FOREX MARGIN TRADING

Forex margin trading is playing main role in forex trading study and learning. As a beginning we should know what is margin?

When a private investor who purchases, let’s say: GBP/USD have to put down a deposit known as ”margin”, this is required rule. Also the sale of one currency involves the purchase of another, the seller of GBP/USD will have bought a volume of USD and will also have to put down margin.

What percent could it be? The normal margin requirement is between 1% and 5% of the underlying value of the trade. Here is an example: If your margin requirement is 2.5% of the 5,000 USD in your margin account, you can open a positions worth 200,000 USD. You may be asked to provide additional funds, when the funds in your margin account drop below the minimum required to support your open positions. This is well known as a ”margin call”.
Margin is really required equity, when it comes to collateralize a position.

The meaning of trading on margin is the ability to buy and sell assets, which represent more value than the capital in your account. Just to give an example: a margin of 2.0% means that you can trade up to $500,000 even though you only have $10,000 in your account. Forex trading is usually done with relatively little margin since currency exchange rate fluctuations tend to be less than one or two percent on any given day.

Here it is: $10,000 is 2.0% of $500.000, or put it another way: 50 times $10,000 is $500,000, because in terms of leverage this corresponds to 50:1. You can make profits very quickly thanks to the possibility of using this much leverage, but there is also a greater risk of incurring large losses and even being completely wiped out. Maximize your leveraging it’s inadvisable, because the risk can be very high. Attracting investors to the FOREX market who wish to risk less than one million dollars at any time (a standard lot for trading on the exchange market), it employs what is referred to as a margin trade.

”Forex Margin trading” was created in 1985 for purposes of potentially advantageous trades of currency. The process involves a cash deposit, which is usually much smaller as an amount than the commodity contract or underlying value of the currency, that is required because of the affecting the trade. The main distinction the financial marketsfrom FOREX trading system, is s that foreign currency purchase-sale operations can be processed and made without having a set required sum to perform trading operations. The client needs to invest only a small start up amount, that is referred to as a ”margin” in order to manage a purchase.

The so-called ”shoulder” or leverage gives the client an opportunity to make deals in volumes that are 50-100 times greater the start up amount. It is granted by a credit institution bank or bank, where he deposits a guaranteed margin. Just a simple example: by depositing a guaranteed amount of $100,000 in a broker company or bank, the individual can make financial operations in amounts of 5 to 10’s of millions of dollars. Any kind of modest gain on the FOREX Market is considered to be of significant size. If we think of another advantage of FOREX, this could be the profit derived from any direction of price changing, regardless of the particular currency involved.

Here are some really important terms connected with the margin:

The margin ( Initial ) is paid by both forex traders: the seller and buyer, representing the losses on that contract, as determined by historical price changes, that is not likely to be exceeded on a usual day’s forex trading.

Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the forex exchange. Calculated by the futures contract, i.e. agreeing a price at the end of each single day, also called the “settlement” or mark-to-market price of the contract.

Speculators use the term - margin-equity ratio, which is the amount of their trading capital, used to hold it as margin at any particular time. Forex trader would rarely hold 100% of their capital as margin, that is also unadvisedly strategy. The options to lose their entire capital at some point could be high. A conservative trader might hold a margin-equity ratio of 15%, while a more aggressive trader might hold 40%. By contrast, if the margin-equity ratio is so low as to make the trader’s capital equal to the value of the futures contract itself, then they would not profit from the inherent leverage implicit in futures trading.. Return on margin (ROM) is often used to judge performance because it represents the gain or loss compared to the exchange’s perceived risk as reflected in required margin. ROM may be calculated (realized return) / (initial margin). The Annualized ROM is equal to (ROM+1)(year/trade_duration)-1. For example if a trader earns 10% on margin in two months, that would be about 77% annualized.

Forex Trading Strategy

All Forex trading strategies begin with analysis such as technical and fundamental. Here are some explains why this analysis is really important for building a solid forex trading strategy:

Fundamental Analysis

We mainly do fundamental analysis to get better information of a long-term trends in the currency market. There are a number of factors that determine the value of a country’s currency. In a fundamental analysis, the primary issues, that are measured are the economic, overall political and social climates of a specific country. It can be difficult measure how these issues affect one another. Before forex trading, every single trader should be aware of the affects of political events, central bank news, non-farm payrolls, consumer price index, imports, exports etc. on the value of currency.

