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Fundamentals of Foreign Exchange and e-Trading

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on 9 August 2013

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Transcript of Fundamentals of Foreign Exchange and e-Trading

Fundamentals of FOREX and e-Trading
Foreign Exchange - What is it?
Foreign Exchange is the exchange of one currency for another and it operates on a Global basis.
It is not a physical market like other securities markets, but operates on an Over-The-Counter Market ( OTC ) - which is where stocks are traded via trader networks instead of localized exchanges.
The Foreign Exchange market is the largest and most LIQUID financial market in the world.
This means that prices are very sensitive to changes in the market and so they are volatile.
It is estimated that the forex market averages over USD$4 trillion in known daily volume.
JPM Trading Platforms:
e-Trading or Electronic Trading is a form of trading either securities, Foreign Exchange or derivatives electronically. There are vast amounts of trading platforms and systems that are available for both professionals and newcomers, and there are many available from J.P.Morgan to trade Foreign Exchange Products.
SWAPS & Options
Bid rate - The rate at which the market maker is buying one currency against another

Offer rate = The rate at which the market maker is selling one currency against another.


The first 3 digits represent the BASIS POINTS whereas the last 2 represent pips
What is a pip?
A pip is a 1/100 of 1% so for example:
Main Currency Pairs
Currency Pairs
A currency pair is two currencies that are traded /exchanged for one another..
Base Currency = first currency quoted in a currency pair
Quoted Currency = second currency quoted in a currency pair
All currencies are quoted in pairs and the value of currency is made by comparing it to another.
For Example:
Base Currency
Quote Currency
Bid, Offers and Basis points
The 4 main currency pairs that are traded across all markets are:

EUR/USD: The euro and the U.S. dollar
USD/JPY: The U.S. dollar and the Japanese yen
GBP/USD: The British pound sterling and the U.S. dollar
USD/CHF: The U.S. dollar and the Swiss franc
The Role of a bank in FX:
The role of a bank such as JP Morgan is to act as an intermediary between buyers and sellers and to facilitate these transactions.
What are emerging markets and their importance?
Emerging Markets are countries which are in the process of rapid growth and development, but do not have high levels of market efficiency as developed countries such as the US and UK.

Traders and investors are finding it increasingly important to capture countries that are developing rapidly as this can lead to higher returns in the market. However these investors are faced with more risks in these currencies as there is greater economic instability

There are 7 main Emerging Markets:
Brazil, Russia, India and China - which make up BRIC
Mexico, Turkey, Indonesia and South-Korea.
US Dollar = Greenback
Pound = Cable
Swiss Franc = Swissy
Japanese Yen = Yen
Canadian Dollar = Loonie
Euro = Fiber
Australian Dollar = Aussie
New Zealand Dollar = Kiwi
Currency Jargon
JPM Trading Platforms
MDP (Morgan Direct Professional)
MDP is one of the trading platform created by JP. Morgan and has been used successfully by many investors.
It is used by professionals, both internally and also external clients and enables users to trade a variety of different products including Foreign Exchange and Commodities. It is a software based platform and users can access it over a wide variety of methods including mobile phones.
MDC (Morgan Direct Commercial)
This system is not as widely known or used as Morgan Direct Professional, and the majority of users are based in the US.
Because the majority of people who use this system are not as professional as those using MDP.

The main use of MDC This system is not as widely used as MDP and most clients are based in the USA.

This is the most recent system created by J.P. Morgan. It will combine not only Trading of Foreign Exchange but also other securities. This is to create a system where clients can access a better variety of services on one platform.
One of the benefits is that JPMM is web-based so it allows easier access than MDP or MDC, and there is no software that needs to be downloaded.
The functionality of JPMM is similar to Morgan Direct although it aims to be faster and provide a better user experience for the client.
There are more facilities available and it aims to create a system where not only FX and Commodities are allowed to be traded but also other securities. Other useful services it will provide includes:
Post trade
This is the new JPMM system
This is a widget on the JPMM System
This shows the market depth
This enables the user to lock the widget so trades can be processed if a client accidenty clicks on a button
This enables the user to switch between a spot and a forward
This enables the user to:
apply changes with a specific price
for all pages or just one specific
The larger number of the two shows the
basis points of the spot price
The smaller number shows the spot price
Other than JP Morgan trading systems there are many different types of vendors such as Bloomberg, Reuters and FXALL which are external trading platforms that offer similar services to JPM.
Whether dealing with an external or internal client that trade on either JPMM, MDP or MDC or external software the process to on-board these clients is in some respects similar to each other. (although different software has different procedures to ensure risk is minimized and the client is getting the right services.

However to be able to trade on these platforms there are a variety of steps that need to be taken to on-board particular clients and accounts and this is done parallel by Client Services, Client On-boarding and Sales teams. It involves a vast array of departments to make sure everything is in place for the trader to trade, but background and credit checks need to be set-in -place first to analyse the potential risks of negotiating with a new client.
Basis Points
SWAPS = It is the he current exchange rate at which a currency can be bought/sold at any given time.
It is continuously changing and depends on the volatility of the stock market.

A benefit of swaps is that there is no foreign exchange risk
It involves the exchange of the principle and the interest of one currency for another.

Although there is no foreign exchange risk, there is interest rate risk from the difference in market interest rates between the spot date and the maturity of the swap.

OPTIONS = An option is a contract that gives the buyer or seller of the option the right but not the obligations to buy or sell that option at a predetermined price on or before a predetermined date.
A forward is an agreement between two counter-parties, where each counter-party within the agreement has the right BUT not the obligation to buy or sell the forward at a specified date in the future.
Unlike futures which are standardized contracts, there is greater potential for risk and losses between counter-parties, as the clients are generally unknown, so background checks are necessary before entering in an agreement.
this can also lead to credit risk which in turn leads to
This why the spread on Forwards are greater for forward than spo
A spot transaction in the FX market is the exchange of one currency against another at an agreed date
The settlement of a spot transaction takes place TWO days after the trade date (when the transaction was made). However the only rule to this exception is the currency pair USD / CAD where the settlement date is after one day not two.
Because of the short period between the start and end date of a spot transaction the value of buying or selling your position is smaller than that of forward contracts.

The Scale of FX in the market
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