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Forex Trading in Islamic Perspective
FOREX trading business is very lucrative business dimaan we can get a pretty good profit in a relatively short time. Moreover, the presence Intradayprofit.Com Team which provides forex signal services on the internet, the more easy for every person to gain profit in this business even without having to pass through the effort to learn who is too old and without having to understand the analysis Teknika / or fundamental to a real headache.
Income of the professional traders are very far left and the other business actors such as the business of MLM and conventional trade. But then a lot of questioning of the results obtained halal forex trading business is because of its abstract and invisible.
Some Muslims halal dubious practice futures trading. What do the experts Padangan Islam?
Do you sell something that is not you, "words of the Prophet Muhammad, in a hadith narrated by Abu Huraira.
By some fuqaha (Islamic jurists), the hadith is interpreted saklek.Anyway, any practice of buying and selling goods that do not exist at the time of contract, unlawful. Such interpretation, no doubt, make it difficult to meet the Islamic jurisprudence demands of the growing period with amendments.
Therefore, a number of famous classical scholar with a brilliant idea, opposed to the narrow interpretation that impressed. For example, Ibn al-Qayyim. Bermazhab Hambali scholars are of the opinion that the sale is not true that there are no prohibited items.Both in the Qur'an, the Sunnah and the fatwas of the Companions, the ban was not there.
In the Sunnah of the Prophet, there are only selling ban that does not exist, as the ban on some items that already exist at the time of contract. "Causa ban legislators or physical defect is not the presence or absence of the goods, but garar," said Dr. Syamsul Anwar, MA from IAIN Yogyakarta LIKE opinion explains Ibn al-Qayyim. Garar is uncertainty about whether the goods are traded or not it can be delivered. For example, someone selling a lost camel. Or sell the property of others, but it is not given by the relevant authority.
Thus, although at the time the contract goods does not exist, but there is no certainty that was held at the time needed to submitted to the buyer, the sale is legitimate. In contrast, although the goods are there but - for one reason or another - may not be submitted to the buyer, the sale was illegal.
Futures trading, obviously, not garar. Because, in the future contract, type of commodity bought and sold have been determined. So is the quantity, quality, delivery time and place.Everything runs on the tracks official rules are strict, in anticipation of the occurrence of irregularities in the form of fraudulent practice - the one thing that could have also occurred in the practice of buying and rather conventional.
In the perspective of Islamic law, the Commodity Futures Trading (PBK) (forex is part of the CPB) can be put in a category almasa'il almu'ashirah or legal problems of contemporary Islam.Therefore, its legal status can be categorized to ijtihadiyyah problem. Ijtihadiyyah classification into the region fi la nasha ma FIH, namely the legal issues that do not have a definite reference to legal texts.
In the category of al-Sahrastani legal problems, he belongs to the paradigm of al-qad nushush intahat wa al-waqa'I la tatanahi. That is, the legal texts in the form of Al-Quran and Sunnah has been completed, no longer any extra. Thus, case law emerging legal certainty should be provided through ijtihad.
In the case of CPB law, ijtihad can refer to the theory of legal changes introduced by Ibn al-Jauziyyah Qoyyim. He explains, Fatwa law may change due to several variables perubahnya, namely: time, place, intent, purpose and benefits. Theory of legal change is derived from the paradigm of legal science teacher Ibn Taymiyyah, who said that a-haqiqah fi al-a'yan la fi al-adzhan.That is, the truth of the law is found in empirical reality, not in the realm of thought or idea of nature.
This paradigm is derived from Islamic law principles of justice that the Qur'an used the term al-mizan, a-qisth, al-wasth, and al-adl.
In practice, in particular the problem can be inserted into PBK in the field of study fiqh al-siyasa maliyyah, the legal political material. In other words, PBK including study of Islamic law in the sense of how Islamic law is applied in the ownership of the property, through the trading of commodity futures in the era of globalization and free trade.
Realization that the most likely in order to protect the perpetrators and those involved in trading commodity futures in space and time as well as consideration of the purpose and benefits of today, in line with the spirit and sound of Law. 32/1977 on CPB.
Because the theory of legal change as described above, can show elasticity Islamic institutions and practices in the economy, the CPB in the Islamic legal system may be analogous to the bay 'al-salam'ajl bi'ajil.
Bay 'al-salam can be interpreted as follows. Al-Salaf al-salam or bay is' AJL bi'ajil, which is traded something with the provisions of its properties are guaranteed the truth. In such transactions, delivery of ra's al-mal in terms of money as exchange value takes precedence over delivery of the commodity in question in the transaction. Hanabilah Syafi'iyah scholars and define it: "Agreement on the sale of commodities which were guaranteed the deferred nature of the (futures) on the price of the stock specified in the contract".