Technical Analysis

Charts and graphs are the main stuff, which is produced by the technical analysis and scrutinizes past data on volume and price. “Fibonacci retracement” is one of the latest buzzwords in this approach to currency trading analysis. Fibonacci was an Italian mathematician, lived in 12th century, who contributed to a modern forex trading strategy consists of his retracements, fans and arcs. The basic - the lines in these mathematical studies are currently used to anticipate a trend change as prices near the lines created by these arcs, fans, and retracements. So Candlestick Formations, Fibonacci Sequence, Financial Breakouts and Trend Lines are some of the more popular forms of technical analysis used in forex.

Successful forex trader will develop a personal forex trading strategy, which will make it perfect with the time. Some traders will use broad spectrum analysis as a means of determining their trades, while others focus a specific study or calculation. If you want to make long-term projections and also determine entry and exit points, most of the experts suggest that you try using a combination of both fundamental and technical analysis. But as we know the final decision is yours, and in this point - trading is a discipline that requires preparation and hard work. You should also know that your overall personal forex trading strategy has to include three vital ingredients:

1. Sound money management.
2. The currency pair you decide to trade.
3. What technical indicators you use for entry/exit plans.

Strategy 1 - Simple Moving Average

Profitable and/or successful trading is mostly described as optimizing your risk with respect to your reward, or upside. Any trading strategy should have a disciplined method of limiting risk while making the most out of favorable market moves. We will show you one decision making model which uses a Simple Moving Average (”SMA”) technical study, based on a 12-period SMA, where each period is 15 minutes. It is one example of a trading decision making strategy, and we encourage any trader to research other strategies as much as possible.

Here we will use a simple algorithm: it will be taken as a signal to buy at the market, when the price of the currency crosses above the 12-period SMA. When the currency price crosses below the 12-period SMA, it will be a signal to “Stop and Reverse” (”SAR”). In other words, a long position will be liquidated and a short position will be established, both with market orders.

Thus this system will keep the traders “always in” the market - he will always have either a long or short position after the first signal. In the chart below, the white line represents the price of USDJPY, the purple line represents the 12-period SMA of USDJPY, and the red line indicates where USDJPY crosses above the SMA, generating a buy signal at approximately 129.90:

The given method is a simple example of technical analysis applied to trading. Many strategies used by professional traders make use of moving averages along with other indicators or “filters”. Note that the moving average method has an element of risk control built in: a long position will be stopped out fairly quickly in a falling market because the price will drop below the SMA, generating a stop-and-reverse signal. The same holds true for a sell signal in a rising market. Note that the SMA is generated automatically by GCI’s integrated charting application.

Forex versus Stocks

Forex versus Stocks Advantages
Advantage	Forex	Stocks
24-hour Trading	YES	NO
Commission Free Trading	YES	NO
Instant Execution of Market Orders	YES	NO
Short-Selling without an Uptick	YES	NO

24-Hour Market

The Forex market is a seamless 24-hour market. Most brokers are open from Sunday at 2PM EST until Friday at 4 PM EST with customer service available 24/7. With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.

Commission Free Trading

Most Forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, Forex trading costs are lower than those of any other market. The brokers are compensated for theirs services through the bid/ask prices.

Instantaneous Execution of Market Orders

Your trades are instantly executed under normal market conditions. You also have price certainty on every market order under normal market conditions. What you click is the price you get. You’re able to execute directly off real-time streaming prices (Yeeeaah!). There's no discrepancy between the displayed price shown on the platform and the execution price to enter your trade. Keep in mind that most brokers only guarantee stop, limit, and entry orders are only guaranteed under normal market conditions. Fills are instantaneous most of the time, but under extraordinarily volatile market conditions order execution may experience delays.

Short-Selling without an Uptick

Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or which way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.

Look at Mr. Forex. He's so confident and sexy. Mr. Stocks has no chance!

SPECULATION IN FOREX

A look into speculation. Something I wrote some time ago [with references :)].

Price movements in financial markets may appear to be based solely on the statistical calculations of fundamental metrics; however, prices are also influenced by an entire culture of speculation (Miyazaki, 2007). Speculators, who are typically short-term investors, trade on the anticipation of making profits due to incorrectly priced assets or securities (Malpezzi & Wachter, 2006). Economic theory states that speculation increases liquidity and price discovery in the market, and consequently, increases economic efficiency. For example, if speculators believe that the market is too optimistic about a firm’s future earnings, they will short the firm’s stock. This collective behavior will drive down the stock price and reflect the correct information about the firm, thus creating a more informationally efficient market (Mengle, 2007). Economic principles also state that only investors with a comparative advantage in speculating will stay in the market because the competent speculators will impose losses on the incompetent ones and eventually weed them out (Bradfield, 2006).

