with two decimal places (EUR/USD : 1.33866 - EUR/JPY : 165.293). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.
Free or peggedMain article: Exchange rate regimeIf a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (CNY, ¥) was pegged to the United States dollar at ¥8.2768 to $1. The Chinese were not the only country to do this; from the end of World War II until 1970, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.
Nominal and real exchange ratesThe nominal exchange rate is the rate at which an organization can trade the currency of one country for the currency of another.The real exchange rate (RER) is an important concept in economics, though it is quite difficult to grasp concretely. It is defined by the model: RER = e(P*/P), where 'e' is the exchange rate, as the number of home currency units per foreign currency unit; where P is the price level of the home country; and where P* is the foreign price level.Unfortunately, this compact and simple model for RER calculations is only a theoretical ideal. In practical usage, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing power parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also worth mentioning that government-enacted tariffs can affect the actual rate of exchange, helping to reduce price pressures. PPP was seen to have worked only in the long term (3-5 years) when prices eventually correct towards parity.More recent approaches in modelling the RER employ a set of macroeconomic variables, such as relative productivity and the real interest rate differential.
Interest rate parity
Interest rate parity (IRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If US interest rates exceed Japanese interest rates then the US dollar should depreciate against the Japanese yen by an amount that prevents arbitrage. The future exchange rate is reflected into the forward exchange rate stated today. In our example, the forward exchange rate of the dollar is said to be at a discount because it buys fewer Japanese yen in the forward rate than it does in the spot rate. The yen is said to be at a premium.IRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated on the reward of the containment of inflation and a higher yielding currency.
Balance of payments model
This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.Like PPP, the balance of payments model focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Their flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.
Asset market model
See also: Capital asset pricing modelThe explosion in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as economic growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border-trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services.The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with other markets, particularly equities.Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates.
Fluctuations in exchange rates
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating).
Foreign exchange marketsMain article: Foreign exchange marketThe foreign exchange markets are usually highly liquid as the world's main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1.9 trillion in 2004 (Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results. The biggest foreign exchange trading centre is London, followed by New York and Tokyo.
As mobile phones define one's personality in the same way ringtone defines mobile phones personality. Ringtone is nothing but the pleasing sound from the mobile instrument indicating an incoming call. It provides a sense of personalization to your mobile phone. Using the same old dull ring tone will never be able to differentiate you in the crowd. But, having a personal ring tone will immediately grab the attention. So ring tones are melodies, tunes, sound, noise your mobile make when an incoming call or message arrives.
Ringtone has become a rage among cell phone users, especially youth. Ringtones have brought around a fresh round of innovations to otherwise monotonous mobile phone market. There is always competition among youth for the ringtones downloaded and put to use. Ringtones show that you're up to date and happening. You can truly display your lifestyle and certainly your musical taste on your sleeve.
There are typically two different types of ringtones: monophonic ringtones and polyphonic ringtones. Monophonic tones are simple tunes, most commonly compatible with today's cell phones. The majority of cell phones previously could only make a single tone at a time. The monophonic tones comprised of a series of sequential tones at different frequencies. Polyphonic tones are played on each and every cellular phone now a days that have the capability of playing up to 16 separate tones at once. The combination of tones creates a harmonic melody. Polyphonic ringtones are more musical than a monophonic ringtone.
New ringtone services are operating in order to offer ringtones for download. These ringtones vary from old numbers to just released songs from latest albums. There also are sound effects, anything from chirping crickets to a rocket blasting off to a galloping horse. Ringtones can either be downloaded from net or can be created by the user. The websites vary in that some allow you to purchase specific ringtones while others offer subscriptions that allow you to download an unlimited number of ringtones. Users often download multiple tones so that they can have different rings for different callers. Software is also available that allow consumers to create their own melodic ringtones. The software runs on a computer, and once the tune is set it can be transferred to the phone via a data cable.
Some technical websites declare that the cell phone of tomorrow will replace the MP3 players of today. This will be possible once a dual use battery is invented that can hold a sufficiently long enough charge. The power would last more than a few hours and could be easily recharged. The technicians declare that memory capabilities must be enhanced so that the user can download and store hundreds and thousands of songs. This isn't that far off, in fact an MP3 player being replaced by a cell phone is considered possible within 5 years according to most technical websites. The development has started and there's no looking back. Consumers spent nearly $3.5 billion last year to download 30-second polyphonic renderings of popular songs. Thousands of ringtones are available to suit the personality and mood of the user.
