Options Market

Currency option – it is a contract between a buyer and a seller that gives the buyer the right (but not imposing the obligation) to acquire a certain amount of currency at a predetermined price and within a predetermined period of time regardless of the market price of the currency and imposes on the seller (writer) the obligation to transfer to the buyer currency within the prescribed period, if and when the buyer wish to exercise the option transaction.
Currency option – it is a unique trading tool, it is equally suitable for trading (speculation), and insurance risk (hedging).
On option prices, compared with the prices of other instruments of currency trading, affects a greater number of factors. In contrast to the spots or forwards as high and low volatility can create profitability in the options market. Options traders and are considered as a cheaper currency trading tool, as a tool, featuring greater security and ensuring precise execution of orders on closing a losing position (stop-loss orders).
Currency options occupy a rapidly growing sector of Forex. Since April 1998, options to take it at least 5% of the total. The largest center of option trading is the U.S., followed by the United Kingdom, and Japan. Option price based on the prices of spots and are therefore secondary market instrument.

In the currency market, options transactions may be in cash or in the form of fyuchersov. This implies that trade is carried out by them or “over the counter» (over-the-counter, OTC), as SPOT, or on a centralized fyuchersnom market. Most of the foreign currency options, about 81%, trading by OTC. According to the technology of the transactions by traders this market is similar to the spot market and swaps – trade is carried out with each other directly or through brokers. Transactions occur with any amount of any currency to any terms of the contract, at any time of the day. The number of units of currency can be an or a fraction, and the cost of each can be measured in both U.S. dollars and in other currencies. The contract period can be set either – from a few hours to several years, although mostly set deadlines, focusing on the integers – one week, one month, two months, etc.

Unlike futures foreign exchange contracts for the purchase of foreign currency options does not require entry of the money stock (“margin”). Value of the option (premium), or the price at which the buyer pays the seller (“writer”) reflects the overall risk of the buyer.
On option prices affect the currency price, sales price (strike (exercise) price), currency volatility, the term of the contract, the difference in interest rates, type of contract (call or put) option and model – an American or European. Price of the currency is a major component of the price-setting option transactions, and all other factors are compared and analyzed, taking into account that price. That change in currency prices cause the need to use the option and the impact on its profitability.

Basic currencies

U.S. Dollar (USD). The U.S. dollar is the base currency of the world – a universal equivalent to evaluate any other currency sold on the forex market. All other currencies are usually evaluated by means of the dollar. In the face of international economic and political instability in the U.S. dollar – is the most self-sufficient currency that has been, in particular, it is proved, for example, during the crisis of 1997-1998. in South – East Asia.

As already indicated, the U.S. dollar became the world’s leading currency toward the end of World War II in accordance with the Bretton Vudsskim agreement, which has been determined that all other currencies are measured in dollar terms. The introduction of the euro did not affect the role of the dollar as a global reserve currency.

Other major currencies (Major Currencies) are the euro, Japanese yen, British pound or pound sterling and the Swiss franc.

Euro (EUR). The euro was designed as a leading currency exchange rates for the formation, by analogy with the U.S. dollar. Like American
dollar, the euro has a strong international presence, provided countries – members of the European Monetary Union. This currency is however subject to the negative influence of the uneven development of these countries, high levels of unemployment in some of them, and the reluctance of some governments to implement structural reforms. In 1999 and 2000, the euro / dollar rate also varied by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in the Euro account. Moreover, European money managers rebalanced their portfolios in the direction of reducing the influence of evrosostavlyayuschey due to the reduced willingness to use the European currency to minimize foreign exchange risk in transactions.

Japanese Yen (JPY). The Japanese yen is the third among the most common currencies in the world market, although in terms of market presence is greatly inferior to the U.S. dollar and the euro. The yen is high, practically around the clock liquidity worldwide. The greatest demand for the yen to foreign exchange transactions is, of course, among the Japanese keiretsu – the economic and financial organizations. The yen is very sensitive to fluctuations in the Nikkei index, the Japanese stock market and real estate market.
British Pound (GBP). Until the end of World War II, the pound was the currency of reference. This currency is traded in large volumes for dollars and yen, but its bid for the other currencies are very different to each other. Prior to the introduction of the euro pound also benefited from any of the rumors about the possible convergence rates. With the introduction of the euro the Bank of England seeks to equalize the upper level of the pound with a lower bound rates in the eurozone.