This paper will aim to identify if there are any negative effects of speculation and how it plays a role in currency markets. We will first look at how speculating has proved to be unprofitable in currency markets. Followed by how speculation, in contrast to economic theory, may lead to negative outcomes such as trend following that decrease informational and economic efficiency. We will also analyze whether currency crises are caused by macroeconomic variables or speculative attacks. Lastly, we will look at how speculation may negatively affect an entity’s decision to undertake projects and whether big market players affect the market.

It is important to analyze the effects of speculation, especially on currency markets, because it has important implications for the design of the international financial architecture (Goh & Groenewold, 2000). For example, if price movements in currency markets are due to inconsistencies between fundamental and policy settings, the markets will be just be doing its job. However, if wide swings in currency prices are due to speculative attacks, even when the fundamentals are sound, it follows that policy makers will need to consider measures that prevent the free movement of speculative capital (Goh et al., 2000).

While speculators account for a large share of total market activity, several studies have shown that speculators generally realize net trading losses (Mahani and Bernhardt, 2007). Some researchers suggest that large-scale speculation still manifests itself because of risk loving and utility from gambling. However, others have found that losses are too large to be reconciled solely by risk seeking, and that traders mistakenly believe they can forecast prices and that they tend to remember profits, but forget losses (Mahani et al., 2007). Therefore, it seems that speculators do not seem to trade fully on additional information acquired because of a comparative advantage, but also from overconfidence and an illusion that they can time the market. This conclusion suggests that speculation may distort the prices of securities and consequently reduce their informational value.

Speculative trading losses have also been documented in the currency markets. Even though banks make large revenues and profits in the currency market through their customer business and by being market makers, a study done by Mende and Menkhoff (2006) analyzed the profitability of a mid-sized German bank in speculating currency and found that speculative trades failed to become systematically profitable after a period of thirty minutes. Considering the competitive nature of the currency market, it is plausible to doubt that any player could systematically make money by speculating. Therefore, two conclusions may be deduced from these results. First, it seems that a speculator’s marginal benefit of acquiring additional information on a currency is less than his or her marginal cost and, hence, could be abandoned. It may also be that speculators’ models cannot properly predict short-term price movements in the currency markets. Succinctly, if speculation generates any negative behaviors, investors should not have a strong financial incentive to oppose partial restrictions on the movements of speculative capital.

Read more: http://www.myinvestmentanalysis.com/speculation-and-forex-speculation/#ixzz0RBj9tQOK

World Currency Market...How you could Make use of it

Trading takes place in New York, Frankfurt, London, Tokyo and Sydney at all hours. Forex trading or foreign exchange currency trading involves selling one currency to buy another. Some of the most commonly traded currency pairs are USD-CHF (US Dollar / Swiss Franc), EUR-USD (Euro / US Dollar), USD-JPY (US Dollar / Japan Yen), and GBP-USD (British Pound / US Dollar).

The main Trading centers of the forex currency market are New York, London, Frankfurt, Tokyo, and Sydney. They are located in different time zones. So, this makes the forex market trade 24 hours a day.

There is no central exchange or location where the trading is conducted, and most trades are executed between two interested parties who use the phone or other electronic means to communicate. The main market for forex currency trading is the inter-bank market, in which banks, insurance companies, corporations and other large institutions trade to manage the risks associated with fluctuations in foreign exchange rates.

Currency Trading and the Benefits of Fx Trading

Currency trading is no longer reserved for large institutions. Anyone can learn how to trade forex, and do it from anywhere. Individuals can trade in the forex market from their homes by means of a high speed Internet connection.

To be successful, it is essential to have access to up to date information about the latest changes and trends in the forex market. You can sign up to get our Forex Trade Signals via e-mail, SMS. Please see our 'Trade Forex' FAQ Page for futher details.

Exchange Rate Equilibrium Stories using the RoR Diagram

Any equilibrium in economics has an associated behavioral story to explain the forces that will move the endogenous variable to the equilibrium value. In the foreign exchange (FOREX) model, the endogenous variable is the exchange rate. This is the variable that is determined as a solution in the model and will change to achieve the equilibrium. Variables that do not change in the adjustment to the equilibrium are the exogenous variables. In this model, the exogenous variables are E^e_$/£, i_$, and i_£ . Changes in the exogenous variables are necessary to cause an adjustment to a new equilibrium. However, in telling an equilibrium story it is typical to simply assume that the endogenous variable is not at the equilibrium (for some unstated reason), and then to explain how and why the variable will adjust to the equilibrium value.