Cell phone antennae- Is it a health hazard
There is growing consensus that cell phone antennas may be harmful to humans due to the huge volume of electromagnetic waves that get concentrated around it during the receipt and placing of calls. This danger is even further aggravated by cellular manufacturers who place the internal antennas close to the earpiece.
Mobile phones are basically radio sets and therefore emit energy radio signals that can penetrate the body and cause harm.
There have been several commissions on the study of the effect of mobile phone on the human body and the most pronounced has been The Stewart Report which suggested that radio waves indeed penetrate human bodies from mobile phone antennas and specially recommended that children who obviously have softer skulls be extra careful and use the device sparingly. The report further went on to state that the brain cells of children are not as fully developed as those of adults and can therefore be at greater risk as they absorb the radiation more than fully hardened adult skulls.
These hazards may exist but cell phones have become part of everyday living like cars and cannot be dispensed with. In the light of this fact, doing away with our phones may not be a practical approach to solving the health hazards issue. Rather we can adopt some habits to mitigate the effects of the radiation.
Children should not use cell phones for long calls. They should sue land lines instead so as to minimize the length of contact with the radiation emitted by the device.
Consumers should buy phones with low specific absorption rate (SAR). Mobile phones should be kept away from the body as much as possible. They can be put in the purse or bag and only brought into contact with the body when there is the need to make or receive a call.
Users should try to keep their conversations short.
If possible, SMS messages can be sent instead of calls so that there is less contact with the body especially around the skull area.
Keep switching between both ears so that one particular ear does not absorb the full brunt of the radiation all the time.
Radiation emission is at the highest when the phone is trying to connect so keep the phone away from the skull till you see the call fully connected.
Weak signal results in higher radiation so avoid making calls in areas where reception is poor as the device will try to boost its power to get you a connection and resultantly bombard you with more radiation.
We cannot do away with cellular devices looking at the convenience they have ushered consumers in. Nevertheless, we can adopt some helpful attitudes to minimize the harmful effects this technology is bringing to mankind.
Cell phone bugs
There are a couple of different ways that cell phone bugs can be used. There are fairly inexpensive low-tech cell phone bugs, and there are more expensive and much more rewarding, devices that can be used to hear what you need to hear, but that others might try to keep from you.
The first category of cell phone bugs is not really a cell phone at all. It merely looks like a cell phone. It can receive calls, and it will call you automatically, but this phone is not meant to be carried with you. This bug is meant to be “forgotten” or “charging” at the home or office. It plugs into a splitter that shares a phone jack with a regular phone. When a call is made, you can listen in to both ends of the conversation by use of your bug. The bug will even call you when the subject places a call so that you can listen in.
One of the cell phone bugs that require you to take a more active role in listening is a cell phone that is equipped to pick up transmissions by cell phones around it. Cell phone calls are among the easiest to intercept, as the sound is carried on frequencies right through the air. All you have to do is be in the vicinity of your subject and then dial in to your cell phone bug. It looks as though you are talking on your cell phone, but really you are listening in on a conversation.
Finally, the most advanced of cell phone bugs let you listen in, even if you are on the other side of the country — or even the other side of the world. This type of bug works like a regular cell phone. Give it to your subject, and then you can listen in to what she or he is doing whenever you want. The phone has a standard number, that anyone can call, and a secret number that only you know. When you call the secret number, a microphone is activated and you can listen in, not only to conversations held on the phone, but also to what is going on in the same room as the cell phone.
These devices are innocuous and common. They look like what everyone today has and seems to need. You cannot go wrong when you get the information you need using cell phone bugs.Forex Trader's Bill of Rights
The Forex Trader’s Bill of Rights (2005) is a non-fiction book about the foreign currency trading market, published by OANDA_Corporation. It is primarily a call to arms for currency traders to call for greater transparency and accountability within the market. The overleaf provided with the printed version of the book states: “Big banks and confederated brokerages have overcomplicated forex: trading costs are inflated, unnecessary risk abounds, and the system is grossly unfair.” Essentially, the book elaborates on this premise, detailing ways in which traders are being unfairly treated and encouraging them to take action.
