Forex Market And Risk Management.docx

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A PROJECT REPORT ON “THE STUDY OF FOREX MARKET AND RISK MANAGEMENT” (SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF MASTER’S DEGREE IN BUSINESS ADMINISTRATION) UNDER THE GUIDENCE OF: SUBMITTED BY:

N.C.COLLEGE OF ENGINEERING, ISRANA (KURUKSHETRA UNIVERSITY, KURUKSHETRA)

ACKNOWLEDGEMENT

Every person who touches heights, reaches that level with the grand support, blessings of his /her loved ones, guides, teachers, elders.He can’t deny the fact that they are the people behind his success. I am very thankful to the people who provided me their help and support. 

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I owe my special thanks to …………………. (HOD, MBA Department) for her grand support, guidance, and for being a helping hand in every possible way in this project. I am very thankful to ………………….. (Lecturer, MBA Department) for devoting his precious time and for leaving no stone unturned for the completion of this project.

I would also like to extend my thanks to my supporting faculty of N.C.C.E., ISRANA, KURUKSHETRA UNIVERSITY. THANK YOU ALL!

EXECUTIVE SUMMARY The project undertaken is based on the study of foreign exchange market and risk management in general as well as in the forex market. FOREIGN EXCHANGE MARKET: Foreign exchange market is a market where foreign currencies are bought & sold.  

Foreign exchange market is a system facilitating mechanism through which one country’s currency can be exchanged for the currencies of another country. The purpose of foreign exchange market is to permit transfers of purchasing power denominated in one currency to another i.e. to trade one currency for another.

The project covers various trading areas of forex market such as, spot market, forward market, derivatives, currency futures, currency swaps etc. It helps in understanding various trend patterns and trend lines. What considerations are kept in mind while trading in forex market and why one should enter such market is studied under this project. Another part of this project covers Risk Management in general as well as in forex market. Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. A person has to face risk whether he’s in business or is entering the forex market.So, he uses various strategies and methods to overcome that risk. The data used in this project has been collected from websites based on related topics and various books of forex market and risk management. The information displayed may be limited,as each and every aspect related with the project that is provided by the avilable sources might not be complete in all respects.

OBJECTIVES OF THE STUDY 

To study Forex market & Risk management in general as well as in forex market.

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To have a knowledge of different types of forex markets and various quotations in Forex markets. To study risk in the Forex market as well as volatility in Forex market. To have a knowledge of how people trade in forex market. To study the factors that force different types of people in different markets. To study various strategies of risk management.

HISTORY Brief history of Forex trading Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies. Before the First World War, most central banks supported their currencies with convertibility to gold. Although paper money could always be exchanged for gold, in reality this did not occur often, fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government. At times, the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility. In the latter stages of the Second World War, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a new world reserve currency in favour of a system built on the US dollar. Other international institutions such as the IMF, the World Bank and GATT were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilising monetary crises which led to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent. The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits. The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values. But the idea of fixed exchange rates has by no means died. The EEC introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange

rates met with near extinction in 1992-93, when pent-up economic pressures forced devaluations of a number of weak European currencies. Nevertheless, the quest for currency stability has continued in Europe with the renewed attempt to not only fix currencies but actually replace many of them with the Euro back in 2001. This project is fairly advanced now and the final structure and fixed levels were decided in May 1998. After this a dangerous three-year period loomed, where devaluation candidates could be attacked nearly without risk until the final introduction of the Euro in this Millennium. The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates, in particular in South America, looking very vulnerable. But while commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have found a new playground. The size of foreign exchange markets now dwarfs any other investment market by a large factor. It is estimated that more than USD1, 200 billion is traded every day, far more than the world's stock and bond markets combined.

INTRODUCTION TO TRADING FOREX Foreign Exchange

This short introduction explains the basics of trading Forex online, a brief explanation of the markets and the major benefits of trading Forex online. There are also two scenarios describing the implications of trading in a bear as well as bull market to better acquaint you with some of the risks and opportunities in the largest and most liquid market in the world.

OVERVIEW Foreign exchange , forex or just Forex are all terms used to describe the trading of the world's many currencies. The forex market is the largest market in the world, with trades amounting to more than $1.5 trillion every day. This is more than one hundred times the daily trading on the NYSE (New York Stock Exchange) . Most forex trading is speculative , with only a few percent of market activity representing governments' and companies' fundamental currency conversion needs. Unlike trading on the stock market, the forex market is not carried out by a central exchange, but on the “interbank” market , which is thought of as an OTC (over the counter ) market. Trading takes place directly between the two counterparts necessary to make a trade, whether over the telephone or on electronic networks all over the world. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centres means that the forex market is a 24-hour market.

TRADING FOREX A currency trade is the simultaneous buying of one currency and selling of another one. The currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called “majors” – EURUSD, USDJPY, USDCHF and GBPUSD. The most important forex market is the spot market as it has the largest volume. The market is called the spot market because trades are settled “immediately” or on the spot. In practice this means within two banking days.

FORWARD OUTRIGHTS For forward outrights, settlement on the value date selected in the trade means that even though the trade itself is carried out immediately, there is a small interest rate calculation left. This is because if you trade e.g. NOKJPY, you get almost 7% (annual) interest in Norway and close to 0% in Japan. So, if you borrow money in Japan, to finance the trade as you must have one currency with which to buy or another, and place it in Norway you have a positive interest rate differential. This differential has to be calculated and added to your account. You can have both a positive and a negative interest rate differential, so it may work for or against you when you make a trade. The interest rate differential doesn't usually affect trade considerations unless you plan on holding a position with a large differential for a long period of time. The interest rate differential varies according to the cross you are trading.

TRADING ON MARGIN Trading on margin means that you can buy and sell assets that represent more value than the capital in your account. Forex trading is usually done with relatively little margin since currency exchange rate fluctuations tend to be less than one or two percent on any given day. To take an example, a margin of 2.0% means you can trade up to $500,000 even though you only have $10,000 in your account. In terms of leverage this corresponds to 50:1, because 50 times $10,000 is $500,000, or put another way, $10,000 is 2.0% of $500.000. Using this much leverage gives you the possibility to make profits very quickly, but there is also a greater risk of incurring large losses and even being completely wiped out. Therefore, it is inadvisable to maximize your leveraging as the risks can be very high.

RESEARCH METHODOLOGY To define the research methodology, one has to go step by step. Any research methodology involves following steps: 1.PROBLEM RECOGNITION 2.SURVEY OF LITERATURE 3.HYPOTHESIS FORMULATION 4.RESEARCH DESIGN 5.SAMPLE DESIGN 6.DATA COLLECTION 7.ANALYSIS AND INTERPRETATION. RESEARCH PROBLEM: A problem properly defined is half solved.   

It is very necessary for any research that research problem should be recognized. It is critical to any research. Once problem is identified, it is to be formulated properly.

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Initially the plan is stated in a broad and general way and then it is properly defined in specific terms. Problem formulation means defining a problem precisely. In this study our research problem is: THE STUDY OF FOREX MARKET AND RISK MANAGEMENT.

LITERATURE SURVEY: To do any research, we have to review/study previous literature. For this we studied Journals, Magazines & Books of FOREX & RISK MANAGEMENT and also the search engine www.google.com. To get good results in any research, it is very essential that this review of literature should be carefully done. The review of literature survey for this project includes the following: 

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Elliot Wave – This is considered by most experienced traders to be the purest form of technical analysis, since Elliott Wave analysis measures investor psychology. The Wave shows how the psychology of traders, en masse, moves from pessimism to optimism on a stock. This shift occurs in a specific and measurable. Detecting where a stock is in the pattern can help a trader estimate the future movements of the market. K.B. Advisory Ltd. – This program offers you daily technical analysis and trading recommendations that are based on sophisticated trading strategies developed by Keith Black. It boasts a successful three-year track record. TRL (Technical Research Limited) – TRL is a Specialist Foreign Exchange Forecasting Service that can help you with forecasting and trading analysis in the global foreign exchange markets. Technical Research Limited is rated the No. 1 FX Advisory Service by customers in 39 different countries around the world. PronetAnalytics - This program is very powerful, and offers real-time analysis for market professionals who are looking for inexpensive real-time data and exchange feeds with standard and simple graphical trading support. IFR (International Financing Review) – IFR Forex Watch has real-time technical analysis of the FX spot and options markets. It connects you with analysts in London, New York, Boston, San Francisco, Singapore and Sydney. IFR specializes in sifting through the vast array of information that clutters up current market participants, and boiling it down to its bare essentials. GMR (Global Market Research) – Global Market Research provides price forecasting and performance-based Trade Strategies for the FX market. You can check out their daily newsletter, their FX Technicals and intraday updates and analysis through the Web. Or you can have them E-mailed to you. CHQREK.com – This is a resource created by a market professional that has been trading and writing about markets for nearly 20 years. You can capitalize on of his experience and his analysis, especially technical analysis, and get a real trader's take on current market action. 4CASTWEB – 4CAST sends out key market information and analysis to market participants worldwide, including central banks. It also has an on-line service that gives you fundamental, political, strategic and technical analysis 24 hours a day ForexTRM – ForexTRM is a forex charting service that pairs 18 world and regional currencies and tracks them every day. This means ForexTRM lets you to trade any one of the 18 currencies against any of the other 17. It uses trademarked Sigma Bands and Hurst Cycle Analysis to correctly identify overbought/sold FOREX markets, where trading risk is at its lowest point in time, and which currency pairs are ready to trade.