Validity of futures transactions, determined by the harmony and the fulfillment of the following requirements:
Pillars of the major elements that must exist in a transaction event key elements in the bay 'al-salam are:
The parties to the transaction participants ('aqid) is referred to as Muslims or Muslim ilaih.Transaction object (ma'qud alaih), the goods and the price of the commodity futures exchange (ra's al-mal al-Muslim al-salam and FIH).Sentence transaction (Sighat 'aqad), the consent and granted.Noteworthy of these elements, is that consent and qabul expressed in the language and the sentence that clearly shows the futures transaction. Therefore, scholars emphasize the use of the term Syafi'iyah al-Salaf al-salam or in sentences that transaction, arguing that 'aqd al-salam is bay' al-ma'dum with nature and the different ways of selling and contract buy (buy).
Conditions
Requirements related to the transaction object, is this: that the object of the transaction must meet the clarity regarding: the type (s yakun jinsin ma'lumin fi), its nature, size (content), term delivery, exchange rates, place of delivery.
Requirements to be met by exchange rates (al-tsaman), is, first, the clarity of the type of exchange, ie dirhams, dinars, dollars or dollar or so on goods that can be weighed, disukat, etc.. Second, the clarity of the type of exchange is dollars, U.S. dollars, Singapore dollars, and so on. Are the scales agreed in kilograms, pounds, etc..
Clarity about the quality of the transaction object, if the special qualities, good or bad being. The terms above are set with the intention of eliminating jahalah fi al-'aqd or excuse ignorance of the conditions of the goods at the time of the transaction.Because this will result in disputes between transactors, which would undermine the value of the transaction.
Clarity of the exchange rates. Brief explanation of the above seems to have been able to provide clarity PBK permissibility.Even if in practice there are still those who feel disadvantaged by laws that exist, it can be used the rule of law or a legal maxim which says: ma la la yutrak kulluh yudrak kulluh. What can not be implemented all of them, then do not have to be abandoned entirely.
Thus, the law and the implementation of the EAP is to some extent be declared acceptable or at least consistent with the spirit and soul of the norms of Islamic law, with the analogies to the bay 'al-salam.
بسم الله الرحمن الرحيم
In his book, Prof. Drs. Zuhdi Masjfuk entitled Masail fiqhiyah; Capita Selecta Islamic law, found that the Forex (Foreign Trade) is allowed in Islamic law.
Foreign exchange trading arises because of the trade goods / commodities between countries that are international. Trade (Exports-Imports) This course requires a means to pay the money that each state has its own provisions and different from each other in accordance with supply and demand among those countries that arose VALUE CURRENCY RATIO between countries.
Comparison between countries of the currency collected in a STOCK or MARKET that is international and is bound in a mutually beneficial agreement. Value of the currency of a country to country is changing (fluctuating) at any time according to the volume of demand and supply. The existence of demand and supply are what caused the transaction currency. Which actually is the exchange of different currencies value.
TRANSACTION LAW ISLAM in FOREXA. There Ijab-Qobul: ---> There is an agreement to give and receive
* The seller delivered the goods and the buyer pays in cash.* Ijab-Qobulnya done with oral, written and messengers.* Buyers and sellers have full authority to implement and perform legal acts (adult and sensible)
2. Qualified to be a transaction object that is:
* Holy merchandise (not unclean)* Can be used* Can be handed over* Obviously the price of goods and* For Sale (purchase) by the owners themselves or their proxies owners permission* Items already in hand if the goods obtained in exchange.
It should be added the opinion of Muhammad Isa, the sale and purchase of shares is allowed in religion.
لاتشترواالسمك فیالماءفاءنه غرد
"Do not buy fish in the water, because such a sale actually contains a fraud". (Hadith Ahmad bin Hambal and Al Bayhaqi from Ibn Mas'ud)
Buying and selling goods in the transaction are not allowed on the condition must be explained by its properties or characteristics.Then if the goods in accordance with the description of the seller, the sale sahlah purchasing. But if it does not fit the buyer has the right khiyar, that may continue or cancel the sale purchasing. This is in accordance with the traditions of the Prophet narrated by al Daraquthni of Abu Hurairah:
من سترئ شيتالم يرهفله الخيارإذاراه
"Anyone who buys something that he did not see it, then he is entitled khiyar if he had seen".