Swiss Franc (CHF). The Swiss franc is the only currency of the leading European countries, which is not part of the European Monetary Union nor the number of the “Big Seven”. Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies, closely resembling the strength and quality of the economy and the financial system in Switzerland. Switzerland has a very close economic relationship with Germany, and thus to the euro zone. Therefore, in the context of political instability in Asia, the Swiss franc competes with the euro.
It is believed that the Swiss franc – a stable currency. In fact, in terms of foreign exchange trading, the franc is exactly the same as those of the euro, but it lacks its liquidity. Excess of demand over supply to it the Swiss franc can be more volatile than the euro.

Trade systems

Trade through brokers. Forex brokers, unlike brokers in the commodity market, do not open their own positions, but only serve the customers. Their role is to ensure to bring buyer and seller in the market, to optimize the advertised price and promptly, accurately and honestly make a request trader.
When trading through a broker, most foreign exchange transactions carried out by the “bleachers» (open box system), which is a microphone facing the broker, constantly translating everything he or she says, in a straight line for the workplace employee of the bank. This ensures that all banks can learn about all executed transactions. Due to the same system as the bleachers trader in a position to know about the announced prices of purchases and sales and the prices at which they are incurred. What a trader can not know – it’s on the volume of purchases and sales and the names of banks that announced prices. Prices are anonymous. The anonymity of the banks, which trade on the market, ensures the efficiency of the market, as all banks participate in trade on equal terms. Sometimes brokers receive a commission, paid by the buyer and seller equally. The fee is negotiable and is set by the bank to the brokerage firm individually.

Brokers announce its customers the price of other customers in a two-way (buying and selling) or unilaterally (buy or sell) form. Traders announce different prices because they have different “read” the market, they have different intentions and different interests. Broker, which is more than one price with one or two sides, will automatically optimize rates. In other words, the broker will always show the highest purchase price to the customer (bid) and the lowest selling price (offer or ask). Thus, the market provides an optimal difference (spread) of these prices.
To predict price movements applies fundamental and technical analysis. The trader has the ability to test the market, making the purchase of a small amount and see if there is any reaction to it.

Another advantage of the brokerage market is that the broker has the ability to provide customers with a wider choice of banks. Some European and Asian banks are working on the night shift, so that incoming requests to them may be transferred to brokers associated with U.S. banks, which increases market liquidity.

Direct dealing. Direct dealing is based on trading reciprocity. Member of the currency market – the bank making or announcing prices – suggests that the calling to another bank to reciprocate ustanovlivaya a price when called upon. Direct dealing provides more flexibility in the trade as compared to dealing in the brokers’ market. Sometimes traders take advantage of this characteristic.

Direct dealing mostly on the phone. Errors in transactions was difficult in this case to install and even harder to remove. With the commissioning of the mid 80′s dealing systems direct dealing has undergone fundamental changes. Dealing systems are running on the Internet computers that connect the participating banks around the world on a one one basis. These systems are characterized by speed, reliability and security. Dealing systems are constantly being improved in order to provide the best possible support when the dealer trade functions. The software is very reliable for the perception of long digits of exchange rates and the standard values. In addition, it provides the correctness and speed for the communication between the partners, switching interlocutors and accessing databases. The trader is in continuous visual contact with the information changing on a monitor. This information is easier to see than to hear, especially when switching during conversations.
Many banks use the combined services of brokers and dealing systems. Both methods are applicable to the same banks, but not to the same right partner, because, for example, the corporation may not engage in transactions in the brokerage market. Traders established in the market as a personal communication with brokers and traders with, but choose resellers, based on the prices offered, and not personal feelings. Therefore, the ratio between the market dealing systems and brokers fluctuates depending on the conditions. For fast-changing conditions more suited dealing systems, whereas under normal conditions are preferred brokerage.

Matching systems. Unlike dealing systems, in which the trade is not anonymous and is carried out on an individual basis, matching systems are anonymous and individual traders vstupayubt to deal with the rest of the market, just as it does in the brokerage market. However, unlike the brokerage market, while there is no individual, optimizing price and liquidity may be limited in time. Matching systems are well suited as trading in small volumes.