HYPOTHESIS FORMULATION: Hypothesis is any assumption for the research effectively & efficiently. The hypothesis of my research is that:    

Forex market is very volatile in nature. It is changing day by day showing a wide growth in economy. Different factors like speculation, hedging forces different people to enter in different market. Risk is there in Forex market and various risk management strategies are there to manage it.

RESEARCH DESIGN: Research design is a conceptual structure within which research is conducted. “A Research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedures.” Research design can be of various types.    

Descriptive. Exploratory. Experimental. Analytical.

Research Design of my study is EXPLORATORY & ANALYTICAL. DATA COLLECTION: The data is of two types: PRIMARY AND SECONDRY. Data are the facts presented to the researcher from the study environment. The method of data collection in my study is SECONDRY only. Because I have collected all the data from books and from websites.

WHY TRADE FOREX 

24 hour trading One of the major advantages of trading forex is the opportunity to trade 24 hours a day from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a unique opportunity to react instantly to breaking news that is affecting the markets.

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Superior liquidity The forex market is so liquid that there are always buyers and sellers to trade with. The liquidity of this market, especially that of the major currencies, helps ensure price stability and low spreads . The liquidity comes mainly from large and smaller banks that provide liquidity to investors, companies, institutions and other currency market players.

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No commissions The fact that forex is often traded without commissions makes it very attractive as an investment opportunity for investors who want to deal on a frequent basis. Trading the “majors” is also cheaper than trading other cross because of the high level of liquidity. For more information on the trading conditions at Saxo Bank, go to the

Account Summary on your Client Station and open the section entitled "Trading Conditions" found in the top right-hand corner of the Account Summary.

.50:1 Leverage With a minimum account of USD 10,000, for example, you can trade up to USD 500,000. The USD 10,000 is posted on margin as a guarantee for the future performance of your position

.Profit potential in falling markets Since the market is constantly moving, there are always trading opportunities, whether a currency is strengthening or weakening in relation to another currency. When you trade currencies, they literally work against each other. If the EURUSD declines, for example, it is because the U.S. dollar gets stronger against the Euro and vice versa. So, if you think the EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell EUR now and then later you buy Euro back at a lower price and take your profits. The opposite trading scenario would occur if the EURUSD appreciates .

TWO WAYS TO TRADE There are two basic approaches to analyzing currency markets, fundamental analysis and technical analysis. The fundamental analyst concentrates on the underlying causes of price movements, while the technical analyst studies the price movements themselves.

TECHNICAL ANALYSIS Technical analysis focuses on the study of price movements. Historical currency data is used to forecast the direction of future prices. The premise of technical analysis is that all current market information is already reflected in the price of that currency; therefore, studying price action is all that is required to make informed trading decisions. The primary tools of the technical analyst are charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.

FUNDAMENTAL ANALYSIS Fundamental analysis focuses on the economic, social and political forces that drive supply and demand. Fundamental analysts look at various macroeconomic indicators such as economic growth rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that guide fundamental analysis. There are several theories as to how currencies should be valued.

PSYCHOLOGY OF TRADING Four Principles for Becoming a Better Trader (A). Trade with a DISCIPLINED Plan: The problem with many traders is that they take shopping more seriously than trading. The average shopper would not spend $400 without serious research and examination of the product he is about to purchase, yet the average trader would make a trade that could easily cost him

$400 based on little more than a “feeling” or “hunch.” Be sure that you have a plan in place BEFORE you start to trade. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.

(B). Cut your losses early and Let your Profits Run: This simple concept is one of the most difficult to implement and is the cause of most traders demise. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position. These same people will easily sit on losing positions, allowing the market to move against them for hundreds of points in hopes that the market will come back. In addition, traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case. Stops are there to be hit, and to stop you from losing more then a predetermined amount! The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be profitable then you are doing well. How then do you make money with only half of your trades being winners? You simply allow your profits on the winners to run and make sure that your losses are minimal.

(C).Do not marry your trades: The reason trading with a plan is the #1 tip is because most objective analysis is done before the trade is executed. Once a trader is in a position he/she tends to analyze the market differently in the “hopes” that the market will move in a favorable direction rather than objectively looking at the changing factors that may have turned against your original analysis. This is especially true of losses. Traders with a losing position tend to marry their position, which causes them to disregard the fact that all signs point towards continued losses.

Do not bet the farm: Do not over trade. One of the most common mistakes that traders make is leveraging their account too high by trading much larger sizes than their account should prudently trade. Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to trade 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to trade with 110 leverage or never use more than 10% of your account at any given time. Trading currencies is not easy (if it was, everyone would be a millionaire!).

FOREX TRADING EXAMPLES Example 1 An investor has a margin deposit with Saxo Bank of USD100,000. The investor expects the US dollar to rise against the Swiss franc and therefore decides to buy USD2,000,000 - his maximum possible exposure. The Saxo Bank dealer quotes him 1.5515-20. The investor buys USD at 1.5520. Day 1: Buy USD2,000,000 vs CHF 1.5520 = Sell CHF3,104,000. Four days later, the dollar has actually risen to CHF1.5745 and the investor decides to take his profit. Upon his request, the Saxo Bank dealer quotes him 1.5745-50. The investor sells at 1.5745.

Day 5: Sell USD2,000,000 vs CHF 1.5745 = Buy CHF3,149,000. As the dollar side of the transaction involves a credit and a debit of USD2,000,000, the investor's USD account will show no change. The CHF account will show a debit of CHF3,104,000 and a credit of CHF3,149,000. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the profit calculation. This results in a profit of CHF45,000 = approx. USD28,600 = 28.6% profit on the deposit of USD100,000.

Example 2: The investor follows the cross rate between the Euro and the Japanese yen. He believes that this market is headed for a fall. As he is less confident of this trade, he does not fully use the leverage available on his deposit. He chooses to ask the dealer for a quote in EUR1,000,000. This requires a margin of EUR1,000,000 x 5% = EUR50,000 = approx. USD52,500 (EUR/USD1.05). The dealer quotes 112.05-10. The investor sells EUR at 112.05. Day 1: Sell EUR1,000,000 vs JPY 112.05 = Buy JPY112,050,000. He protects his position with a stop-loss order to buy back the euro at 112.60. Two days later, this stop is triggered as the euro strengthens short term in spite of the investor's expectations. Day 3: Buy EUR1,000,000 vs JPY 112.60 = Sell JPY112,600,000. The EUR side involves a credit and a debit of EUR1,000,000. Therefore, the EUR account shows no change. The JPY account is credited JPY112.05m and debited JPY112.6m for a loss of JPY0.55m. Due to the simplicity of the example and the short time horizon of the trade, we have disregarded the interest rate swap that would marginally alter the loss calculation. This results in a loss of JPY0.55m = approx.USD5,300 (USD/JPY 105) = 5.3% loss on the original deposit of USD100,000.

Fundamentals Every Trader Should Know Currency prices reflect the balance of supply and demand for currencies. Two primary factors affecting supply and demand are interest rates and the overall strength of the economy. Economic indicators such as GDP, foreign investment and the trade balance reflect the general health of an economy and are therefore responsible for the underlying shifts in supply and demand for that currency. There is a tremendous amount of data released at regular intervals, some of which is more important than others. Data related to interest rates and international trade is looked at the closest.

(1).Interest Rates If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency of that country will strengthen in relation to other countries as investors shift assets to that country to gain a higher return. Hikes in interest rates, however, are generally bad news for stock markets. Some investors will transfer money out of a country's stock market when interest rates are hiked, causing the country's currency to weaken. Which effect dominates can be tricky, but generally there is a consensus beforehand as to what the interest rate move will

do. Indicators that have the biggest impact on interest rates are PPI, CPI, and GDP. Generally the timing of interest rate moves are known in advance. They take place after regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.

(2).International Trade The trade balance shows the net difference over a period of time between a nation’s exports and imports. When a country imports more than it exports the trade balance will show a deficit, which is generally considered unfavorable. For example, if U.S dollars are sold for other domestic national currencies (to pay for imports), the flow of dollars outside the country will depreciate the value of the currency. Similarly if trade figures show an increase in exports, dollars will flow into the United States and appreciate the value of the currency. From the standpoint of a national economy, a deficit in and of itself is not necessarily a bad thing. However, if the deficit is greater than market expectations then it will trigger a negative price movement.