Buying and selling, yields were still hidden, such as cassava, potatoes, onions and so on are also allowed, as long as given for example, because it would have difficulty or loss if you have to spend all that pent-up crop to sell. This is in accordance with the rules of Islamic law:
المشقة تجلب التيسر
The difficulty is interesting ease.
Likewise, buying and selling goods that have been wrapped / covered, such as canned food, LPG, and so on, asalkam labeled stating its contents. Vide Sabiq, op. cit. thing. 135. Text of the rules of Islamic law regarding the above, vide Al Suyuti, Al Ashbah wa al Nadzair, Egypt, Muhammad Mustafa, 1936 p. 55.
BUY AND SELL FOREIGN STOCK
The definition of foreign currency is the currency of foreign countries like the U.S. dollar, British Pound, Euro, Australian dollar, Malaysian Ringgit, and so on.
If international trade occurs between countries so every country needs foreign exchange as a means of payment abroad in the world is called foreign exchange trading. Indonesia for example, exporters will earn foreign exchange from the export, otherwise the importer Indonesia needs foreign exchange to import from abroad.
Thus there will be supply and perminataan in the foreign exchange market. full authority to assign each state its respective rate (rate is the ratio of its value against foreign currencies) for example 1 U.S. dollar = Rp. 12,000. But the exchange of money or the ratio of the exchange rate at any time can vary, depending on the economic strength of each country. Recording rate and currency trading, foreign currency held in the Stock Exchange
Compiled from various sources
FOREX trading business is very lucrative business dimaan we can get a pretty good profit in a relatively short time. Moreover, the presence Intradayprofit.Com Team which provides forex signal services on the internet, the more easy for every person to gain profit in this business even without having to pass through the effort to learn who is too old and without having to understand the analysis Teknika / or fundamental to a real headache.
Income of the professional traders are very far left and the other business actors such as the business of MLM and conventional trade. But then a lot of questioning of the results obtained halal forex trading business is because of its abstract and invisible.
Some Muslims halal dubious practice futures trading. What do the experts Padangan Islam?
Do you sell something that is not you, "words of the Prophet Muhammad, in a hadith narrated by Abu Huraira.
By some fuqaha (Islamic jurists), the hadith is interpreted saklek.Anyway, any practice of buying and selling goods that do not exist at the time of contract, unlawful. Such interpretation, no doubt, make it difficult to meet the Islamic jurisprudence demands of the growing period with amendments.
Therefore, a number of famous classical scholar with a brilliant idea, opposed to the narrow interpretation that impressed. For example, Ibn al-Qayyim. Bermazhab Hambali scholars are of the opinion that the sale is not true that there are no prohibited items.Both in the Qur'an, the Sunnah and the fatwas of the Companions, the ban was not there.
In the Sunnah of the Prophet, there are only selling ban that does not exist, as the ban on some items that already exist at the time of contract. "Causa ban legislators or physical defect is not the presence or absence of the goods, but garar," said Dr. Syamsul Anwar, MA from IAIN Yogyakarta LIKE opinion explains Ibn al-Qayyim. Garar is uncertainty about whether the goods are traded or not it can be delivered. For example, someone selling a lost camel. Or sell the property of others, but it is not given by the relevant authority.
Thus, although at the time the contract goods does not exist, but there is no certainty that was held at the time needed to submitted to the buyer, the sale is legitimate. In contrast, although the goods are there but - for one reason or another - may not be submitted to the buyer, the sale was illegal.
Futures trading, obviously, not garar. Because, in the future contract, type of commodity bought and sold have been determined. So is the quantity, quality, delivery time and place.Everything runs on the tracks official rules are strict, in anticipation of the occurrence of irregularities in the form of fraudulent practice - the one thing that could have also occurred in the practice of buying and rather conventional.
In the perspective of Islamic law, the Commodity Futures Trading (PBK) (forex is part of the CPB) can be put in a category almasa'il almu'ashirah or legal problems of contemporary Islam.Therefore, its legal status can be categorized to ijtihadiyyah problem. Ijtihadiyyah classification into the region fi la nasha ma FIH, namely the legal issues that do not have a definite reference to legal texts.
In the category of al-Sahrastani legal problems, he belongs to the paradigm of al-qad nushush intahat wa al-waqa'I la tatanahi. That is, the legal texts in the form of Al-Quran and Sunnah has been completed, no longer any extra. Thus, case law emerging legal certainty should be provided through ijtihad.
In the case of CPB law, ijtihad can refer to the theory of legal changes introduced by Ibn al-Jauziyyah Qoyyim. He explains, Fatwa law may change due to several variables perubahnya, namely: time, place, intent, purpose and benefits. Theory of legal change is derived from the paradigm of legal science teacher Ibn Taymiyyah, who said that a-haqiqah fi al-a'yan la fi al-adzhan.That is, the truth of the law is found in empirical reality, not in the realm of thought or idea of nature.