Exchange Rate too High

Suppose, for some unspecified reason, the exchange rate is currently at E"_$/£ as shown in the adjoining diagram. The equilibrium exchange rate is at E'_$/£ since at this rate, rates of return are equal and interest rate parity (IRP) is satisfied. Thus, at E"_$/£ the exchange rate is too high. Since the exchange rate, as written, is the value of the pound, we can also say that the pound value is too high relative to the dollar to satisfy IRP.

With the exchange rate at E"_$/£, the rate of return on the dollar, RoR_$, is given by the value A along the horizontal axis. This will be the value of the US interest rate. The rate of return on the pound, RoR_£ is given by the value B, however. This means that RoR_£ < style="margin-top: 0px; margin-right: 0px; margin-bottom: 0px; margin-left: 0px; ">$ and IRP does not hold. Under this circumstance, higher returns on deposits in the US will motivate investors to invest fund in the US rather than Britain. This will raise the supply of £s on the FOREX as British investors seek the higher average return on US assets. It will also lower the demand for British £s by US investors who decide to invest at home rather than abroad. Both changes in the FOREX market will lower the value of the pound and raise the US $ value, reflected as a reduction in E_$/£.

In more straightforward language, when the rate of return on $ deposits is higher than on British deposits, investors will increase demand for the higher RoR currency and reduce demand for the other. The change in demand on the FOREX raises the value of the currency whose RoR was initially higher (the US dollar in this case) and lowers the other currency value (the British pound).

As the exchange rate falls from E"_$/£ to E'_$/£, RoR_£ begins to rise up, from B to A. This occurs because RoR_£ is negatively related to changes in the exchange rate as described in 20-7. Once the exchange rate falls to E'_$/£, RoR_£ will become equal to RoR_$ at A and IRP will hold. At this point there are no further pressures in the FOREX for the exchange rate to change, hence the FOREX is in equilibrium at E'_$/£.

Exchange Rate too Low

If the exchange rate is lower than the equilibrium rate, for some unspecified reason, the then adjustment will proceed in the opposite direction. At any exchange rate below E'_$/£ in the diagram, RoR_£ > RoR_$. This condition will inspire investors to move their funds to Britain with the higher rate of return. The subsequent increase in the demand for pounds will raise the value of the pound on the FOREX and E_$/£ will rise (consequently the dollar value falls). The exchange rate will continue to rise, and the rate of return on pounds will fall, until RoR_£ = RoR_$ (IRP holds again) at E'_$/£.

The following theories explain the fluctuations in FX rates in afloating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions viz; purchasing power parity,interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.

Inflation levels and trends
Typically a currency will lose value if there is a high level ofinflation in the country or if inflation levels are perceived to be rising [. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health
Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality
Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[11]

Economic numbers
While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations
As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns

HEDGING CURRENCY RISKS

Currency hedging (also known as Foreign Exchange Risk hedging) is used both by financial investors to parse out the risks they encounter when investing abroad, as well as by non-financial actors in the global economy for whom multi-currency activities are a necessary evil rather than a desired state of exposure.
For example, labour costs are such that much of the simple commoditized manufacturing in the global economy today goes on in China and South-East Asia (Philippines, Vietnam, Indonesia, etc.). The cost benefit of moving manufacturing to outsource providers outweighs the uncertainties of doing business in foreign countries, so many businesses are moving manufacturing operations overseas. But the benefits of doing this have to be weighted also against currency risk.
If the price of manufacturing goods in another country is fixed in a currency other than the one that the finished goods will be sold for, there is the risk that changes in the values of each currency will reduce profit or produce a loss. Currency hedging is akin to insurance that limits the impact of foreign exchange risk.
Currency hedging is not always available, but is readily found at least in the major currencies of the world economy, the growing list of which qualify as major liquid markets beginning with the "Major Eight" (USD, GBP, EUR, JPY, CHF, HKD, AUD, CAD), which are also called the "Benchmark Currencies", and expands to include several others by virtue of liquidity.
Currency hedging, like many other forms of financial hedging, can be done in two primary ways: with standardized contracts, or with customized contracts (also known as over-the-counter or OTC).
The financial investor may be a hedge fund that decides to invest in a company in, for example, Brazil, but does not want to necessarily invest in the Brazilian currency. The hedge fund can separate out the credit risk (i.e. the risk of the company defaulting), from the currency risk of the Brazilian Real by "hedging" out the currency risk. In effect, this means that the investment is effectively a USD investment, in Brazil. Hedging allows the investor to transfer the currency risk to someone else, who wants to take up a position in the currency. The hedge fund has to pay this other investor to take on the currency exposure, similar to insuring against other types of events.