CURRENCY PAIRS In the Forex market, trading is always in currency pairs, such as EUR/USD or USD/JPY. Trading Forex Symbol Currency Pairs Terminologies EUR/USD Euro / U.S. Dollar Euro GBP/USD British Pound / U.S. Dollar Cable or Sterling USD/JPY U.S. Dollar / Japanese Yen Dollar Yen USD/CHF U.S. Dollar / Swiss Franc Dollar Swiss U.S. Dollar / Canadian USD/CAD Dollar Canada Dollar Australian Dollar / U.S. Aussie Dollar or AUD/USD Dollar Aussie EUR/GBP Euro / British Pound Euro Sterling EUR/JPY Euro / Japanese Yen Euro Yen EUR/CHF Euro / Swiss Franc Euro Swiss British Pound / Japanese GBP/JPY Sterling Yen Yen The base currency-the first currency listed in the currency pair-is the basis for the buy or the sell. As an example, the US Dollar is the base currency for USD/JPY (US Dollar/Japanese Yen). The current bid/ask price for USD/JPY could be 107.20/107.23, which means you could buy $1 US for 107.23 Japanese Yen, or sell $1 US for 107.20 Japanese Yen.

RISK MANAGEMENT Generally, Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk. In general, the strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Traditional risk management focuses on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Intangible risk management focuses on the risks associated with human capital, such as knowledge risk, relationship risk, and engagement-process risk. Regardless of the type of risk management, all large corporations have risk management teams and small groups and corporations practice informal, if not formal, risk management.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled later. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss vs. a risk with high loss but lower probability of occurrence can often be mishandled. Intangible risk management identifies a new type of risk - a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, knowledge risk occurs when deficient knowledge is applied. Relationship risk occurs when collaboration ineffectiveness occurs. Process-engagement risk occurs when operational ineffectiveness occurs. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity. Risk management also faces a difficulty in allocating resources properly. This is the idea of opportunity cost. Resources spent on risk management could be instead spent on more profitable activities. Again, ideal risk management spends the least amount of resources in the process while reducing the negative effects of risks as much as possible. The Forex Market is the largest and most liquid financial market in the world. Since macroeconomic forces are one of the main drivers of the value of currencies in the global economy, currencies tend to have the most identifiable trend patterns. Therefore, the Forex market is a very attractive market for active traders, and presumably where they should be the most successful. However, success has been limited mainly for the following reasons: Many traders come with false expectations of the profit potential, and lack the discipline required for trading. Short term trading is not an amateur's game and is not the way most people will achieve quick riches. Simply because Forex trading may seem exotic or less familiar then traditional markets (i.e. equities, futures, etc.), it does not mean that the rules of finance and simple logic are suspended. One cannot hope to make extraordinary gains without taking extraordinary risks, and that means suffering inconsistent trading performance that often leads to large losses. Trading currencies is not easy, and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process. The most enticing aspect of trading Forex is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot ($10,000) of currency only requires $100 as a minimum margin deposit, it does not mean that a trader with $1,000 in his account should be easily able to trade 10 lots. One lot is $10,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves (get in with a position that is too big for their portfolio), and as a consequence, often end up forced to exit a position at the wrong time. For example, if your account value is $10,000 and you place a trade for 1 lot, you are in effect, leveraging yourself 10 to 1, which is a very significant level of leverage. Most professional money managers will leverage no more then 3 or 4 times. Trading in small increments with protective stops on your positions will allow one the opportunity to be successful in Forex trading.

UTILIZING STOP LOSS ORDER

A stop-loss is an order linked to a specific position for the purpose of closing that position and preventing the position from accruing additional losses. A stop-loss order placed on a Buy (or Long) position is a stop-loss order to Sell and close that position. A stop-loss order placed on a Sell (or Short) position is a stop-loss order to Buy and close that position. A stop-loss order remains in effect until the position is liquidated or the client cancels the stop-loss order. As an example, if an investor is Long (Buy) USD at 120.27, they might wish to put in a stop-loss order to Sell at 119.49, which would limit the loss on the position to the difference between the two rates (120.27-119.49) should the dollar depreciate below 119.49. A stop-loss would not be executed and the position would remain open until the market trades at the stop-loss level. Stop-loss orders are an essential tool for controlling your risk in currency trading.

RISK WARNING Trading foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. However, before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency. Moreover, the leveraged nature of FX trading means that any market movement will have an effect on your deposited funds proportionally equal to the leverage factor. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'limit' orders. There are also risks associated with utilizing an internet-based deal execution software application including, but not limited, to the failure of hardware and software and communications difficulties.

OBJECTIVES OF RISK MANAGEMENT        

Mere survival; Peace of mind; Lower risk management costs and thus higher profits; Fairly stable earnings; Little or no interruption of operations; Continued growth; Satisfaction of the firm’s sense of social responsibility desire for a good image; Satisfaction of externally imposed obligations.

STEPS IN THE RISK MANAGEMENT PROCESS The core of the process is a series of five steps:  

Establish the context Identify risks

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Analyse risks Evaluate risks Treat risks

In parallel with the core process, communication & consultation is required to ensure adequate information is provided and conclusions are disseminated. Monitoring and review is an intrinsic part of the process required to ensure that the process is executed in a timely fashion and the identification, analysis, evaluation and treatment are kept up to date.

1. Establish the context Establishing the context includes planning the remainder of the process and mapping out the scope of the exercise, the identity and objectives of stakeholders, the basis upon which risks will be evaluated and defining a framework for the process, and agenda for identification and analysis.

2.Identification After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, will cause problems. Hence, risk identification can start with the source of problems, or with the problem itself. 

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Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport. Problem analysis Risks are related to identified threats. For example: the threat of losing money, the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholder, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; privacy information may be stolen by employees even within a closed network; lightning striking a Boeing 747 during takeoff may make all people onboard immediate casualties. The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event. Common risk identification methods are: 

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Objectives-based Risk Identification Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. Objective-based risk identification is at the basis of COSO's Enterprise Risk Management - Integrated Framework Scenario-based Risk Identification In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk. Taxonomy-based Risk Identification The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on the taxonomy and

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knowledge of best practices, a questionnaire is compiled. The answers to the questions reveal risks. Common-risk Checking In several industries lists with known risks are available. Each risk in the list can be checked for application to a particular situation.

3.Assessment Once risks have been identified, they must then be assessed as to their potential severity of loss and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible in order to properly prioritize the implementation of the risk management plan. The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for immaterial assets. Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of information. Nevertheless, risk assessment should produce such information for the management of the organisation that the primary risks are easy to understand and that the risk management decisions may be prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is: Rate of occurrence multiplied by the impact of the event equals risk Later research has shown that the financial benefits of risk management are not so much dependent on the formulae used. The most significant factor in risk management seems to be that 1.) risk assessment is performed frequently and 2.) it is done using as simple methods as possible. In business it is imperative to be able to present the findings of risk assessments in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formulae for presenting risks in financial terms. The Courtney formulae was accepted as the official risk analysis method for the US governmental agencies. The formulae proposes calculation of ALE (Annualised Loss Expectancy) and compares the expected loss value to the security control implementation costs (cost-benefit analysis).

Potential Risk Treatments Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:    

Transfer Avoidance Reduction (aka Mitigation) Acceptance (aka Retention)

Ideal use of these strategies may not be possible. Some of them may involve trade offs that are not acceptable to the organization or person making the risk management decisions.

Risk

avoidance

Includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the liability that comes with it. Another would be not flying in order to not take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning the profits.

Risk reduction Involves methods that reduce the severity of the loss. Examples include sprinklers designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy. Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in increments, software projects can limit effort wasted to a single increment. A current trend in software development, spearheaded by the Extreme Programming community, is to reduce the size of increments to the smallest size possible, sometimes as little as one week is allocated to an increment.

Risk retention Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

Risk transfer Means causing another party to accept the risk, typically by contract or by hedging. Insurance is one type of risk transfer that uses contracts. Other times it may involve contract language that transfers a risk to another party without the payment of an insurance premium. Liability among construction or other contractors is very often transferred this way. On the other hand, taking offsetting positions in derivatives is typically how firms use hedging to financially manage risk. Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.

Create the plan Decide on the combination of methods to be used for each risk. Each risk management decision should be recorded and approved by the appropriate level of management. For example, a risk concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks. The risk management plan should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing anti virus software. A good risk management plan should contain a schedule for control implementation and responsibile persons for those actions. The risk management concept is old but is still not very effectively measured

4.Implementation Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.