This paradigm is derived from Islamic law principles of justice that the Qur'an used the term al-mizan, a-qisth, al-wasth, and al-adl.
In practice, in particular the problem can be inserted into PBK in the field of study fiqh al-siyasa maliyyah, the legal political material. In other words, PBK including study of Islamic law in the sense of how Islamic law is applied in the ownership of the property, through the trading of commodity futures in the era of globalization and free trade.
Realization that the most likely in order to protect the perpetrators and those involved in trading commodity futures in space and time as well as consideration of the purpose and benefits of today, in line with the spirit and sound of Law. 32/1977 on CPB.
Because the theory of legal change as described above, can show elasticity Islamic institutions and practices in the economy, the CPB in the Islamic legal system may be analogous to the bay 'al-salam'ajl bi'ajil.
Bay 'al-salam can be interpreted as follows. Al-Salaf al-salam or bay is' AJL bi'ajil, which is traded something with the provisions of its properties are guaranteed the truth. In such transactions, delivery of ra's al-mal in terms of money as exchange value takes precedence over delivery of the commodity in question in the transaction. Hanabilah Syafi'iyah scholars and define it: "Agreement on the sale of commodities which were guaranteed the deferred nature of the (futures) on the price of the stock specified in the contract".
Validity of futures transactions, determined by the harmony and the fulfillment of the following requirements:
Pillars of the major elements that must exist in a transaction event key elements in the bay 'al-salam are:
The parties to the transaction participants ('aqid) is referred to as Muslims or Muslim ilaih.Transaction object (ma'qud alaih), the goods and the price of the commodity futures exchange (ra's al-mal al-Muslim al-salam and FIH).Sentence transaction (Sighat 'aqad), the consent and granted.Noteworthy of these elements, is that consent and qabul expressed in the language and the sentence that clearly shows the futures transaction. Therefore, scholars emphasize the use of the term Syafi'iyah al-Salaf al-salam or in sentences that transaction, arguing that 'aqd al-salam is bay' al-ma'dum with nature and the different ways of selling and contract buy (buy).
Conditions
Requirements related to the transaction object, is this: that the object of the transaction must meet the clarity regarding: the type (s yakun jinsin ma'lumin fi), its nature, size (content), term delivery, exchange rates, place of delivery.
Requirements to be met by exchange rates (al-tsaman), is, first, the clarity of the type of exchange, ie dirhams, dinars, dollars or dollar or so on goods that can be weighed, disukat, etc.. Second, the clarity of the type of exchange is dollars, U.S. dollars, Singapore dollars, and so on. Are the scales agreed in kilograms, pounds, etc..
Clarity about the quality of the transaction object, if the special qualities, good or bad being. The terms above are set with the intention of eliminating jahalah fi al-'aqd or excuse ignorance of the conditions of the goods at the time of the transaction.Because this will result in disputes between transactors, which would undermine the value of the transaction.
Clarity of the exchange rates. Brief explanation of the above seems to have been able to provide clarity PBK permissibility.Even if in practice there are still those who feel disadvantaged by laws that exist, it can be used the rule of law or a legal maxim which says: ma la la yutrak kulluh yudrak kulluh. What can not be implemented all of them, then do not have to be abandoned entirely.
Thus, the law and the implementation of the EAP is to some extent be declared acceptable or at least consistent with the spirit and soul of the norms of Islamic law, with the analogies to the bay 'al-salam.
بسم الله الرحمن الرحيم
In his book, Prof. Drs. Zuhdi Masjfuk entitled Masail fiqhiyah; Capita Selecta Islamic law, found that the Forex (Foreign Trade) is allowed in Islamic law.
Foreign exchange trading arises because of the trade goods / commodities between countries that are international. Trade (Exports-Imports) This course requires a means to pay the money that each state has its own provisions and different from each other in accordance with supply and demand among those countries that arose VALUE CURRENCY RATIO between countries.
Comparison between countries of the currency collected in a STOCK or MARKET that is international and is bound in a mutually beneficial agreement. Value of the currency of a country to country is changing (fluctuating) at any time according to the volume of demand and supply. The existence of demand and supply are what caused the transaction currency. Which actually is the exchange of different currencies value.
