PROFITEERING IN THE
GLOBAL FOREX MARKET
-Presentation by R.K.Gurumurthy
-Treasurer, Bank One Ltd
… The story of a successful trader
Dec-12
Profiteering in the Global Forex
Market
2
… The story of a successful trader trader
Dec-12
Profiteering in the Global Forex
Market
3
… The story of a successful trader
Dec-12
Profiteering in the Global Forex
Market
4
… The story of a successful trader
Dec-12
Profiteering in the Global Forex
Market
5
… The story of a successful trader
Dec-12
Profiteering in the Global Forex
Market
6
… The story of a successful trader
Dec-12
Profiteering in the Global Forex
Market
7
… The story of a very successful trader
Dec-12
Profiteering in the Global Forex
Market
8
The basics of any economic activity..
Dec-12
Profiteering in the Global Forex
Market
9
The Global Marketplace
What is a market
A regular gathering of people for the purchase and sale of provisions, livestock, and other commodities
The different Markets – Exchange Traded or Over the counter
Physical retail markets, such as local formers market or shopping malls
Virtual Markets or internet markets
Labor markets
International Currency and Commodity Markets
Stock Markets / Capital Markets
Artificial markets created by regulation to exchange rights for derivatives - Carbon Trading
Illegal markets such as the market for arms or drugs…
Characteristics of efficient markets
Dec-12
Many buyers and sellers (lots of competition)
Firms want to maximize profits (uniform motives)
Ease of entry/exit into market (no restrictive quotas / taxes / laws)
Perfect information (instantaneous, accurate, complete)
Homogeneous product offerings
The prime objective then is profiteering…
Profiteering in the Global Forex
Market
10
… Is this how an Fx market would look?
Dec-12
Profiteering in the Global Forex
Market
11
.. A typical dealing room
Dec-12
Profiteering in the Global Forex
Market
12
The Foreign Exchange (Fx) Market
Who are the Participants
Central Banks, Authorized Dealers, Brokers, Clients, Retailers
Dec-12
Profiteering in the Global Forex
Market
13
The Market Structure
The flow originates and ends with a client
Dec-12
Profiteering in the Global Forex
Market
14
Evolution of Fx Markets… Liquidity
IT’S A 24- HOUR MARKET
Dec-12
Profiteering in the Global Forex
Market
15
Evolution of Fx Markets… Volumes
SHARE OF THE PIE
Dec-12
Profiteering in the Global Forex
Market
16
Evolution of Fx Markets… Volumes
Dec-12
Profiteering in the Global Forex
Market
17
Fx Markets – different types of Currency Trades
Currency trading is generally conducted via five different types of transactions
or trading vehicles:
Spot Transactions - The buying of one currency against another currency for immediate
delivery
Forward Transactions- Negotiated (as opposed to standardized) contracts in which one
party agrees to exchange a specific amount of a given currency for an equivalent amount of
another currency at a set value on a specific date in the future.
Vanilla Swaps - These are trades involving the simultaneous purchase of one currency and
sale of an equivalent amount of another, but with differing delivery dates. Typically, one side of
a swap will call for immediate delivery of the currency, while the other calls for future delivery,
although some trades call for future delivery on both sides.
Dec-12
Profiteering in the Global Forex
Market
18
Fx Markets – different types of Currency Trades
Currency trading is generally conducted via five different types of transactions
or trading vehicles:
Currency Swaps - These are actually derivative products in that they involve other
financial vehicles - typically loans - and call for converting principal and interest payments
denominated in one currency to payments denominated in an alternate currency.
Futures, Options and Other Derivatives - These are standardized contracts traded on
regulated exchanges (or their electronic networks) like Chicago's CME Group. These are both
exchange traded (Futures) and OTCs - Options
Dec-12
Profiteering in the Global Forex
Market
19
Profiteering in Markets – Low hanging fruit?
Dec-12
Profiteering in the Global Forex
Market
20
.. Nor is it tight-rope walking
Dec-12
Profiteering in the Global Forex
Market
21
.. It’s a judicious balance of risk and reward
Dec-12
Profiteering in the Global Forex
Market
22
How Fx traders generate profits..
Interbank market makes up for 48% for all fx trades – this number is seeing a decline in recent years due to
stricter regulatory control and the efficiency of price matching systems and advanced technology in
treasury management
Dec-12
Profiteering in the Global Forex
Market
23
When Opportunity Knocks at your doorsteps…
Dec-12
Profiteering in the Global Forex
Market
24
Futures Trading - Advantages
Futures trading is considered as an efficient market tool for hedging the
price volatility of underlying asset. In addition to hedging price changes,
futures trading offers much more advantages over other forms of
hedging tools..
Easy to own underlying commodity or stock.
Instant execution of market orders
Usually includes simple and reasonably low commission fees and plans.
Availability of around the clock electronic trading services
Availability of both standard and mini contracts especially for retailers
Reasonable market liquidity available for all major futures types
No need for holding/storing the underlying commodity or equity..
An efficient product to maximize profit and
Limit risk on trading
Dec-12
Profiteering in the Global Forex
Market
25
Forward Contracts vs. Futures
Forward Contract
Meaning:
Futures Contract
A futures contract is a standardized contract, traded
A forward contract is an agreement between two
on a futures exchange, to buy or sell a certain
parties to buy or sell an asset (which can be of any
underlying instrument at a certain date in the future, at
kind) at a pre-agreed future point in time.
a specified price.
Structure &
Purpose:
Customized to customers need. Usually no initial
payment erequired. Usually used for Hedging
Transaction
Negotiated directly by the buyer and seller
method:
Market regulation: Not regulated
Standardized. Initial margin payment required. Usually
used for Speculation.
Quoted and traded on the Exchange
Government regulated market
Institutional
guarantee:
The contracting parties
Clearing House
Risk:
High counterparty risk
Low counterparty risk
Guarantees:
No guranantee of settlement until the date of
Both parties must deposit an initial guarantee (margin).
maturity only the forward price, based on the spot The value of the operation is marked to market rates
price of the underlying asset is paid
with daily settlement of profits and losses.
Contract Maturity: Forward contract mostly mature by delivering the
commodity
Expiry date:
Depending on the transaction
Future contracts may not necessarily mature by
delivery of commodity
Standardized
Method of pretermination:
Opposite contract with same or different
counterparty. Counterparty risk remains while
terminating with different counterparty.
Opposite contract on the exchange.
Contract size:
Depending on the transaction and the
requirements of the contracting parties.
Standardized
Dec-12
Profiteering in the Global Forex
Market
26
Why a Futures Contract..
Highest Transparency
Standard lots and Fixed Delivery
Regulated and Settlement Guaranteed by Exchange (GBOT)
Suitable for retail hedging
Wider range of products and asset classes (Banks cannot offer metals)
Lower Margin
Daily MIS and ease of risk-management
Dec-12
Profiteering in the Global Forex
Market
27
The essentials of successful profiteering..
….The KISS principle
Dec-12
Profiteering in the Global Forex
Market
28
The essentials of successful profiteering..
Information is holy grail ..
But money management is equally important
Dec-12
Profiteering in the Global Forex
Market
29
The essentials of successful profiteering..
Knowing your risk is paramount…
Dec-12
Profiteering in the Global Forex
Market
30
Never flout the rules…
Dec-12
Profiteering in the Global Forex
Market
31
One of my recent trade ideas..
Dec-12
Profiteering in the Global Forex
Market
32
One of my recent trade ideas..
Dec-12
Profiteering in the Global Forex
Market
33
Dec-12
Profiteering in the Global Forex
Market
34