Brief information about the origin and development of the foreign exchange market.

Currency trading has a long history that dates back to the times of the ancient East, and during the Middle Ages, when caused international banks began to apply the exchange means of payment, valid for presentation to third parties, thereby increasing the flexibility and growth in the number of foreign exchange transactions entered into, began the final formation of the foreign exchange market .
The modern market rates for Cawthorne characterized periodically successive periods of rising volatility (frequency and magnitude of changes) prices and their relative stability emerged in the twentieth century. Until the mid-’30s London was the leading center for foreign exchange trading, and the British pound was the currency for settlement and the creation of reserves. Since then currency trading via telex or telegram, the British pound was the common name “cable” (telegram). After the Second World War, when Britain’s economy has suffered a great loss, and the United States was the only of industrialized countries that are not economically affected by the war, the U.S. dollar, according to the Bretton Vudsskim agreement (1944) between the U.S., Britain and France became the backup currency for all the capitalist countries with a hard peg, their currencies to the U.S. dollar (the creation of the exchange rate band, which should provide the central banks of the countries through intervention or buying currency). In turn, the U.S. dollar was pegged to gold at $ 35 an ounce. The same contract was formed the International Monetary Fund (IMF), which plays an important role in providing credit support to developing and former socialist countries undertaking economic reforms. To meet these goals the IMF uses such tools as reserve tranche to enable countries to use the resources of their own membership quota at maturity, credit lines and agreements such as stand-by. Lines of credit and stand-by – agreements are standard forms of IMF loans, as opposed to compensation such as financial support, which is designed to extend financial assistance to countries with temporary problems due to the decline in exports; replenishment of reserve stocks, intended to aid in the accumulation of primary commodities resources in order to ensure price stability in specific product groups, and extended support to assist countries in financial difficulty, which is the size or duration greater than the volume of other forms of assistance.
An important milestone in the history of the financial markets of the twentieth century was the introduction in the late 70′s freely floating exchange rates, which led to the formation of Forex in its modern sense. This means that the currency may be traded by anybody and its value is a function of the current supply and demand on the market and specific intervention that require constant monitoring, no. After the introduction of a floating exchange rate there was a significant increase in the volume of trade in the Forex market. If in 1977, the daily turnover stood at its U.S. $ 5 billion, by 1987 it grew to 600 billion, and in September 1992 stood at $ 1 trillion by 2000 and stabilized at the level of about one and a half trillion dollars . This significant increase is due to the major factors discussed below. An important role is played by factors such as increased volatility of exchange rates, the efforts of the mutual influence of the economies of various countries on the value of the interest rates of central banks, which essentially depends on the exchange rate of the currency, increase competition in product markets and, in equal measure, amalgamation of different countries, technological revolution in the field of foreign exchange operations. The last expression in the creation of automated dealing systems and the transition to currency trading on the Internet. Dealing systems banks of different countries in a single network, and special matching systems are electronic brokers.
The development of computer technology, software, telecommunications, and increased experience have led to an increase in the skill level of traders and their ability to make profits and reduce risk in operations. Because of this increase in trade qualification also affected the growth of trade.

Regional reserve currency

Along with the world’s reserve currency – the U.S. dollar, currently, there are other regional and international reserve currency. In 1978. Nine countries – members of the European Union adopted a plan to create the European Monetary System, for which the control was created by the European Monetary Cooperation Fund. By 1999. these countries have drawn up a so-called eurozone, was the transition to the single European currency, the euro.
The euro was released in the form of banknotes of 5, 10, 20, 50, 100, 200 and 500 (see Fig. 1.1) and coins of 1 and 2 Euros and 50, 20,10, 5, 2 and 1 cent.
Euro is a regional reserve currency for the euro-zone countries and the Japanese yen – for South-East Asia. In certain situations, the international reserve currency is also the Swiss franc.

The role of the U.S. Federal Reserve and other central banks of the “Big Seven” in Forex.

All central banks, including the U.S. Federal Reserve (Fed) have an impact on the foreign exchange market through changes in interest rates and foreign exchange operations (intervention purchases and currency).