TRANSACTION LAW ISLAM in FOREXA. There Ijab-Qobul: ---> There is an agreement to give and receive
* The seller delivered the goods and the buyer pays in cash.* Ijab-Qobulnya done with oral, written and messengers.* Buyers and sellers have full authority to implement and perform legal acts (adult and sensible)
2. Qualified to be a transaction object that is:
* Holy merchandise (not unclean)* Can be used* Can be handed over* Obviously the price of goods and* For Sale (purchase) by the owners themselves or their proxies owners permission* Items already in hand if the goods obtained in exchange.
It should be added the opinion of Muhammad Isa, the sale and purchase of shares is allowed in religion.
لاتشترواالسمك فیالماءفاءنه غرد
"Do not buy fish in the water, because such a sale actually contains a fraud". (Hadith Ahmad bin Hambal and Al Bayhaqi from Ibn Mas'ud)
Buying and selling goods in the transaction are not allowed on the condition must be explained by its properties or characteristics.Then if the goods in accordance with the description of the seller, the sale sahlah purchasing. But if it does not fit the buyer has the right khiyar, that may continue or cancel the sale purchasing. This is in accordance with the traditions of the Prophet narrated by al Daraquthni of Abu Hurairah:
من سترئ شيتالم يرهفله الخيارإذاراه
"Anyone who buys something that he did not see it, then he is entitled khiyar if he had seen".
Buying and selling, yields were still hidden, such as cassava, potatoes, onions and so on are also allowed, as long as given for example, because it would have difficulty or loss if you have to spend all that pent-up crop to sell. This is in accordance with the rules of Islamic law:
المشقة تجلب التيسر
The difficulty is interesting ease.
Likewise, buying and selling goods that have been wrapped / covered, such as canned food, LPG, and so on, asalkam labeled stating its contents. Vide Sabiq, op. cit. thing. 135. Text of the rules of Islamic law regarding the above, vide Al Suyuti, Al Ashbah wa al Nadzair, Egypt, Muhammad Mustafa, 1936 p. 55.
BUY AND SELL FOREIGN STOCK
The definition of foreign currency is the currency of foreign countries like the U.S. dollar, British Pound, Euro, Australian dollar, Malaysian Ringgit, and so on.
If international trade occurs between countries so every country needs foreign exchange as a means of payment abroad in the world is called foreign exchange trading. Indonesia for example, exporters will earn foreign exchange from the export, otherwise the importer Indonesia needs foreign exchange to import from abroad.
Thus there will be supply and perminataan in the foreign exchange market. full authority to assign each state its respective rate (rate is the ratio of its value against foreign currencies) for example 1 U.S. dollar = Rp. 12,000. But the exchange of money or the ratio of the exchange rate at any time can vary, depending on the economic strength of each country. Recording rate and currency trading, foreign currency held in the Stock Exchange
Compiled from various sources
Market size and liquidity
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.
Trading in the United Kingdom accounted for 36.7% of the total, making it by far the most important center for foreign exchange trading. Trading in the United States accounted for 17.9%, and Japan accounted for 6.2%.[5]
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Most developed countries permit the trading of derivative products (like futures and options on futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Some governments of emerging economies do not allow foreign exchange derivative products on their exchanges because they have capital controls. The use of derivatives is growing in many emerging economies.[6] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.
| Rank | Name | Market share |
|---|---|---|
| 1 |  Deutsche Bank | 15.64% |
| 2 |  Barclays Capital | 10.75% |
| 3 |  UBS AG | 10.59% |
| 4 |  Citi | 8.88% |
| 5 | JPMorgan | 6.43% |
| 6 | HSBC | 6.26% |
| 7 | Royal Bank of Scotland | 6.20% |
| 8 | Credit Suisse | 4.80% |
| 9 | Goldman Sachs | 4.13% |
| 10 | Morgan Stanley | 3.64% |
Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house. The biggest geographic trading center is the United Kingdom, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the International Monetary Fund calculates the value of its Special Drawing Rights every day, they use the London market prices at noon that day.
[edit] Market participants
interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. 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 foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller 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 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”.[9] Central banks also participate in the foreign exchange market to align currencies to their economic needs.
[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. 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.[citation needed][edit] 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.[edit] 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. 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.[edit] Foreign exchange fixing
Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.The mere expectation or rumor of a central bank foreign exchange 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. The combined resources of the market can easily overwhelm any central bank.[10] Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Southeast Asia.
[edit] Hedge funds as speculators
About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. 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.[edit] 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 bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.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), and hence can generate large trades.
[edit] Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market with the advent of retail foreign exchange platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the Commodity Futures Trading Commission and National Futures Association have in the past been subjected to periodic Foreign exchange fraud.[11][12] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the foreign exchange brokers operate from the UK under Financial Services Authority regulations where foreign exchange trading using margin is part of the wider over-the-counter derivatives trading industry that includes Contract for differences and financial spread betting.There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at.