Matching systems are inherent dignity of dealing systems such as speed, reliability and security. In addition, these systems automatically manage credit lines. Traders ask all the credit line of each partner. When data is received on the credit line, the system automatically locks the deal with private partners in detecting credit limits or trader shows prices of those banks, which have open lines of credit. Once the credit line is restored, the system will again allow the bank to make the transaction. On the interbank market, traders trade directly with the dealing systems, matching systems, and brokers on the principle of mutual complementarity.

What is fundamental analysis?

In order to predict the movement of the foreign exchange market are used two types of analysis: fundamental and technical (research charts of past changes in commodity prices). Fundamental analysis is based on the application of theoretical models of exchange rate determination and the study of basic economic, social and political factors that affect the exchange rates of foreign currencies.

Theories of exchange rate determination

Purchasing power parity . According to the theory of purchasing power parity (PPP) price of goods in one country should be equal to the price of the same product in another country, based on the exchange rate, ie has implemented the law of one price. There are two known versions of the theory of PPP – absolute and relative. According to the absolute version, the exchange rate is determined by a ratio of the general price level of the two countries, which is a weighted average of prices of all goods produced in the country. This version is applicable to the case when it is possible to distinguish two countries produce and consume the same goods. In addition, with the absolute version does not take into account transport costs and trade barriers. In fact, transport costs are usually quite substantial and are not the same in different countries. Trade barriers are still alive and well are sometimes obvious and sometimes hidden and can significantly affect the cost and distribution of goods. Finally, for this version does not take into account the importance of brands. For example, a car purchase, focusing not only on its lowest cost of all vehicles of the same class, but also taking into account the manufacturer’s name («You are what you drive» – «Tell me, on what you ride, and I’ll tell you who You “).
According to the relative version of the PPP, the exchange rate as a percentage for a specific reference period shall be equal to the difference between the percentage change in the price level in the country and abroad. The relative version of PPP is also not free from drawbacks, such as: (1) the complexity and ambiguity of the definition of the base period, (2) how and when the absolute versions are not considered trade restrictions, (3), the average price in the calculation of the indices and the availability of different products in the indexes make it difficult to compare them, and in the long term, the ratio of domestic prices of the country may change, causing the deviation of the exchange rate on which is determined by the relative PPP. Finally, the exchange rate in the spot market is changing regardless of the ratio of domestic and foreign prices, being exposed to the influence of financial conditions, and other factors not related to the product market.

The theory of elasticity. The theory of elasticity states that the exchange rate is not that other, as the price of foreign currency, which is supported by ranovesie balance of payments. For example, if imports in some countries, and the great, the trade balance is weak. Accordingly, the exchange rate rises, causing the growth of exports from country A and the related income, along with a drop in income of the foreign partner. Once the growth of domestic revenue (in country A) will cause the growth of domestic consumption, both domestic and foreign goods and thus increase the demand for foreign currency, the decline of foreign income (in country B) will result in a decline in consumption in the country in domestic goods and zprubezhnyh and a decrease in demand for domestic currency.
The theory of elasticity is not free of shortcomings, because for a short time, the exchange rate is less elastic than for a long time, and besides constantly having additional factors affecting the validity of this theory.

Modern monetary theory of exchange rate volatility. Modern financial theory of short-term volatility of the exchange rate into account the role of short-term capital market and the long-term impact of the commodity market on the exchange rate. According to these theories, the difference between the exchange rate and PPP due to supply and demand in the international capital level of solvency.
One of the modern financial theory states that exchange rate volatility is caused by a one-time increase
Deals of the domestic currency, because it implies the expectation of further growth in the money supply.
PPP theory applies, therefore, to the capital markets. While some of the two countries, the cost of which varies currency, the demand for money is determined by the level of domestic income and the value of the discount rate, then at higher income increases the number of transactions, while at the high discount rate reduces the demand for money.
According to the second version, the exchange rate adjusts instantaneously to maintain a constant currency parity prices, and the volatility is due to the fact that the commodity market adapts to this slower than the financial one. This version is known as an approach in terms of movement of Finance (the dynamic monetary approach).
The synthesis of traditional and modern monetarist theories. To better accommodate the above theory to the realities of the market, it is possible to formulate a more reasonable conditions for the synthesis of traditional and modern monetarist theories.
Short-term capital outflows caused by the financial turmoil creates a disturbance of balance of payments, causing the need for exchange rate adjustment to restore the balance of payments. Speculative aspirations, volatility of commodity markets and the availability of short-term capital movements cause volatility. The degree of exchange rate flexibility is a function of consumer demand. Because financial markets are more adaptable to changing market conditions than commodity, foreign exchange value of the currency is vulnerable to short-term changes in the capital markets and long-term changes in the commodity markets.