5.Review and evaluation of the plan Initial risk management plans will never be perfect. Practice, experience, and actual loss results, will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced. Risk analysis results and management plans should be updated periodically. There are two primary reasons for this: 1. to evaluate whether the previously selected security controls are still applicable and effective, and 2. to evaluate the possible risk level changes in the business environment. For example, information risks are a good example of rapidly changing business environment.

Foreign Exchange Risk Management Guidelines Your business is open to risks from movements in competitors' prices, raw material prices, competitors' cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed. This section addresses the task of managing exposure to Foreign Exchange movements. These Risk Management Guidelines are primarily an enunciation of some good and prudent practices in exposure management. They have to be understood, and slowly internalized and customized so that they yield positive benefits to the company over time. It is imperative and advisable for the Apex Management to both be aware of these practices and approve them as a policy. Once that is done, it becomes easier for the Exposure Managers to get along efficiently with their task.

(1).Exposure Analysis

An Exposure can be defined as a Contracted, Projected or Contingent Cash Flow whose magnitude is not certain at the moment. The magnitude depends on the value of variables such as Foreign Exchange rates and Interest rates. The company will determine and analyze its Foreign Exchange exposures.

Determination: The following cash flows/ transactions will be considered for the purpose of exposure management. Variable / Cash Flows Transaction Type  Both Capital and Revenue in  Contracted Foreign Currency Cash Flows nature  Foreign Interest Rates, whether Floating or  All Interest Payments/ Receipts Fixed  All Open hedge transactions  Cash Flows from Hedge Transactions  Both Capital and Revenue in  Projected/ Contingent Cash Flows nature

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Cash Flows above $100,000/- in value will be brought to the notice of the Exposure Manager, as soon as they are projected. It is the responsibility of the Exposure Manager to ensure that he receives the requisite information on exposures from various sections of the company in time.

Analysis These exposures will be analyzed and the following aspects will be studied:      

Foreign Currency Cash Flows/ Schedules Variability of Cash flows - how certain are the amounts and/ or value dates? Inflow-Outflow Mismatches / Gaps Time Mismatches / Gaps Currency Portfolio Mix Floating / Fixed Interest Rate ratio

(2). MARKET FORECASTS After determining its Exposures, the company has to form an idea of where the market is headed. The company will focus on forecasts for the next 6 months, as forecasts for periods beyond 6 months can be unreliable. The focus of the Apex Management is to be aware of :    

the Direction or the Big Trend in rates. the underlying assumptions behind the forecasts the Probability that can be assigned to the forecast coming true the possible extent of the move

The Risk Appraisal exercise and Benchmarking decisions will be based on such forecasts.

(3).RISK

APPRAISAL

This exercise is aimed at determining where the company's exposures stand vis-à-vis market forecasts. The following Risks will be considered.

1.Risk to the Exposure or Value at Risk (VAR) Given a particular view or forecast, VAR tries to determine by how much the company’s underlying cash flows are affected.

2. Forecast Risk What is the likelihood of the rate actually moving to xx.xxxx and what is the likelihood of a forecast going wrong. It is imperative to know this before deciding on a Benchmark and devising a hedging strategy.

3. Market and Transaction Risk This will take into consideration the risks attached with each particular market and the likelihood of a transaction not going through smoothly. For instance,  

The Rupee is given to sudden swings in sentiment, whereas the Deutschemark is generally more predictable. The monetary and time costs of hedging with a nationalized bank are generally higher than with a private/ foreign bank.

4. Systems Risk The risks that arise through gaps or weaknesses in the Exposure Management system. For example: where there are delays/ errors in reporting exposures to the Reporting Gap Exposure Management cell Implementation Gap where there is a gap between the decision to hedge and the implementation of such hedge decision.

(4). BENCHMARKING

This

exercise aims to state where the company would like its exposures to reach. 1. The company will set a Benchmark for its Exposure Management practices. 2. The Benchmarks will be set for 6 months periods. 3. The Benchmark will reflect and incorporate the following: 1. The Objective of Exposure Management, or in other words, "Should Exposure Management be conducted on a Profit Centre or Cost Centre basis?" 2. The Forecasts discussed and agreed upon earlier. Mathematically, the Benchmark should be the Probabilistic Expectation of the rate in question. 3. The Forecast risk, Market and Transaction risk, and Systems risk as determined earlier. 4. Room for error in keeping with the Stop Loss Policy to be decided 4. The Benchmark will be realistic and achievable. Suggestions: Companies whose exposures are of long-term Capital nature can look to manage them on a Profit Centre basis, since the exposures are not open to day-to-day business risks. Companies whose exposures are of short-term Revenue nature should manage them on a Cost Centre basis, since the exposures impact the P&L Account directly. A small note on the Profit/ Cost centre concept: Profit Centre under this concept, the Exposure Manager is required to generate a NET profit on the exposure over time. This is an aggressive stance implying a high degree of risk appetite on the part of Apex Management. A company with a strong position in its daily bread and butter business can afford to take some financial risks and can opt for this concept.

Cost Centre

The Benchmarks under a Profit-Centre concept would take the form of “The total cost of a foreign currency loan should be reduced by at least 25 bp over a one year period, from the forecasted rate of ex. % p.a.”. under this concept, the Exposure Manager would be required to ensure that the cashflows of the company are not adversely affected beyond a certain point. This is a defensive strategy, implying a lower risk appetite. A company whose cash-flows are volatile, or whose underlying business is not on a very sound footing would be advised to adopt this concept. The Benchmarks under a Cost-Centre concept would take the form of “Foreign Exchange fluctuations should add no more than x% to the cost of Imported Raw Material over and above the budgeted cost.”

(5). HEDGING This is the most visible and glamorized part of the Exposure Management function. However, the Trader is like the Driver in a car rally, who needs to follow the general directions of the Navigator. 1. Hedging strategies will be designed to meet the Exposure Management objectives, as represented by the Benchmarks 2. The Exposure Management Cell will be accorded full operational freedom to carry out the hedging function on a day to day basis 3. Hedges will be undertaken only after appropriate Stop-Loss and Take-Profit levels have been predetermined 4. The company will use all hedging techniques available to it, as per need and requirement. In this regard, it will pass a Board Resolution authorizing the use of the following:         

Rupee-Foreign Currency Forward Contracts Cross Currency Forward Contracts Forward-to-Forward Contracts FRAs Currency Swaps Interest Rate Swaps Currency Options Interest Rate Options Others, as may be required.

Suggestion: Indian companies with sizeable US Dollar denominated exposures are extremely vulnerable to sudden drastic moves in the USD-INR rate. They can, to an extent, insulate themselves from such shocks by undertaking hedges in currencies other than RupeeDollar. For instance, a Dollar payable can be hedged by selling a currency (say Sterling Pound) in order to buy Dollars, instead of selling the Rupee. The choice of currency would, of course, depend on the trend and forecast for the currency(s) at that point of time. It is easier and safer to generate profits from a Cross-Currency Forward Contract and a Rs 1 Lac profit thereon is equivalent to saving a 10 paisa depreciation in the Rupee (on USD 1 million)

(6). STOPLOSS Exposure Management should not be undertaken without having a Stop-Loss policy in place. A Stop-Loss policy is based on the following two fundamental principles:

1. To err is human 2. A stitch in time saves nine It is appropriate to recount here some words from a speech Dr Alan Greenspan, Chairman of the US Federal Reserve, delivered in December 1997, on the Asian financial crisis. He says, “There is a significant bias in political systems of all varieties to substitute hope (read, wishful thinking) for possibly difficult pre-emptive policy moves. There is often denial and delay in instituting proper adjustments Reality eventually replaces hope and the cost of the delay is a more abrupt and disruptive adjustment than would have been required if action had been more preemptive. Whether an Exposure is hedged or not, it is assumed that the decision to hedge/ not to hedge is backed by a View or Forecast, whether implicit or explicit. As such, Stop Loss is nothing but a commitment to reverse a decision when the view is proven to be wrong. Suggestions: Stop Losses should be activated when    

Critical levels in the rate being monitored are reached, which clearly tell that the view held has been proven wrong. The factors/ assumptions behind a view either change or are proven wrong. The Exposure Manager should be accorded flexibility to set appropriate StopLosses for each trade. The Exposure Manager should, however, make sure he has set a stop-loss for positions he enters into, on an a priori basis.

While Benchmarks will be based upon the Big Trend and will incorporate a certain amount of room for error, the Exposure Manager should be careful to not violate the Benchmark on the wrong side.

(7). REPORTING AND REVIEW There needs to be continuous monitoring whether the Exposures are headed where they are intended to reach. As such, the Exposure Management activities need to be reported and reviewed.