[edit] Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account).It is estimated that in the UK, 14% of currency transfers/payments[13] are made via Foreign Exchange Companies.[14] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
[edit] Money transfer/remittance companies and bureaux de change
Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange[citation needed]Bureaux de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.
[edit] Trading characteristics
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2010) |
|---|---|---|---|
| 1 | United States dollar | USD ($) | 84.9% |
| 2 |  Euro | EUR (€) | 39.1% |
| 3 |  Japanese yen | JPY (¥) | 19.0% |
| 4 | Pound sterling | GBP (£) | 12.9% |
| 5 |  Australian dollar | AUD ($) | 7.6% |
| 6 | Swiss franc | CHF (Fr) | 6.4% |
| 7 |  Canadian dollar | CAD ($) | 5.3% |
| 8 |  Hong Kong dollar | HKD ($) | 2.4% |
| 9 |  Swedish krona | SEK (kr) | 2.2% |
| 10 |  New Zealand dollar | NZD ($) | 1.6% |
| 11 |  South Korean won | KRW (₩) | 1.5% |
| 12 |  Singapore dollar | SGD ($) | 1.4% |
| 13 |  Norwegian krone | NOK (kr) | 1.3% |
| 14 |  Mexican peso | MXN ($) | 1.3% |
| 15 |  Indian rupee | INR (  ) | 0.9% |
| Other | 12.2% | ||
| Total[15] | 200% | ||
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were:
- EURUSD: 28%
- USDJPY: 14%
- GBPUSD (also called cable): 9%
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
[edit] Determinants of exchange rates
See also: exchange rates
The following theories explain the fluctuations in exchange rates in a floating exchange rate regime (In a fixed exchange rate regime, rates are decided by its government):- International parity conditions: Relative 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.
- 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.
- 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.”
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors
These include: (a) economic policy, disseminated by government agencies and central banks, (b) economic conditions, generally revealed through economic reports, and other economic indicators.- Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
- Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
- Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
- Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation 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.
- Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector [1].
[edit] Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.
[edit] 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", a type of capital flight whereby investors move their assets to a perceived "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.[16]
- Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.[17]
- "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[18] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
- 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.[19]
[edit] Financial instruments
[edit] Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.[edit] Forward
See also: Forward contract
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.[edit] Swap
Main article: Foreign exchange swap
The most common type of forward transaction is the swap. In an swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.[edit] Future
Main article: Currency future
Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.[edit] Option
Main article: Foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world.[edit] Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[20] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[21]Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors.[22]
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[23] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[24]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
[edit] Risk aversion
See also: Safe-haven currency
In the context of the foreign exchange market, traders liquidate their positions in various currencies to take up positions in safe-haven currencies, such as the US Dollar.[26] Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across the world fell while the US Dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA.[27]
[edit] See also
| |
[edit] References
- ^ The Economist – Guide to the Financial Markets (pdf)
- ^ Global imbalances and destabilizing speculation (2007), UNCTAD Trade and development report 2007 (Chapter 1B).
- ^ a b c 2010 Triennial Central Bank Survey, Bank for International Settlements.
- ^ "What is Foreign Exchange?". Published by the International Business Times AU. Retrieved: February 11, 2011.
- ^ BIS Triennial Central Bank Survey, published in September 2010.
- ^ "Derivatives in emerging markets", the Bank for International Settlements, December 13, 2010
- ^ Source: Euromoney FX survey FX survey 2011: The Euromoney FX survey is the largest global poll of foreign exchange service providers.'
- ^ "The $4 trillion question: what explains FX growth since the 2007 survey?, the Bank for International Settlements, December 13, 2010
- ^ Gabriele Galati, Michael Melvin (December 2004). "Why has FX trading surged? Explaining the 2004 triennial survey". Bank for International Settlements.
- ^ Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. , the Wall Street Journal, December 12, 2007
- ^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits". The Wall Street Journal (Dow Jones and Company). Retrieved 2007-10-31.
- ^ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100". The New York Times. Retrieved 2007-10-30.
- ^ The Sunday Times (UK), 16 July 2006
- ^ The 5 largest in the UK are Travelex, Moneycorp, HiFX, World First and Currencies Direct
- ^ The total sum is 200% because each currency trade always involves a currency pair.
- ^ Safe haven currency
- ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343–375.
- ^ Investopedia
- ^ Sam Y. Cross, All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York (1998), chapter 11, pp. 113–115.