Of the most significant foreign exchange for forex trading is an agreement to repurchase (repurchase agreements), providing for the re-sale of the same system previously purchased by customers currencies at the same price at the agreed time in the future (usually within 15 days) and with a certain interest rate . The volume of transactions on such an agreement corresponds to the amount of temporary injection of reserves into the banking system. The impact on the foreign exchange market is done in order to weaken its currency. Repurchase agreement may impose obligations on either the client or the bank (Fed).
Negotiated contracts for the sale of (matched sale-purchase agreements) are opposite to repurchase agreements. In carrying out the agreed contract of sale, the bank or the Fed sells a currency with a view to its immediate delivery dealer or a foreign central bank, agreeing to buy the currency back at the same price at the agreed time in the future (usually within 7 days). This agreement aims to reset the temporary reserves. The volume of transactions on such an agreement corresponds to the amount of temporary relief provisions. Effect on the market intended for the fact that, to enhance its currency.
Among the foreign currency transactions is placing money in the other central banks or mezhdunarodnh funds. In addition, the Fed since 1962., Has signed a number of agreements with other central banks on currency exchange. For example, to help the allies in the war to liberate Kuwait from Iraqi occupation in 1991: 1990. Bundesbank and the Bank of Japan placed the money in the Fed. Through other central banks made U.S. contributions to the World Bank and the United Nations etc..
Intervention in the foreign exchange market by the Treasury and the Fed are aimed at ensuring orderly market or exchange rate management. They are not intended to affect the state’s financial reserves.
There are two types of currency interventions: naked (naked intervention) and sterile (sterilized).
Naked, or unsterilized intervention is associated exclusively with foreign exchange trading. Everything that happens in this case – it is the purchase or sale of the Federal System of dollars for foreign currency. In addition to the impact on the foreign exchange market, while there is a change in financial situation due to the inflow or outflow of money. A noticeable change in the financial flows makes it necessary to adjust the size of the dividend payment, to change the prices and to make other amendments at all levels of the economy. Therefore, the effect of naked foreign exchange intervention is long-lasting.
Sterilized intervention is neutral in terms of its impact on cash flow. Since not many central banks have
they want their intervention in the currency markets tially all aspects of the economy, sterilized intervention is preferable. The same applies to the Federal Reserve. Sterilized intervention involves an additional measure in the original currency of the transaction. This measure is to sell government securities, compensating increase in provisions due to the intervention. It is easier to understand if you imagine that the central bank intends to finance the transaction currency by selling a certain amount of government securities. Since sterile intervention affects only the level of supply and demand separate currency, its effect is short-term or medium-term.

Exchange rate risk

Exchange rate risk is the result of a permanent change in the markets of the world supply and demand for currency in circulation. The open position is subject to price changes during the entire time of its existence. The most popular measures hold potential losses within reasonable limits are limiting position (position limit) and limiting losses (loss limit). In limiting positions set the maximum amount of a particular currency, which allows the trader to trade in a given time. Limiting losses – a measure aimed at minimizing losses trader carried out by setting the level of stop-loss on the opening.

The risk discount rate

Interest rate risk associated with losses due to fluctuations in the spreads as well as the presence of windows in interest rates, due to the different periods of validity of transactions in different countries. The discrepancy amounts – it’s the difference between the amount of spot and forward (see below). To minimize the risk discount rate set limits on the total size of the discrepancies. A common approach is to divide the discrepancy based on terms of the contract with those that are associated with the contracts, which expire in more or less than six months. All discrepancies shall be entered into the computer system to calculate positions on the end date of the contract, the losses and profits. To predict any changes that may affect the situation of the windows in the discount rates must be constantly monitored.

Credit risk

Credit risk associated with the risk of failure to meet contractual obligations to pay foreign exchange exposure due to voluntary or involuntary action of the second party. If there is such fear trade is in the form of forced transactions, as all traders agree with the Court of Auditors (clearinghouse). Known forms of credit risk:
1. The risk compensation (Replacement risk), which occurs when customers fail banks are at risk of running not to get compensation from the bank for a personal account imbalances.
2. Geographic risk that arises due to different time zones on different continents. For this reason, the currency can be sold
central banks of different countries at different prices at different times of the day. At the beginning of the world trade of the day sold the Australian and New Zealand dollars, then the Japanese yen, the European currency and the last one – the U.S. dollar. Therefore, there may, for example, occur premature payments favor of the party that intends to soon declare bankruptcy or soon to be declared insolvent.
Credit risk for the currencies that are traded on organized markets, minimize collateral credit customers. Commercial and investment banks, trading companies and bank customers should closely monitor the financial viability of their partners. Along with the market value of foreign exchange portfolios participants of transactions in order to avoid the risk, should also evaluate their potetsialnuyu cost. The latter can perform a probabilistic forecast spending for the duration of the open positions.

Risk of the country

Country risk associated with the regular intervention of the government in the face of the Treasury and the credit agency to the work of Forex. Such intervention in foreign exchange transactions is still widespread. Traders need to be aware of this and be able to take into account the possible administrative restrictions of this kind.

Spot Market

To trade foreign exchange cash (spot) accounts for about 37% of the total volume of Forex trading. This market is characterized by high volatility and quick profits (and losers). Basic, in terms of transactions, market participants spots are commercial and investment banks, followed by insurance companies and corporate traders. However, this market is completely open to any individual traders.

The deal on the spot market is actually a two-way contract in which one party sends a certain amount of the currency in exchange for the other party a specified amount of another currency, calculated on the basis of an agreed exchange rate, within two working days from the date of the transaction. The exception is the Canadian dollar, the transfer of which takes place on the next business day.