Reporting The Exposure Manager will prepare the following Reports on a regular basis: Report Name What it shows Periodicity MTM Report The Mark-to-Market Profit/ Loss status on Open Forward Daily, closing Contracts Exposure NAV The All-in-all exchange/ interest rate achieved on each Fortnightly Report Exposure, and profitability vis-à-vis the Benchmark VAR Report Expected changes in overall Exposure due to forecasted Monthly exchange/ interest rate movements

Review A monthly Review meeting will consider the following: Issue On the basis of Points to be reviewed Exposure Exposure NAV Report Is the Benchmark being met/ Performance bettered? What are the chances of the Benchmark being violated on the wrong side?

Market Situation

Reviews of market developments Forecasts of market movements

Benchmarking The above two Hedging Strategy

MTM and Exposure NAV Reports

Operational issues

Exposure Manager's experiences

Reasons for the Benchmark being violated on the wrong side Is the Big Trend still in place? Or has it changed? Does the Benchmark need to be changed? Is the strategy working well? Or does it need to be fine-tuned/ overhauled? Operational problems to be solved

(8). CONCLUSION Exposure Management is an essential part of business and should be viewed with Objectivity. It is neither a license to print money nor is it a cause for getting trapped in a Fear Psychosis, and should be viewed with the same clarity of vision as, say, Production or Marketing is viewed. Having said that, it should be remembered that    

All that has been stated above cannot start happening straightaway Installing Hedging, Reporting and Review systems that work takes time and effort There will be a Learning Curve to be overcome when setting Benchmarks There will be initial losses, which should be viewed as what they are - initial losses.

There has to be a long-term commitment to Exposure Management, because it is today an activity, which no company can afford to ignore.

WHY HEDGE FOREIGN CURRENCY RISK International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates. This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, effectively ensuring a future financial position. Each entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this website can not possibly cover every existing foreign exchange hedging situation. Therefore, we will cover the more common reasons that a foreign exchange hedge is placed and show you how to properly hedge foreign exchange rate risk. Foreign Exchange Rate Risk Exposure - Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading. Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. If a firm price is quoted ahead of time for a contract using a foreign exchange rate that is deemed appropriate at the time the quote is given, the foreign exchange rate quote may not necessarily be appropriate at the time of the actual agreement or performance of the contract. Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.

Interest Rate Risk Exposure - Interest rate exposure refers to the interest rate differential between the two countries' currencies in a foreign exchange contract. The interest rate differential is also roughly equal to the "carry" cost paid to hedge a forward or futures contract. As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low. In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold. Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought. Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials. Foreign Investment / Stock Exposure - Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. Investing in foreign stocks automatically exposes the investor to foreign exchange rate risk and speculative risk. For example, an investor buys a particular amount of foreign currency (in exchange for domestic currency) in order to purchase shares of a foreign stock. The investor is now automatically exposed to two separate risks. First, the stock price may go either up or down and the investor is exposed to the speculative stock price risk. Second, the investor is exposed to foreign exchange rate risk because the foreign exchange rate may either appreciate or depreciate from the time the investor first purchased the foreign stock and the time the investor decides to exit the position and repatriates the currency (exchanges the foreign currency back to domestic currency). Therefore, even if a speculative profit is achieved because the foreign stock price rose, the investor could actually net lose money if devaluation of the foreign currency occurred while the investor was holding the foreign stock (and the devaluation amount was greater than the speculative profit). Placing a foreign exchange hedge can help to manage this foreign exchange rate risk. Hedging Speculative Positions - Foreign currency traders utilize foreign exchange hedging to protect open positions against adverse moves in foreign exchange rates, and placing a foreign exchange hedge can help to manage foreign exchange rate risk. Speculative positions can be hedged via a number of foreign exchange hedging vehicles that can be used either alone or in combination to create entirely new foreign exchange hedging strategies.

How To Trade Forex Successfully: Forex Trading Risk Management Trading the Markets Trading the markets for speculation purposes is a challenging task that numerous amounts of people have embarked on. Do you know anyone who successfully makes money trading? The answer is most likely no. If you do I recommend you become as friendly as possible with the person and learn everything you can from him, unless he is charging for his services. That usually means he is not a successful trader. With the type of leverage that is offered in the futures, options and forex markets, I personally find it hard to believe that anyone who has a successful system that is right for them will be too eager to teach it. Why should they teach if they can be trading the daylights out of it and be making millions with the 400:1 leverage that some forex platforms offer. On the other hand numerous people have made millions trading. Look at the list of CTA’s on IASG.com, look at John W. Henry, Max Ansbacher, Warren Buffet, Peter Lynch and all the Market Wizards. I recommend reading the market wizards book for some inspiration.

The problem is that most traders go into trading with the wrong attitude. Have you ever heard this phrase “I am tired of working I need to trade to get rich.” It takes 7 years to complete medical school and there is no green arrow red arrow system for performing heart surgery. Trading will pay you much more than doctors make so you should expect to have to do more work than doctors do for a longer period of time to get wealthy and become a market wizard. While you start and practice it is imperative that you do so at a low cost, meaning you don’t blow out your account on bad trades due to poor risk management. It has been hypothesized that, with proper risk management, a simple system like flipping a coin to buy or sell could be successful. However having the slightest edge should enhance the traders chances a great deal. By edge, I mean something that will make the trader make more money than he looses. An edge can be discretional or algorithmic as long as the trader makes money in the long run. A perfect example of this is the game of blackjack. The house has a very slight edge less than not more than 2%. But by repetitive play they consistently end up profitable. This is because they have a set approach, and edge, and they don’t get emotional when a player goes on a winning streak. Good traders put themselves in the position of a casino. Traders can make money discretionally by following support and resistance levels, watching the volume, size and market action. Or, traders can create a trading system by back-testing a certain edge. Calculate the systems expectancy, develop trading and risk management rules, and follow those rules religiously to generate profits. Numerous people will try to sell systems. It is very important that with any system traders create a reevaluation point. By reevaluation point I mean a point where the trader starts to question the systems effectiveness and begins to look for other systems that he expects to fair profitable over time. The reevaluation point should be decided upon before trading begins. It should be based on the back tested data, and you must take into account concepts that we will discuss such as a drawdown, consecutive loosing sessions, reward risk ratio.

TOOLS FOR MANAGING RISK IN FOREX MARKET THE SPOT MARKET 1.

Introduction

The spot market accounts for nearly a third of global foreign exchange turnover. It can be broadly divided into two tiers: • The interbank market where currency is bought and sold for delivery and settlement within two days, with the banks acting as “wholesalers” or “market makers”. • The retail market made up of private traders, who deal over the telephone or the internet through intermediaries (brokers). The forex market has no centralized exchanges. All trades are over-the-counter deals, agreed and settled by individual counterparties known to one another. The forex market is truly global and operates 24 hours a day, Monday to Friday. Daily trading commences in Wellington, New Zealand and follows the sun to (inter alia) Sydney, Tokyo, Hong Kong, Singapore, Bahrain, Frankfurt, Geneva, Zurich, Paris, London, New York, Chicago and Los Angeles before starting again.

2. Currency pairs and the rate of exchange

Every foreign exchange transaction is an exchange between a pair of currencies. Each currency is denoted by a unique three-character International Standardization Organization (ISO) code (e.g. GBP represents sterling and USD the US dollar). Currency pairings are expressed as two ISO codes separated by a division symbol (e.g. GBP/USD), the first representing the “base currency” and the other the “secondary currency”. The rate of exchange is simply the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 US dollars (the secondary currency). The base currency is the one that you are buying or selling. This elementary point is often lost on beginners. Exchange rates are usually written to four decimal places, with the exception of Japanese yen which is written to two decimal places. The rate to two (out of four) decimal places is known as the “big figure” while the third and fourth decimal places together measure the “points” or “pips”. For instance, in GBP/USD = 1.5545 the “big figure” is 1.55 while the 45 (i.e. the third and fourth decimal places) represents the points.

2.1. Bid offer spread As with other financial commodities, there is a buying price (“offer” or “ask” price) and a selling price (“bid” price). The difference is known as the “bid-offer spread” or “the spread”. The spread is written in a particular format, best demonstrated by way of an example. GBP/USD = 1.5545/50 means that the bid price of GBP is 1.5545 USD and the offer price is 1.5550 USD. The spread in this case is 5 points.

2.2.The major pairings All pairings with the US dollar are known as the “majors”. The “big four” majors are: EUR/USD denoting euro/USdollar GBP/USD denoting sterling/US dollar (known as “cable”) USD/JPY denoting US dollar /Japanese yen USD/CHF denoting US dollar/Swiss franc.

2.3.Crossrates Pairings of non-US dollar currencies are known as “crosses”. We can derive cross exchange rates for GPB, EUR, JPY and CHF from the aforementioned major pairs. Exchange rates must be consistent across all currencies, or else it will be possible to “roundtrip”and make riskless profits. The following “major” exchange rates (red) imply the “cross rates” (blue). An illustration of how cross rates are computed is given in Appendix A.