- ^ Michael A. S. Guth, "Profitable Destabilizing Speculation," Chapter 1 in Michael A. S. Guth, Speculative behavior and the operation of competitive markets under uncertainty, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850.
- ^ What I Learned at the World Economic Crisis Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org
- ^ Summers LH and Summers VP (1989) 'When financial markets work too well: a Cautious case for a securities transaction tax' Journal of financial services
- ^ But Don't Rush Out to Buy Kronor: Sweden's 500% Gamble - International Herald Tribune
- ^ Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995.
- ^ "Risk Averse". Investopedia. Retrieved 2010-02-25.
- ^ "Global markets-US stocks rebound, dollar gains on risk aversion". Reuters. 2010-02-05. Retrieved 2010-02-27.
- ^ Stewart, Heather (2008-04-09). "IMF says US crisis is 'largest financial shock since Great Depression'". London: guardian.co.uk. Retrieved 2010-02-27.
[edit] External links
The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.
Trading in the United Kingdom accounted for 36.7% of the total, making it by far the most important center for foreign exchange trading. Trading in the United States accounted for 17.9%, and Japan accounted for 6.2%.[5]
Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-traded currency derivatives represent 4% of OTC foreign exchange turnover. Foreign exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Most developed countries permit the trading of derivative products (like futures and options on futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Some governments of emerging economies do not allow foreign exchange derivative products on their exchanges because they have capital controls. The use of derivatives is growing in many emerging economies.[6] Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some capital controls.
| Rank | Name | Market share |
|---|---|---|
| 1 | Deutsche Bank | 15.64% |
| 2 | Barclays Capital | 10.75% |
| 3 | UBS AG | 10.59% |
| 4 | Citi | 8.88% |
| 5 | JPMorgan | 6.43% |
| 6 | HSBC | 6.26% |
| 7 | Royal Bank of Scotland | 6.20% |
| 8 | Credit Suisse | 4.80% |
| 9 | Goldman Sachs | 4.13% |
| 10 | Morgan Stanley | 3.64% |
Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange or clearing house. The biggest geographic trading center is the United Kingdom, primarily London, which according to TheCityUK estimates has increased its share of global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the International Monetary Fund calculates the value of its Special Drawing Rights every day, they use the London market prices at noon that day.
[edit] Market participants
interbank market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the EUR) as you go down the levels of access. 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 foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier interbank market accounts for 53% of all transactions. From there, smaller 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 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”.[9] Central banks also participate in the foreign exchange market to align currencies to their economic needs.[edit] Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. 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.[citation needed][edit] 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.[edit] 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. 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.[edit] Foreign exchange fixing
Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.The mere expectation or rumor of a central bank foreign exchange 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. The combined resources of the market can easily overwhelm any central bank.[10] Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Southeast Asia.
[edit] Hedge funds as speculators
About 70% to 90%[citation needed] of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. 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.[edit] 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 bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.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), and hence can generate large trades.
[edit] Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market with the advent of retail foreign exchange platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the Commodity Futures Trading Commission and National Futures Association have in the past been subjected to periodic Foreign exchange fraud.[11][12] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller and perhaps questionable brokers are now gone or have moved to countries outside the US. A number of the foreign exchange brokers operate from the UK under Financial Services Authority regulations where foreign exchange trading using margin is part of the wider over-the-counter derivatives trading industry that includes Contract for differences and financial spread betting.There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at.
[edit] Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account).It is estimated that in the UK, 14% of currency transfers/payments[13] are made via Foreign Exchange Companies.[14] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
[edit] Money transfer/remittance companies and bureaux de change
Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange[citation needed]Bureaux de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.
[edit] Trading characteristics
| Rank | Currency | ISO 4217 code (Symbol) | % daily share (April 2010) |
|---|---|---|---|
| 1 | United States dollar | USD ($) | 84.9% |
| 2 | Euro | EUR (€) | 39.1% |
| 3 | Japanese yen | JPY (¥) | 19.0% |
| 4 | Pound sterling | GBP (£) | 12.9% |
| 5 | Australian dollar | AUD ($) | 7.6% |
| 6 | Swiss franc | CHF (Fr) | 6.4% |
| 7 | Canadian dollar | CAD ($) | 5.3% |
| 8 | Hong Kong dollar | HKD ($) | 2.4% |
| 9 | Swedish krona | SEK (kr) | 2.2% |
| 10 | New Zealand dollar | NZD ($) | 1.6% |
| 11 | South Korean won | KRW (₩) | 1.5% |
| 12 | Singapore dollar | SGD ($) | 1.4% |
| 13 | Norwegian krone | NOK (kr) | 1.3% |
| 14 | Mexican peso | MXN ($) | 1.3% |
| 15 | Indian rupee | INR ( ) | 0.9% |
| Other | 12.2% | ||
| Total[15] | 200% | ||
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateral currency pairs were:
- EURUSD: 28%
- USDJPY: 14%
- GBPUSD (also called cable): 9%
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
[edit] Determinants of exchange rates
See also: exchange rates
The following theories explain the fluctuations in exchange rates in a floating exchange rate regime (In a fixed exchange rate regime, rates are decided by its government):- International parity conditions: Relative 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.