OANDA is a company that provides currency trading tools for investors, travelers, and businesses. As such, there is an unavoidable marketing aspect to this publication. However, OANDA is not mentioned throughout the book. There has been a clear effort to maintain a relatively neutral point of view. The back cover does state “OANDA is a leading provider of online currency trading…FXTrade…enables all currency investors to change the way forex trading is done”.
The authors believe currency investors have 10 basic rights which are being violated: each short chapter deals with one of these rights. They are:1. The right to immediate, uncensored access to the marketplace2. The right to trade real spot3. The right to know4. The right to trade whenever you want5. The right to equal treatment6. The right to choose and manage risk7. The right to understand cost8. The right to learn – on your own, or through free exchange with other traders9. The right to full disclosure10. The right to pay and receive interest
1) The right to immediate, uncensored access to the marketplace Chapter one argues that when trading traditionally (with banks etc.,) execution and price are affected by who you are (size of your order/ relationship with your market maker etc.), the amount of greed on the part of the market maker, and manual intervention which can delay the trade. The chapter calls for transparency, fairness, and efficiency for traders from market makers.
2) The right to trade real spotChapter two addresses unnecessary delays in settlement of trades, which according to the authors increase risk for investors.
3) The right to knowThe third chapter states that market makers share information based on who you are: in some cases they share information that should not be shared; in other cases they do not share information that should be publicly available. This leads to an unfair advantage.
4) The right to trade whenever you wantThe chapter asserts that market makers may advertise 24 hour trading but they close the books on Friday. However, world events which affect currency price occur on weekends. The argument continues that since the technology for 24/7 trading is available, it should be offered by all market makers.
5) The right to equal treatmentChapter five argues that every trader should be given the same price and spread, and that market makers should not discriminate between traders.
6) The right to choose and manage riskTraders are encouraged to use a market maker who does not require high minimums, lets them trade any amount, and provides immediate settlement as a way of minimizing risk.
7) The right to understand costIt is reasoned that traders have the right to understand spreads, as well as who gets a “cut” and why. This chapter also includes a profitability calculator.
8) The right to learn – on your own, or through free exchange with other tradersThis chapter covers multiple ways to learn about trading, and test new strategies, including trading games offered by online market makers and other sources of Internet information.
9) The right to full disclosureThe book claims that a lack of transparency in pricing, execution, and after the trade needs to addressed. Market makers should publish statistics regarding real spreads and prices and traders should demand that they do this.10) The right to pay and receive interestIt is argued that continuous interest should be introduced, which would make for price flows that are less volatile.
Forex scam
A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to gain an unreasonably high profit by trading in the foreign exchange market, which would be a zero-sum game were it not for the fact that there are brokerage commissions, which technically make forex a "negative-sum" game.
These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits,improperly managed "managed accounts", false advertising, Ponzi schemes and outright fraud. It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment.
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.
An official of the National Futures Association was quoted as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $300 million, mostly in managed accounts. CNN also quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"
The highly technical nature of retail forex industry, the OTC nature of the market, and the loose regulation of the market, leaves retail speculators vulnerable. Defrauded traders and regulatory authorities, can find it very difficult to prove that market manipulation has occurred since there is no central currency market, but rather a number of more or less interconnected marketplaces provided by interbank market makers.
Market participantsTop 10 Currency Traders% of overall volume, May 2006
Source: Euromoney FX survey[3]
Rank Name % of volume1 Deutsche Bank 19.262 UBS AG 11.863 Citigroup 10.394 Barclays Capital 6.615 Royal Bank of Scotland 6.436 Goldman Sachs 5.257 HSBC 5.048 Bank of America 3.979 JPMorgan Chase 3.8910 Merrill Lynch 3.68
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens. This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001-2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS (now owned by ICAP), Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives, however. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in Southeast Asia.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds
Hedge funds, such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Retail forex brokers
Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market and it has been reported by the CFTC website that unexperienced investors may become targets of forex scams.