3. Buying equals selling Every purchase of the base currency implies a reciprocal sale of the secondary currency. Likewise, sale of the base currency implies the simultaneous purchase of the secondary currency. For example, when I sell 1 GBP, I am simultaneously buying 1.5545 USD. Likewise, when I buy 1 GBP, I am simultaneously selling 1.5550 USD. We can express this equivalence by inverting the GBP/USD exchange rate and rotating the bid and offer reciprocals, to derive the USD/GBP rate i.e. USD/GBP = (1/1.5550) bid; (1/1.5545) offer = 0.6431/33 This means that the bid price of one USD is 0.6431 GBP (or 64.31p) and the offer price of one USD is 0.6433 GBP (or 64.33p). Note that USD has now become the base currency and that the spread is 2 points.

4. Practical spot trading 4.1 Units of trading – lots

As we have already seen, every forex transaction is an exchange of one currency for another. The basic unit of trading for private investors is known as a “lot” which consists of 100,000 units of the base currency (although some brokers may arrange trading in mini-lots). • Using the data in Table A, the purchase of a single lot of GBP/USD will involve the purchase of 100,000 GBP at a price of 1.5852 USD = 158,520 USD. • Similarly, the sale of a single lot of GBP/USD entails the sale of 100,000 GBP at 1.5847 USD = 158,470 USD.

4.2 Margin A private investor who purchases a GBP/USD lot does not have to put down the full value of the trade (158,520 USD). Instead, the buyer is required to put down a deposit known as “margin” which enables the investor to gear up the trade size to institutional level. Since the sale of one currency involves the simultaneous purchase of another, the seller of a GBP/USD lot will have bought a volume of USD, and will also have to put down margin for the value of the deal (158,470 USD). The normal margin requirement is between 1% and 5% of the underlying value of the trade. The currency denomination depends on the brokerage through which you execute your trade. If you are dealing through an American broker (say online), then it is likely that you will have to deposit margin in USD even if you are resident in the UK. With 5,000 USD in your margin account and with margin requirement of 2.5%, you can open positions worth 200,000 USD. Your positions will be valued continuously. If the funds in your margin account drop below the minimum required to support your open positions, then you may be asked to provide additional funds. This is known as a “margin call”. If your trade is denominated in a currency other than that accepted by the broker, you will have to convert your gains and losses back into an acceptable currency. For example, if you trade a USD/JPY pair, then your gains and losses will be denominated in JPY. If your broker’s home currency is USD, then your profits and losses will be converted back to USD at the relevant USD/JPY offer rate.

4.3 Closing out An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account. To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price). Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.

5. Worked example 5.1 Betting on a rise Assume that you start with a clean slate and that the current GPB/USD rate is 1.5847/52. • You expect the pound to appreciate against the US dollar, so you buy a single lot of 100,000 GBP at the offer price of 1.5852 USD. • The value of the contract is 100,000 X $1.5852 = $158, 520. The broker wants margin of 2.5% in USD, so you must ensure that you deposit at least 2.5% of 158,520 USD = 3,963 USD in your margin account • GBP/USD duly appreciates to 1.6000/05 and you decide to close out your position by selling your sterling for US dollars at the bid rate. Your gain is: 100,000 X (1.6000 – 1.5852) USD = 1,480 USD, the equivalent of 10 USD per point

• Your rate of return is 1,480/3,963 = 37.35%, on an exchange rate movement of less than 1%. This illustrates the positive effect of buying on margin. • Had GBP/USD fallen to 1.5700/75, your loss would have been: 100,000 X (1.5852 – 1.5700) USD = 1,520 USD, a return of –38.35% The lesson is that margin trading magnifies your rate of profit or loss.

6. Screen-based spot trading The technology for trading forex has evolved from the telephone and telex (not forgetting voice dealing) through to the modern Electronic Broking System (EBS) that enables “straight through processing” (STP) with integrated quotation, transactional and administrative functionality. EBS-type technology is now available to individual, private investors who can receive live, streaming data from and transact directly through their chosen brokers. The private dealer, however, does not deal on the highly competitive inter-bank market with its tight spreads. In practice, brokers add points to the price spread in lieu of dealing commission.

A

private

trader

requires:

• A margin account broker with internet access and a fast connection • A computer terminal capable of running several programmes simultaneously • Proprietary software to open and manage positions and to display technical analysis tools. • Sufficient monitors to handle market data, submit dealing instructions, display technical analysis; and for keeping tabs on open positions, managing orders (e.g. stop loss, TPO, limit etc.) and viewing the state of the margin account. For demonstrations of the kind of proprietary software available, visit Pronet Analytics (www.pronetanalytics.com) and Nostradamus (www.nostradamus.co.uk) Pronet Analytics provides the only chart-based software package approved by Association of Cambistes Internationale, the governing body of professional forex trading. From early 2003, a new spot trading software package from US provider Gain Capital will be available through the UK online margin broker Easy2Trade (www.easy2trade.com), better known for its futures online global trading platform. “We will build our required margin into the bid-offer spread,” says Easy2Trade chief executive David Wenman. “It will be free to use after that.” Before you splash out on the full kit, why not does a test drive by renting a dealing desk at an organization like TraderHouse (www.traderhouse.net).

7. Fundamental and technical analysis Without the apparatus for making sense of the currency market, any trade represents a pure gamble. There are two broad schools of analysis, which are not mutually exclusive.

7.1Fundamentalanalysis Fundamental analysis is the application of micro and macroeconomic theory to markets, with the aim of predicting future trends. So what fundamental forces drive currency markets? (a). The balance of trade: Currencies that are associated with long term trade surpluses will tend to strengthen against those associated with persistent deficits - simply because there is net buying of surplus currencies corresponding to the excess of exports over imports. Trends are important too. An improving balance of trade should cause the relevant currency to appreciate relative to those associated with a deteriorating or stable balance of trade. (b). Relative inflation rates: If country A is suffering a higher rate of price inflation than country B, then A’s currency ought to weaken relative to B’s in order to restore “purchasing power parity”.

(c). Interest rates: International capital flows seek the highest inflation-adjusted returns, creating additional demand for high real interest-rate currencies and pushing up their rates of exchange. (d). Expectations and speculation: Markets anticipate events. Speculation on, say, the future rate of inflation may be enough to move the exchange rate - long before the actual trend becomes apparent. It should be understood that these economic forces act in concert. It is a supremely difficult task, however, to establish where the sum of interacting economic forces will take the market. The solution, some argue, lies in technical analysis.

7.2Technical analysis Technical analysis is concerned with predicting future price trends from historical price and volume data. The underlying axiom of technical analysis is that all fundamentals (including expectations) are factored into the market and are reflected in exchange rates. The tools of technical analysis are now freely available to private investors in support of their trading decisions. It cannot be stressed too heavily, however, that such tools are only estimators and are not infallible. The following is the briefest of introductions to the technical analytical tools used to identify trends and recurring patterns in a volatile marketplace. Aspiring forex dealers are advised to undergo proper training in technical analysis, although true proficiency comes with practice, endurance and experience.

TREND CLASSIFICATIONS

DRAWING TRENDLINES The basic trendline is one of the simplest technical tools employed by the trader, and is also one of the most valuable in any type of technical trading. For an up trendline to be drawn, there must be at least two low points in the graph where the 2nd low point is higher than the first. A price low is the lowest price reached during a counter trend move.

BULLISH TREND LINES

TREND, ANALYSIS AND TIMING Markets don't move straight up and down. The direction of any market at any time is either Bullish (Up), Bearish (Down), or Neutral (Sideways). Within those trends, markets have countertrend (backing & filling) movements. In a general sense "Markets move in waves", and in order to make money a trader must catch the wave at the right time.

DRAWING VARIOUS TRENDLINES DRAWING TRENDLINES

TRENDLINES Drawing Trendlines will help to determine when a trend is changing.

TREND The direction of trend is absolutely essential to trading and analyzing the market.

In the Foreign Exchange (FX) Market it is possible to profit from UP and Down movements, because of the buying of one currency and selling against the other currency e.g. Buy US Dollar Sell German Mark. ex. Up Trend chart.

8. Tips for aspiring spot traders Andy Shearman, a director of forex day-trading service Trader House Network (UK) has “Seven Pillars of Wisdom” for aspiring forex traders: (1) Don’t be under-capitalized or you will lose trading opportunities. (2) Don’t suspend your daily (successful) economic activity while you are learning to trade currencies. (3) Get an education. Make time to practice and to check markets every day.