- 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.
- 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.”
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
[edit] Economic factors
These include: (a) economic policy, disseminated by government agencies and central banks, (b) economic conditions, generally revealed through economic reports, and other economic indicators.- Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
- Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
- Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
- Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation 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.
- Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector [1].
[edit] Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.
[edit] 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", a type of capital flight whereby investors move their assets to a perceived "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty.[16]
- Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.[17]
- "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[18] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
- 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.[19]
[edit] Financial instruments
[edit] Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.[edit] Forward
See also: Forward contract
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.[edit] Swap
Main article: Foreign exchange swap
The most common type of forward transaction is the swap. In an swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. A deposit is often required in order to hold the position open until the transaction is completed.[edit] Future
Main article: Currency future
Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.[edit] Option
Main article: Foreign exchange option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The options market is the deepest, largest and most liquid market for options of any kind in the world.[edit] Speculation
Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[20] Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[21]Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors.[22]
Currency speculation is considered a highly suspect activity in many countries.[where?] While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona.[23] Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[24]
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
[edit] Risk aversion
See also: Safe-haven currency
In the context of the foreign exchange market, traders liquidate their positions in various currencies to take up positions in safe-haven currencies, such as the US Dollar.[26] Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics. An example would be the Financial Crisis of 2008. The value of equities across the world fell while the US Dollar strengthened (see Fig.1). This happened despite the strong focus of the crisis in the USA.[27]
[edit] See also
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[edit] References
- ^ The Economist – Guide to the Financial Markets (pdf)
- ^ Global imbalances and destabilizing speculation (2007), UNCTAD Trade and development report 2007 (Chapter 1B).
- ^ a b c 2010 Triennial Central Bank Survey, Bank for International Settlements.
- ^ "What is Foreign Exchange?". Published by the International Business Times AU. Retrieved: February 11, 2011.
- ^ BIS Triennial Central Bank Survey, published in September 2010.
- ^ "Derivatives in emerging markets", the Bank for International Settlements, December 13, 2010
- ^ Source: Euromoney FX survey FX survey 2011: The Euromoney FX survey is the largest global poll of foreign exchange service providers.'
- ^ "The $4 trillion question: what explains FX growth since the 2007 survey?, the Bank for International Settlements, December 13, 2010
- ^ Gabriele Galati, Michael Melvin (December 2004). "Why has FX trading surged? Explaining the 2004 triennial survey". Bank for International Settlements.
- ^ Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. , the Wall Street Journal, December 12, 2007
- ^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits". The Wall Street Journal (Dow Jones and Company). Retrieved 2007-10-31.
- ^ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100". The New York Times. Retrieved 2007-10-30.
- ^ The Sunday Times (UK), 16 July 2006
- ^ The 5 largest in the UK are Travelex, Moneycorp, HiFX, World First and Currencies Direct
- ^ The total sum is 200% because each currency trade always involves a currency pair.
- ^ Safe haven currency
- ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343–375.
- ^ Investopedia
- ^ Sam Y. Cross, All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York (1998), chapter 11, pp. 113–115.
- ^ Michael A. S. Guth, "Profitable Destabilizing Speculation," Chapter 1 in Michael A. S. Guth, Speculative behavior and the operation of competitive markets under uncertainty, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850.
- ^ What I Learned at the World Economic Crisis Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org
- ^ Summers LH and Summers VP (1989) 'When financial markets work too well: a Cautious case for a securities transaction tax' Journal of financial services
- ^ But Don't Rush Out to Buy Kronor: Sweden's 500% Gamble - International Herald Tribune
- ^ Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995.
- ^ "Risk Averse". Investopedia. Retrieved 2010-02-25.
- ^ "Global markets-US stocks rebound, dollar gains on risk aversion". Reuters. 2010-02-05. Retrieved 2010-02-27.
- ^ Stewart, Heather (2008-04-09). "IMF says US crisis is 'largest financial shock since Great Depression'". London: guardian.co.uk. Retrieved 2010-02-27.