Indicators for fundamental analysis

The fundamental analysis of the currency market, as well as any of the stock or commodity markets using published data for the purpose of special analytical reports and graphs, and tables of numerical indicators – indicators of fundamental analysis. The last is usually published monthly (except for data on gross natsionalnm product and the Employment Cost Index, published quarterly).
Any indicator for fundamental analysis is a pair of numbers. The first number is the figure for the period. The second number – the revised figure for the month preceding the accounting period. For example, in July, the economic indicators are published in June (the reporting period). In addition, the release includes the value of the same indicator for May. This is for the reason that the agency responsible for the collection of economic statistics is the time of the publication of an indicator for more information in May, which is very important for traders. If, for example, the importance of economic indicators over the past month by 0.4%, better than expected and the figure for the previous month is revised lower by 0.4%, the trader can make informed choices about the shift in the state of the economy.
The economic indicators are released at different times. In the U.S., they are usually published in 8h 30min and 10h 30min am ET
time. It is important to remember that most of the data for foreign exchange is released in 8h 30min morning. Therefore, the foreign exchange market opened in the U.S. 8h 20min morning to have time to study the latest data necessary for fundamental analysis.
Information about economic indicators is published in all leading newspapers such as the Wall Street Journal, Financial Times, and the New York Times and magazines for the business world, such as Business Week. There is reason to believe that traders use electronic sources – Bridge Information Systems, Reuters and Bloomberg – to get information from newspapers as well as from scrap sources of current information.
The following discusses some of the indicators for fundamental analysis in accordance with their common classification.

Economic Indicators

Gross national product. Gross national product (GNP) represents the perfection of the overall economy. This indicator is in the macro scale, the sum of consumer spending, investment, government spending and net trade. The gross national product refers to the sum of all goods and services produced by the U.S. both domestically and abroad.
Gross domestic product. Gross domestic product (GDP) is the sum of all goods and services produced in the U.S. by both domestic and foreign companies. The difference between GNP and GDP in terms of the U.S. economy, is rated. GDP figures are more popular. In the U.S., GDP figures are published to facilitate the comparison of performances of different economies.
Consumer Index (Consumption Spending). Consumption is made possible by the personal and the net income. The decision by consumers to spend or save them in nature is psychological. Consumer confidence – it is also an important indicator of the propensity of consumers who have discretionary income to switch from saving to consumption.
Index investment (Investment Spending). Investment or gross private domestic investment, consists of fixed investment and the cost of goods in warehouses.
The index of government expenditure (Government Spending). Indicator of government expenditure is very important by itself, and from the point of view of its impact on other economic indicators. For example, U.S. defense spending until 1990, played an important role in total employment in the United States. What happened after that cuts in military spending in a short time led to an increase in unemployment.
The index of net trading volume (Net Trade). Net trade is another major component of the GNP. Global internationalization, as well as economic and political developments since 1980 have had a strong impact on the United States’ ability to compete overseas. Education over the past decades, the U.S. trade deficit slowed the growth of GNP. GDP depends on trade flows and on financial flows.