(4) Decide what your monetary goals are and devise a trading plan to realize them. Remember that you have overheads and that risk is involved. Your target remuneration must not only be realistic but must include a risk premium. (5) Choose a good broker – preferably one that feeds live, streaming prices to your screen. (6) Be decisive. Over-caution will cost you money. You can’t make any profits if you don’t trade. Don’t agonize too long over a deal and trust your instincts. (7) Watch your back. Never leave your trading screen even momentarily without putting stop losses in place. A pee is a long time in the forex market. “Trading forex is a bit like life in a combat zone,” says Shearman. “There are bouts of frenetic, exhilarating and even panic-stricken activity interspersed with periods of uneventful ness. No one can physically trade 24 hours a day. You need your rest and recreation.” Trader House has come up with a novel solution. It has set up a tutorial centre (with a night school for those with a day job) and a dealing room at the Cottesmore Country Club in West Sussex. You can play hard in the forex markets and chill out later in the bar, the gym, the pool or on the golf course - all for the rental of a dealing desk. Who needs the Lottery!

CURRENCY FORWARD A forward contract that locks-in the price an entity can buy or sell currency on a future date. In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity, and on a specified future date. These contracts cannot be transferred. Also known as "outright forward currency transaction."

CURRENCY FUTURES A transferable futures contract that specifies the price at which a specified currency can be bought or sold at a future date. Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date. A currency future, also FX future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the last trading date. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then a certain amount of other currency, for instance EUR 125,000. Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Example Peter buys 10 September CME Euro FX Futures, at 1.2713 USD/EUR. At the end of the day, the futures close at 1.2784 USD/EUR. The change in price is 0.0071 USD/EUR. As each contract is over EUR 125,000, and he has 10 contracts, his profit is USD 8,875. As with any future, this is paid to him immediately. More generally, each change of

0.0001 USD/EUR (the minimum tick size), is a profit or loss of USD 12.5 per contract. Investors use these futures contracts to hedge against foreign exchange risk. They can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. Investors can close out the contract at any time prior to the contract's delivery date. Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972, less than one year after the system of fixed exchange rates was abandoned along with the gold standard. Some commodity traders at the CME did not have access to the inter-bank exchange markets in the early seventies, when they believed that significant changes were about to take place in the currency market. They established the International Monetary Market (IMM) and launched trading in seven currency futures on May 16, 1972. Today, the IMM is a division of CME. In the second quarter of 2005, an average of 332,000 contracts with a notional value of USD 43 billion were traded every day. Most of these are traded electronically nowadays [1].

The Advantages of Trading Currency Futures 



Currency futures trade nearly 24 hours. Traders looking to profit from market movements can act any time of the day or night during the trading week to take advantage of changing market conditions. CME currency futures trade virtually 24 hours per day during the trading week, and XPRESSTRADE gives you the ability to trade in the open-outcry pits or on the Globex electronic platform, day or night. FX markets are deep and liquid. Traders can enter the market and exit positions efficiently. Since their inception, CME currency futures have produced an active trading environment through which customers collectively place trades worth up to $32.1 billion (CME single-day notional volume record, December 9, 2002). The success of FX futures has created a robust trading environment.

Currency futures offer diversification. In today's equity market environment, diversification is a critical factor in individual portfolio management. Because exchange rates march to their own beat, currency futures can offer valuable diversification for an investment portfolio that has equity market risk. On a historical basis, changes in exchange rates have had very low correlations with price movements in stock market values and interest rates. This lack of any systematic relationship can lower portfolio risk and generate positive returns when other markets are in a depressed state.

OPTIONS ON FUTURE CONTRACTS INTRODUCTION Options on futures contracts have added a new dimension to futures trading. Like futures, options provide price protection against adverse price moves. Present-day options trading on the floor of an exchange began in April 1973 when the Chicago Board of Trade created the Chicago Board Options Exchange (CBOE) for the sole purpose of trading options on a limited number of New York Stock Exchange-listed equities. Options on futures contracts were introduced at the CBOT in October 1982 when the exchange began trading Options on U.S. Treasury Bond futures.

What Are Options? There are two basic types of options on futures contracts: "calls" and "puts." A call option on futures contracts conveys the right (but not the obligation) to the buyer to purchase a specific futures contract (for example, a corn contract for a December 1997 delivery month) at a particular price during a specified period of time. A put option conveys the right (but not the

obligation) to the buyer to sell a specific futures contract at a given price during a specified period of time. The price for which the futures contract can be brought (in the case of a call option) or sold (in the case of a put option) under the terms of the option contract is referred to as the option's strike price or exercise price. The date on which an option expires--the date after which it can no longer be exercised--is the option's expiration date. The price of a specific option, that is, the amount of money paid by the buyer of an option and received by the seller of any option, is the option premium.

Where Are Options Traded? Options are traded on the same exchanges as those of the underlying futures contracts. There are 11 different commodity exchanges in the U.S. as well as abroad. The major domestic agricultural crops are traded on the Chicago Board of Trade, the Kansas City Board of Trade, the Minneapolis Grain Exchange, the New York Cotton Exchange, and the Coffee, Sugar and Cocoa Exchange.

How Are Options Traded? Options contracts are traded in much the same manner as their underlying futures contracts. There are several important factors to remember when trading options. The most important one is that trading a call option is completely separate and distinct from trading a put option. If producers buy or sell a call option, it does not in any way involve a put option. Trading a put does not involve a call option. Calls and puts are separate contracts, not opposite sides of the same transaction. At any given time, there is simultaneous trading in a number of different call and put options-different in terms of delivery months and strike prices. Option delivery months are typically the same as those of the underlying futures contract. Strike prices are listed in predetermined multiples for each commodity. The listed strike prices will include an at- or near-the-money option, at least five strikes below, and at least nine strikes above the at-the-money option. At-the-money is defined as an option whose strike price is equal--or approximately equal--to the current market price of the underlying futures contract. The five lower strikes would follow normal intervals. The nine higher strikes would include five normal intervals above the at-themoney option(s), plus an additional four strikes listed in even strikes that are double the normal interval. As prices increase or decrease, additional strike prices are listed as needed so that there are always five strike prices listed in normal intervals and four strike prices in double intervals above the current futures price, and at lease five strike prices below the current futures prices. An important difference between futures and options is that trading in futures contracts is based on prices, while trading in options is based on premiums. The premium depends on market conditions such as volatility, time until expiration, and other economic variables affecting the value of the underlying futures contract. How various factors influence premiums and how and to what extent market price declines are offset by option profits are among the topics to discuss in detail with a broker. The premium is the only part of the option contract negotiated in the trading pit; all other contract terms are predetermined. For an option buyer, the premium represents the maximum amount that he or she can lose, since the buyer is limited only to his initial investment. For an option seller, however, the premium represents the maximum amount he or she can gain, since the option seller faces the possibility of the option being exercised against him or her. When an option is exercised, the futures position assigned to an option seller will almost always be a losing one, since only an in-the-money option will normally be exercised by the option buyer.

Reasons for using Options Options differ considerably from futures. When used prudently, options can be of immense importance, especially in attempting to preserve the value of an existing fixed-income portfolio. To many in the financial markets, options are considered "insurance" against adverse price movements while offering the flexibility to benefit from possible favorable price movement. The reasons for using options on futures are reflected in the structure of an option contract. First, an option, when purchased, gives the buyer the right, but not the obligation, to buy or sell a specific amount of a specific commodity at a specific price within a specific period of time. By comparison, a futures contract requires a buyer or seller to perform under the terms of the contract if an open position is not offset before expiration. Second, the decision to exercise the option is entirely that of the buyer. Third, the purchaser of the option can lose no more than the initial amount of money invested (premium). That is not the case, however, for the buyer of a futures contract. Finally, an option buyer is never subject to margin calls. This enables the purchaser to maintain a market position, despite any adverse moves without putting up additional funds.