Market size and liquidity
The foreign exchange market is unique because of:its trading volume,the extreme liquidity of the market,the large number of, and variety of, traders in the market,its geographical dispersion,its long trading hours - 24 hours a day (except on weekends).the variety of factors that affect exchange rates,
According to the BIS [1], average daily turnover in traditional foreign exchange markets was estimated at $1,880 billion. Daily averages in April for different years, in billions of US dollars, are presented on the chart below:
This $1.88 trillion in global foreign exchange market "traditional" turnover was broken down as follows:$621 billion in spot transactions$208 billion in outright forwards$944 billion in forex swaps$107 billion estimated gaps in reporting
In addition to "traditional" turnover, $1.26 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Average daily global turnover in traditional foreign exchange market transactions totaled $2.7 trillion in April 2006 according to IFSL estimates based on semi-annual London, New York, Tokyo and Singapore Foreign Exchange Committee data. Overall turnover, including non-traditional foreign exchange derivatives and products traded on exchanges, averaged around $2.9 trillion a day. This was more than ten times the size of the combined daily turnover on all the world’s equity markets. Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms has also made it easier for retail traders to trade in the foreign exchange market. [2]
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 32.4% in April 2006.
The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually only 0-3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203. Minimum trading size for most deals is usually $100,000.
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition has greatly increased with pip spreads shrinking on the major pairs to as little as 1 to 2 pips.
Foreign exchange market
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex markets currently exceeds US$ 2 trillion. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks.
Exchange rate
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.Contents1 Quotations2 Free or pegged3 Nominal and real exchange rates4 Interest rate parity5 Balance of payments model6 Asset market model7 Fluctuations in exchange rates8 Foreign exchange markets9 See also10 External links//
QuotationsAn exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency (also called base currency). For example, in a quotation that says the EUR/USD exchange rate is 1.3 (USD per EUR), the price currency is USD and the unit currency is EUR.Quotes using a country's home currency as the price currency (e.g., 0.50593 = $1 in the UK) are known as direct quotation or price quotation (from that country's perspective) ([1]) and are used by most countries.Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.direct quotation: 1 foreign currency unit = x home currency unitsindirect quotation: 1 home currency unit = x foreign currency unitsNote that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.When looking at a currency pair such as EUR/USD, many times the first component (EUR in this case) will be called the base currency. The second is called the counter currency. For example : EUR/USD = 1.33866, means EUR is the base and USD the counter, so 1 EUR = 1.33866 USD.Currency pair are given with four decimal places except au JPY with two decimal places (EUR/USD : 1.33866 - EUR/JPY : 165.293). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.
Free or peggedMain article: Exchange rate regimeIf a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (CNY, ¥) was pegged to the United States dollar at ¥8.2768 to $1. The Chinese were not the only country to do this; from the end of World War II until 1970, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system.
Nominal and real exchange ratesThe nominal exchange rate is the rate at which an organization can trade the currency of one country for the currency of another.The real exchange rate (RER) is an important concept in economics, though it is quite difficult to grasp concretely. It is defined by the model: RER = e(P*/P), where 'e' is the exchange rate, as the number of home currency units per foreign currency unit; where P is the price level of the home country; and where P* is the foreign price level.Unfortunately, this compact and simple model for RER calculations is only a theoretical ideal. In practical usage, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing power parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also worth mentioning that government-enacted tariffs can affect the actual rate of exchange, helping to reduce price pressures. PPP was seen to have worked only in the long term (3-5 years) when prices eventually correct towards parity.More recent approaches in modelling the RER employ a set of macroeconomic variables, such as relative productivity and the real interest rate differential.
Interest rate parity
Interest rate parity (IRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If US interest rates exceed Japanese interest rates then the US dollar should depreciate against the Japanese yen by an amount that prevents arbitrage. The future exchange rate is reflected into the forward exchange rate stated today. In our example, the forward exchange rate of the dollar is said to be at a discount because it buys fewer Japanese yen in the forward rate than it does in the spot rate. The yen is said to be at a premium.IRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated on the reward of the containment of inflation and a higher yielding currency.
Balance of payments model
This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium.Like PPP, the balance of payments model focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Their flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model.
Asset market model
See also: Capital asset pricing modelThe explosion in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as economic growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border-trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services.The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with other markets, particularly equities.Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates.
Fluctuations in exchange rates
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating).
Foreign exchange marketsMain article: Foreign exchange marketThe foreign exchange markets are usually highly liquid as the world's main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1.9 trillion in 2004 (Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results. The biggest foreign exchange trading centre is London, followed by New York and Tokyo.
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