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With
Noble DraKoln
author of the best-selling books Futures For Small Speculators and Forex For Small Speculators
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Risk Disclosure
All of the information provided is for informational purposes and in no instance should the content of this presentation be construed as an express or implied promise, guarantee, or implication that you might profit from or that your potential loss may become limited in any manner whatsoever. Nor is the information provided to be construed as an offer to sell or a solicitation to purchase anything. Recommendations may result in a loss, therefore, no claim is implied or made that a loss will not result from following the information provided. The information provided by Noble DraKoln, on-line Internet sites, email or in a communicated report by other means is subject to change at any time without prior notice. And while the information is obtained from sources and methods believed to be reliable it is not guaranteed as to its accuracy or completeness and therefore those using this information are fully responsible for their own actions. Our analysis may reflect or discuss historical trends which may not repeat themselves. Investing / trading in equities, futures, options, stock indices, foreign exchange, currencies etc. involves an inherent and possible substantial risk. Price can and does move rapidly in a volatile manner from time to time and market conditions can present themselves where the liquidation of an existing position may not be possible at the time / price that execution is desired for your order. Therefore one should conduct their own research to investigate the appropriateness of the related risk before entering into such transactions. Futures trading is risky, only persons who can afford to lose their entire investments should consider this type of trading. Liverpoolgroup.com, Liverpool Derivatives Group Co., its officers, directors, editors, employees, clients, and others may purchase or sell the commodity futures and / or other risk investment vehicles referred to at an on-line Internet site area or contained in other communications, information, or report. All information relating to past performance is to be considered hypothetical or simulated, and therefore does not necessarily represent actual trading results. Past performance results are not necessarily indicative of a future forecasting ability or profitable investing / trading result.
Introduction
What I will cover in this seminar
History of Foreign Currencies Fundamentals of Foreign Exchange Fundamental Influences and Reports Tips to trade foreign currencies
Currency Evolution
Pre-Currency Era - 1950's Floating Currency Catalyst - 1970's Modern Currency Foundation - Present
Shaped by three core factors War Gold Standard Dollars in Foreign Banks
World War II
Bretton Woods Agreement is adopted at the end of the War Kept all foreign currencies pegged to the US Dollar. Foreign currency fluctuations rarely exceeded 1%
Gold is pegged to the dollar at a fixed rate Gold is valued at $35/ounce 1950's Fort Knox gold reserve exceeds $23 Billion US currency was directly exchangeable for gold
US dollar prominent
After World War II United States is the primary economic super power. Foreign trade begins to escalate and in 1950 foreign countries hold US $8 billion. Oil business begins its nascent development
Shaped by three core factors War Gold Standard Dollars in Foreign Banks
Eurodollar is Invented
Gold leveraging problems are compounded by the invention of the Eurodollar Foreign banks with US dollars would make low interest loans in US dollars to importers and exporters. Although the dollars are never repatriated, the US is still on the hook to exchange these credit created dollars for gold.
With oil prices up, gold prices up, and an economy still reeling from the rapid currency shift- stagflation hits the United States soon afterwards.
Historical Anecdotes
George Soros
Through his Quantum Fund, one of the world's first hedge funds, he hunts down investment opportunities around the world. George Soros' focus is macroeconomic theory and the affects of geopolitical events on the U.S. Economy. George Soros is credited with breaking the Bank of England in 1992. He held a highly leveraged short position against the British pound. Within six months he had made $1 billion. George Soros is also known for his part in the collapse in the Russian ruble and the aggressive short stance he took against Asia in 1997.
Transaction of international monetary business, as between governments or businesses of different countries. Negotiable bills drawn in one country to be paid in another country.
The American Heritage Dictionary of the English Language, Fourth Edition Copyright 2000 by Houghton Mifflin Company.
There are several ways to view foreign exchange: Every country's intrinsic value is represented in the movement of its currencies. Foreign exchange trading can be considered a way of timing a business cycle in a country. Foreign exchange trading can be seen as way of finding countries where economic growth, inflation, and real interest rates are at extreme highs or lows in relation to similar countries. No matter how you look at foreign exchange the values of these currencies are constantly influx around the world.