The name “spot” or cash currency exchange does not mean necessarily that the exchange transaction takes place on the day of the transaction. The two-day deadline for the transfer of currency was established long before the technological breakthroughs in the field of telecommunications. This period of time was needed to comply with the contracting parties of all details of the transaction. With all perfection, in terms of technology, advanced forex, it is impractical further reduce the time available for calculations because mistakes happen and now performers that should be considered before all operations.
With a deal on the spot market bank serving the trader, said last quotation of the currency against the U.S. dollar or other currencies (quota), consisting of two digits (for example, USD / JPY = 133.27/133.32, or what is the same, USD / JPY = 133.27/32). The first digit (the left part of the quota) is bid’a the price at which the trader sells, and the second (right-hand part of the quota) is called the ask, or offer – the price at which a trader buys a currency. The difference between the ask – and bid – prices is called a spread (spread). Spread, like any other change in the price, measured by the number of points (points, or pips).

Most of the volume of trade in the spot market transactions are sale and purchase of major currencies, which include the U.S. dollar, Swiss franc, British pound, Japanese yen and the euro. In other currencies, occupying a significant sector size on the spot market are the Canadian and Australian dollars. Also notable is the share of currency crosses – transactions in which foreign currencies valued in currencies other than the U.S. dollar.

For the spot market is characterized by high levels of liquidity and volatility. So, within the global trading day (24 hours), the euro / dollar could change 18 thousand times, “taking off” at 100-200 points for a few seconds when the market was under the influence of sensational news. However, the rate may remain almost unchanged for a long time, even hours if a trading market practically ceased, and its opening on the other only expected. For example, there is a technical trading window between 4 h 30 min and 6 h pm EDT U.S.. Most of the trades in the spot market is the United States between 8 am and noon, when the same trading time in New York and evropeyskoto markets (see Fig. 1.3). In the absence of international trade support market activity in New York drops sharply, by almost 50%. The volume of trade is limited to night, because not all banks have night shifts. Most of these reports are available nightly application (overnight orders) from traders in their branches or other banks, which are at this time in working time zones.

The reasons for popularity of the spot market, in addition to rapid implementation due to the volatility of open positions, is also a short term of the contract, so that the danger of the risk credit is limited in this market.

Gains and losses may be realized and unrealized. Realized gain or loss – is a certain amount recorded at the closing position. Unrealized gain or loss – is uncertain amount that will create about the current position when it is closed at the current rate. Unrealized gain or loss is constantly changing with the change of the course.

Forward Market

On the Forex market, the forwards are two tools: the irreversible forward transactions (forward outright deals) and exchange transactions, or swaps. Swap is a combination of transactions on the spot market and a forward transaction irreversible. According to the Bank for international agreements, the sector forward transactions held in 1998, 57% of the foreign exchange market. Expressed in U.S. dollars of the total daily turnover of the foreign exchange market in the $ 1.5 trillion at a fraction of forwards have 900 billion.

Timeframe of the forward contract can be from 3 days to 3 years. In fact, any transaction with a term greater than the term of the transaction on the spot market can be considered a forward agreement provided that for both currencies specified in the contract due at the trading day. Market forwards is decentralized, and its members worldwide, regardless of the type of transactions may operate either directly with each other, or through a broker.
Forward price consists of two main parts: the market value (exchange rates) and the forward spread. The main role in setting prices plays market value. Forward spreads as spreads in the spot market, measured in points (or pips) and represent the difference between bid-and ask-prices. Spread value depends on the term of the forward contract, which thus affects the final size of the forward price.

Futures Market

Futures Market is a special kind of irreversible forward transactions, the sector which occupies a small part of Forex. Its features include a fixed amount and timing of the transaction. In contrast to the market forwards, foreign exchange market futures is centralized and all transactions are carried out on it in special sales areas (trading floors). If the irreversible forward transaction – ie deal with a due date greater than the period of the spot market – is performed, as described above, on any day, trading in both countries, the standard amount of foreign currency fyuchersov can be implemented only on the third Wednesday of March, June, September, and December.

There are several advantages of currency fyuchersov creating their appeal. They are available to all market participants, including individuals. Futures trade in the United States excludes the presence of credit risk, since the role of the buyer in respect of any seller, and vice versa performs with the Chicago Clearing House (the Chicago Mercantile Exchange Clearinghouse). In turn, the chamber minimizes its own risk by requiring traders with losing positions to make up the equivalent of their losses.

Although the spot market and the market fyuchersov closely linked, among them there are some differences that create opportunities for arbitrage, ie of the purchase and sale of foreign currency on different exchanges with the difference in prices for a profit.

Windows (gaps), volume and open interest, which are useful tools for technical analysis, are particularly effective in the market futures, although they are widely used in the spot market. Because of these advantages, futures trade constantly attracts a large number of participants. Traders who do not work on the exchange, can recognize futures prices, using the computers from the Internet. The most popular posts in this respect Companies Bridge, Telerate, Reuters and Bloomberg. Telerate provides information about the prices of currency futures together with other materials, while Reuters and Bloomberg report them on special pages, showing the difference futures prices and spot prices.