FOREIGN EXCHANGE RESERVES

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held bycentral banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold,SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assetsof the central bank held in different reserve currencies, mostly thedollar, and to a lesser extent the euro and yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government orfinancial institutions

History:
Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollarfunctioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, all major currencies have not been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves

FOREIGN CURRENCY EXCHANGE RATES

If you are an active trader in the Foreign Exchange Market or the Forex, then you know the value of being regularly informed or updated of the current Forex exchange rate . Forex exchange rate is highly volatile. Theexchange rate of a trading currency at one given time will not be the same the next day. To simplify the concept, the Forex exchange rate of let’s say the Japanese Yen is 100 yen to 1 United States dollar, what it means is that 100 yen is equal to the value of 1 U.S. dollar. How do Forex traders profit from a Forex exchange rate ? A trader buys a currency at a certain amount or exchange rate . The difference between the previous rate and the new rate when the currency was sold or exchanged is the profit that the trader made.

What is Foreign Currency Exchange Rate?

Even the ordinary citizens outside the United States hold on to their precious dollars hoping for an increase in the foreign currency exchange rate later on

Foreign currency exchange rate refers to the value of a certain currency based or compared to the rate of another currency. A foreign currency exchange is said to be increasing its value if it is gaining strength against the dollar even in terms of centavos.

Most people have their foreign currencies changed through banking institutions. Traders are very active in foreign exchange because they use the dollars they get for the payment of their imports. The value of a certain currency increases depending on the actual demand for suchcurrency. The forex market is not really a physical market where a certain quantity of currency is bought and sold, much like the situation in the stock exchange market.

Unlike the stock exchange which can be manipulated through insider trading and other factors, the foreign exchange market is generally safer because it is influenced by world events and economies.

CURRENCY SWAP

A currency swap is a form of swap. It is most easily understood by comparison with an interest rate swap. An interest rate swap is a contract to exchange cash flow streams that might be associated with some fixed income obligations—say swapping the cash flows of a fixed rate loan for those of a floating rate loan. A currency swap is exactly the same thing except, with an interest rate swap, the cash flow streams are in the same currency. With a currency swap, they are in different currencies.

That difference has a practical consequence. With an interest rate swap, cash flows occurring on concurrent dates are netted. With a currency swap, the cash flows are in different currencies, so they can't net. Full principal and interest payments are exchanged without any form of netting.

Suppose the spot JPY/USD exchange rate is 109 JPY per USD. Two firms might enter into a currency swap to exchange the cash flows associated with

a five-year USD 100MM loan at 6-month USD Libor, and

a five year JPY 10,900MM loan at a fixed 3.15% semiannual rate.

All cash flows associated with those loans are paid:

initial receipt/payment of loaned principal,

payment/receipt of interest (in the same currency) on that loan,

ultimate return/recovery of the principal at the end of the loan.

Vanilla currency swaps are quoted both for fixed-floating and floating-floating (basis swap) structures. Fixed-floating swaps are quoted with the interest rate payable on the fixed side—just like a vanilla interest rate swap. The rate can either be expressed as an absolute rate or a spread over some government bond rate. The floating rate is always "flat"—no spread is applied. Floating-floating structures are quoted with a spread applied to one of the floating indexes.

Currency swaps can be used to exploit inefficiencies in international debt markets. Suppose a corporation needs anAUD 100MM loan, but US-based lenders are willing to offer more favorable terms on a USD loan. The corporation could take the USD loan and then find a third party willing to swap it into an equivalent AUD loan. In this manner, the firm would obtain its AUD loan but at more favorable terms than it would have obtained with a direct AUD loan. That advantage must, of course, be balanced against the transaction costs, pre-settlement risk and settlement risk associated with the swap. This is illustrated in Exhibit 1.

FOREIGN EXCHANGE MARKET

The foreign exchange market (currency, forex, or FX) market is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per theBretton Woods system till 1971.
Now, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks,central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.