Industrial Sector Indicators

Index of Industrial Production (Industrial Production). Characterizes the amount of the total national production of industrial, municipal and mining companies. From the standpoint of fundamental analysis, it is an important economic indicator that reflects the strength of the economy and indirectly – the power of the domestic currency. For this reason, foreign exchange traders use this indicator as a potential signal for trading decisions.
The index of production capacity (Capacity Utilization). Characterizes the total volume of industrial production, divided by the total production capacity. By the latter is meant the maximum level of production, which the company can go out of business under normal conditions. In principle, the use of power to a number of important indicators for the foreign exchange market does not apply. However, there are examples where the attraction of this indicator in terms of the economy has been useful for fundamental analysis. His “normal” value for a steady economy is 81.5%. If it is equal to 85% or more, it is evidence of the “overheating” of industrial production, ie that the economy is close to achieving maximum capacity. The high degree of capacity utilization is preceded by inflation, and the foreign exchange market is the expectation that the central bank will raise interest rates in order to prevent or reduce inflation.
Factory orders. Characterizes the total orders for durable goods and nondurable goods (TAP). The latter include food, clothing, light industrial products and products intended to serve durables. Orders for last discussed separately. For foreign exchange traders factory orders is of limited value.
The index of orders for durable goods (Durable Goods Orders). The index of orders for durable goods (TDP) represents the output operation for over three years. Examples of such products are vehicles, stationary equipment, furniture, jewelry and toys. These products are divided into four main categories: primary metals, machinery, electrical and transport engineering. To remove the effects of the volatility inherent in the volume of military orders, the determination of the indicator defense products accounted for separately. This indicator is important enough for the foreign exchange market, as it gives a good indication of consumer confidence. Since TPD are more expensive tap, high value indicator reflects the intentions of consumers to spend money. Therefore, the foreign exchange market is the value of the indicator is bullish.
Index of stocks (Business Inventories). Based on the cost of items produced and placed in the warehouse for later sale. It is easy to collect such information, and it is not something than can hit the market. In addition, the current level of financial management and universal computerization provide a high degree of control over the storage of goods. Therefore, the importance of this indicator for the currency market is limited.

Construction Data

These indicators are an important economic indicator, included in the calculation of the U.S. GDP. Above all, the building is traditionally the engine, the withdrawal of the U.S. economy out of recessions since World War II. This indicator is divided into three main categories:
1. the number of permits for new construction and the number of zero cycles
2. The number of sales of new and existing single-family homes
3. construction costs.
Building indicator is subject to cyclical changes and is very sensitive to the level of net income. It should be noted here that in itself low discount rate is not able to lead a high demand for homes. As the situation in the early 90s, despite the traditionally low U.S. interest rates on mortgages, of – of no confidence to the weak economy, construction of houses has increased only slightly. However, despite the recession years 2000-2001, the value of houses, for example, in California, and almost fell.
Construction volume in the range from a half to two million units reflect a strong economy, while the figure is equal to about one million units is a testament to the economic downturn.

Inflation Indicators

Traders are closely watching the developments in inflation as the primary method of combating it is the increase in interest rates, and higher rates are aimed to support the local currency. To measure inflation traders use the following economic instruments.
The Producer Price Index. The Producer Price Index (PPI) is composed of ekonmiki most sectors, such as engineering, mining and agriculture. Set to compile the index contains about 3,400 items. The share of each of the most important groups in the calculation of the index:
food products, 24%, 7% fuel, vehicles, 7%, 6%, Apparel. Unlike the CPI, PPI does not include imported goods, services or taxes.

The Consumer Price Index. The Consumer Price Index (CPI) reflects the average change in retail prices for a fixed basket of goods and services. CPI indices are composed of a set of prices for food, shelter, clothing, fuel, transportation, and medical services, daily purchased and received by the population. The share of each of the most important groups in the calculation of the index: Housing – 38% food to 19% fuel, 8%, 7%, cars, clothes, 6%.
Both the PPI and CPI index used by traders as supporting the assessment of inflationary activity, although in the opinion of the Federal Reserve System, these indices are overrated because of inflation.
Deflator GNP (Gross national product implicit deflator). It is calculated by dividing the current value of GDP for a constant value of GDP in U.S. dollars.
The GDP deflator (Gross domestic product implicit deflator). It is calculated by dividing the current value of GDP for a constant value of GDP in U.S. dollars. Both deflator published quarterly, along with those of the GNP and GDP. Deflators are considered to be the most important gauges of inflation.
American Research Bureau Index Features Commodity  (Commodity research bureau’s futures index). American Research Bureau Index Features Commodity facilitates the monitoring of inflationary trends. IBTF consists of Item 21 with the same specific gravity. IBTF components are:
• Precious metals: gold, silver, platinum
• Industrial crude oil, heating oil, unleaded gasoline, lumber, copper and cotton
• grain wheat, rye, soybeans, soybean, soy oil
• Livestock and meat: cattle, pigs and sows
• Import: coffee, cocoa, sugar
• Miscellaneous: orange juice, etc.
Features of food products do IBTF less reliable in terms of general inflation. However, this index is a popular and proven to be reliable since the late 80s.
PPI of magazine “The Journal of Sommerce.” It consists of 18 industrial materials prices and raw materials used in the initial stages of the engineering, construction and energy production. It is more sensitive than other indexes, as has been designed to generate signals about changes in the inflation process, ahead of other indexes.