Cash in the Interbank/dealer market (OTC) Futures in the exchange traded markets
Cash Market
Cash Advantages/Disadvantages
2. Margin ability of up to 500:1 leverage 3. 1.5 trillion traded daily. 3 times larger than Stock and bond markets combined 4. No overt commissions 5. Price is negotiated Disadvantages 1. 24 hour market 2. Easy to over leverage 3. No centralized market place 4. Interest charges for holding a position too long 5. Price knowledge is limited to your dealer
Regulated Exchanges
Commodity Exchanges Chicago Mercantile Exchange- Currency Pioneer started in 1972 Offers mini currency contracts in addition to their full size contracts. New York Board of Trade: Finex Division Started 1985 with US Dollar Index. Stock Exchange Philadelphia Stock Exchange (PHLX) - G7 currencies only. Offers customized and standardized currency options.
CME launch of currency futures was the worlds first financial futures contracts, in 1972. This was in direct response to the breakdown of the Bretton Woods Agreement. On May 16, 1972 seven foreign currency futures contracts were listed. British pounds, Canadian dollars, Deutsche marks, French francs, Japanese yen, Mexican pesos and Swiss francs. In April 2001, CME expanded FX market coverage by offering electronic access to its full range of currency contracts virtually 24-hours a day via the GLOBEX electronic trading platform. This electronic trading access occurs "side-by-side" with floor trading in CMEs currency pits during floor trading hours. In March 2003, the total notional value of FX trading at CME was U.S. $347.5 billion. Currency futures are derivatives on the interbank cash and forward exchange rates.
Philadelphia ExchangePHLX
The Philadelphia Stock Exchange (PHLX) was founded in 1790 as the first organized stock exchange in the United States. In 1982, the PHLX pioneered options on currencies. Forward and futures markets provide a way to protect yourself from obligatory currency transactions, options provide the right - not the obligation - to buy or sell currency at a specific rate within a specified time period. Philadelphia Stock Exchange (PHLX) is the world's leading marketplace for exchange traded currency options. What has fueled their growth is the fact that they offer both customized and standardized currency options. They only trade options on the following currencies Australian dollar, British pound, Canadian dollar, Euro, Japanese yen, Mexican Peso, Swiss franc, and U.S. dollar
Futures Advantages/Disadvantages
Advantages 1. 2. 3. 4. 5. Exchanges have transparency Guaranteed counterparty system Accurate volume and open interest figures No bid/ask spread Able to hold position trades
Disadvantages 1. 2. 3. 4. 5. Most active during central and east coast times Significantly less liquidity than the cash Forex market Margins are typically 2% of the contract value Commission Exchange does not reflect all of the various foreign exchange trading
Secondary Market Influences List of all central banks - http://www.bis.org/cbanks.htm Eastern Europe reports -http://www.ccme.cz/ Emerging market reports - http://www.nber.org/crisis/
1. Cash and Futures Convergence watch the cash market as futures contracts expires 2. Trade cash and futures currencies in a spread position. 3. Potential to use futures as a way to protect your long term cash/spot positions. 4. Write options on futures against your cash positions 5. Understand normal markets and backwardation markets 6. Take advantage of longer term trending. 7. Focus your trading mainly in the Chicago Mercantile Exchange.
751 Economic Statistics of its member countries Only 16 are vital economy statistics
Discount rate Currency Exchange rate Capital accounts Gross national income Total financing Total net borrowing Claims on private sector Foreign liabilities
Article The fundamentals of forex in Futures Magazine May 2001 by Karlis Sarkans uses these same indicators to trade foreign treasury securities.
Suggested reading
Futures Magazine - www.futuresmag.com FX Week- www.fxweek.com Federal Reserve Bank of New York Free 123 page Forex Book http://www.ny.frb.org/education/addpub/usfxm/ Article - The fundamentals of forex by Karis Sarkans, Futures Magazine May 2001 Article - E-forex: Currency trading for the rest of us by Abe Cofnas, Futures magazine Trading in the Global Currency Markets by Cornelius Luca
Conclusion
History of Foreign Currencies Fundamentals of Foreign Exchange Fundamental Influences and Reports Tips to trade foreign currencies