Options Terminology There are several important terms the would-be user of options on futures should understand. They include:

call option: Gives the buyer the right, but not the obligation, to buy a specific futures contract at a predetermined price within a limited period of time.

put option: Gives the buyer the right, but not the obligation, to sell a specific futures contract at a predetermined price within a limited period of time.

holder: The buyer of the option.

premium: The dollar amount paid by the buyer of the option to the seller.

writer: The option seller.

strike price: The predetermined price at which a given futures contract can be bought or sold. Also called the exercise price, these levels are set at regular intervals. For example, if Treasury bond futures were at 79-00, T-bond option strike prices would be at 74, 76, 78, 80, 82, and 84.

at-the-money: An option is at-the-money when the underlying futures price equals, or nearly equals, the strike price. For example, a T-bond put or call option is at-the-money if the option strike price is 78 and the price of the Treasury bond futures contract is at, or near, 7800.

in-the-money: A call option is in-the-money when the underlying futures price is greater than the strike price. For example, if Treasury bond futures are at 80-00 and the T-bond call option strike price is 78, the call is in-the-money. The put option is in-the-money when the strike price of the option is greater then the price of the underlying futures contract. For

example, if the strike price of the put option is 80 and T-bond futures are trading at 7700, the put option is in-the-money.

out-of-the-money: A call option is out-of-the-money if the strike price is greater than the underlying futures price. For example, if T-bond futures are at 80-00 and the T-bond call option has an 82 strike price, the option is out-of-the-money. The put option is out-of-themoney if the underlying futures price is greater then the strike price. For example, if Tbond futures are at 77-00, and the T-bond put option strike price is 76, the put option is out-of-the-money. Call option Put option In-the-money Futures > Strike Futures < Strike At-the money Futures = Strike Futures = Strike Out-of-the-money Futures < Strike Futures > Strike Options are considered "wasting assets." In other words, they have a limited life because each expires on a certain day, although it may be weeks, months, or years away. The expiration date is the last day the option can be exercised, otherwise it expires worthless. For every option buyer there is an option seller. In other words, for every call buyer there is a call seller; for every put buyer, a put seller. The buyer of the option, unlike the buyer of a futures contract, need not worry about margin calls. However, the seller of the option is generally required to post margin. If an option position is covered, the seller holds an offsetting position in the underlying commodity itself or a futures contract. For example, the seller of a Treasury bond call option would be covered if he actually owned cash market U.S. Treasury bonds or was long the Treasury bond futures contract. If the writer did not hold either, he would have an uncovered or "naked" position. In such instances, margin would be required because the seller would be obligated to fulfill terms of the option contract in the event the contract is exercised by the buyer. It is imperative, therefore, that the seller demonstrate the ability to meet any potential contractual obligations beforehand. In addition, the seller of uncovered options on interest rate futures assumes the potential for significant losses.

Motives for Buying and Selling Options One may be a buyer or seller of call or put options for a variety of reasons. A call option buyer, for example, is bullish. That is, he or she believes the price of the underlying futures contract will rise. If prices do rise, the call option buyer has three courses of action available. The first is to exercise the option and acquire the underlying futures contract at the strike price. The second is to offset the long call position with a sale and realize a profit. The third, and least acceptable, is to let the option expire worthless and forfeit the unrealized profit. The seller of the call option expects futures prices to remain relatively stable or to decline modestly. If prices remain stable, the receipt of the option premium enhances the rate of return on a covered position. If prices decline, selling the call against a long futures position enables the writer to use the premium as a cushion to provide downside protection to the extent of the premium received. For instance, if T-bond futures were purchased at 80-00 and a call option with an 80 strike price was sold for 2-00, T-bond futures could decline to the 78-00 level before there would be a net loss in the position (excluding, of course, margin and commission requirements). However, should T-bond futures rise to 82-00, the call option seller forfeits the opportunity for profit because the buyer would likely exercise the call against him and acquire a futures

position

at

80-00

(the

strike

price).

The perspectives of the put buyer and put seller are completely different. The buyer of the put option believes prices for the underlying futures contract will decline. For example, if a T-bond put option with a strike price of 82 is purchased for 2-00, while T-bond futures also are at 8200, the put option will be profitable for the purchaser to exercise if T-bond futures decline below 80-00. In many instances, puts will be purchased in conjunction with a long cash or long T-bond futures position for "insurance" purposes. For instance, if an institution is long T-bond futures at 82-00 and a T-bond put option with an 82 strike is purchased for 2-00, the futures contract could, theoretically, fall to zero and the put option holder could exercise the option for the 82 strike price, assuming the option had not yet expired. The seller of put options on fixed-income securities believes interest rates will stay at present levels or decline. In selling the put option, the writer, of course, receives income. However, if interest rates rise, the buyer of the put option can require the writer to take delivery of the underlying instrument at a price greater than that in the new market environment. Since an option is a wasting asset, an open position must be closed or exercised, otherwise the option expires worthless. The chart below illustrates what happens to the buyer and the seller after an option is exercised.

Futures Positions After Option Exercise Call option Put option Buyer assumes Long T-bond/note Short T-bond/note futures position futures position Seller assumes Short T-bond/note Long T-bond/note futures position futures position

Option Premium Valuation The price (value) of an option premium is determined competitively by open outcry auction on the trading floor of the CBOT. The premium is affected by the influx of buy and sell orders reaching the exchange floor. An option buyer pays the premium in cash to the option seller. This cash payment is credited to the seller's account. Prices for T-bond and T-note futures contracts are quoted differently from the options premiums on these futures. Options on these contracts are quoted in 64th of a point. Therefore, a quote of -01 in options means 1/64, in futures, 1/32. The option premium has two components: "intrinsic value" and "time value." The intrinsic value is the gross profit that would be realized upon immediate exercise of the option. In other words, intrinsic value is the amount by which the portion is in-the-money. (An option that is out-of-the- money or at-the-money has no intrinsic value.) For example, in December, a June Treasury bond futures contract is priced at 82-00, while the June 80 call is priced at 3 10/64. The intrinsic value of the option is 2-00: Bond futures 82-00 Option strike price 80-00 Intrinsic value 2-00 Time value reflects the probability the option will gain in intrinsic value or become profitable to exercise before it expires. Time value is determined by subtracting intrinsic value from the option premium:

Time value = Option premium - Intrinsic value = 3 10/64 - 2-00 = 1 10/64 Several other factors also have an impact on the premium. One is the relationship between the underlying futures price and strike price. The more an option is in-the-money, the more it is worth. A second factor is volatility. Volatile prices of the underlying commodity can stimulate option demand, enhancing the premium. The greater the volatility, the greater the chance the option premium will increase in value and the option will be exercised; thus, buyers pay more while writers demand higher premiums. A third factor affecting the premium is time until expiration. Since the underlying value of the futures contract changes more within a longer time period, option premiums are subject to greater fluctuation. Some parallels can be drawn between the time value component of an option premium and the premium charged for an automobile insurance policy. The longer the term of the policy, the greater the probability a claim will be made by the policyholder. This, of course, presents a greater risk to the insurance company. To compensate for this increased risk, the insurer charges a greater premium.

CURRENCY SWAPS Currency Swaps are derivative products that help manage exchange rate and interest rate exposure on long-term liabilities. A Currency Swap involves exchange of interest payments denominated in two different currencies for a specified term, along with exchange of principals. The rate of interest in each leg could either be a fixed rate, or a floating rate indexed to some reference rate, like the LIBOR. Consider a corporate who has a USD loan with interest rate at a spread over 6-month LIBOR. The corporate faces the following risks:  

Currency risk: If the rupee depreciates against USD, it will be more expensive for the corporate to service its loan Interest rate risk: An upward movement in LIBOR would increase the cost of servicing the loan

In order to hedge its risks the corporate can enter into a currency swap where it moves from USD floating rate loan to a INR fixed rate loan. The currency swap could be represented as follows: Currency Swaps therefore enable a swap into both, a different currency and a different interest rate basis. Some of the advantages of currency swaps are:    

Enables moving a liability from one currency into another Can be customized Can be reversed at any time (at a cost or benefit) Off Balance Sheet, and does not change the terms of the existing liability.

Currency swaps can be structured to synthetically move liabilities in one currency to another depending on which risks and what costs are acceptable. The interest rates on either of the legs can be floating or fixed.

It is also possible to move rupee liabilities into foreign currencies through currency swaps. Corporates wishing to match currency of loan repayments with currency of receivables (for example, exporters having a long tenor Rupee liabilities) could enter into such swaps. Corporates could also undertake such swaps if they wish to take advantage of lower interest rates in return for exchange rate risk. Consider a corporate that has an INR 25 Crores loan at 9% fixed rate, repayable bullet at the end of two years. If this corporate wishes to swap its liability into a USD loan, the structure of the loan would be as follows: The cash flows in this swap would be as follows:

.At inception None. The loan is notionally converted from INR into USD at current USDINR spot rate. These will then be the principal amounts on which the interest will be computed.

.Every 6 months Company pays to the bank 6 month USD LIBOR plus a spread on the notional USD principal Company receives from the bank Rupee interest @ 9% on the notional INR principal

.At maturity Company receives INR principal from IDBI Bank. Pays USD principal to the IDBI Bank. The company therefore gains from a lower interest rate loan, for which it bears the cost of INR depreciation against USD during the tenor of the swap. Currency swaps can be used to move from any currency to any other desired currency and interest rate. For example, a corporate could swap its INR liability into JPY to benefit from the low JPY interest rates. The risk of adverse JPY/USD exchange rate movement can be limited to desired levels at a price. Such products can be customized to suit specific corporate interest. It is also possible to structure swaps to hedge specific risks. For example, there could be swap such that only the principal amount of a foreign currency loan is protected at current exchange rates (Principal Only Swap). Coupon swaps – swaps involving only interest payments and no principal amounts – is another such variant.

THE EXCHANGE OF PRINCIPAL AT INCEPTION AND AT MATURITY In an interest rate swap, we were concerned exclusively with the exchange of cash flows relating to the interest payments on the designated notional amount. However, there was no exchange of notional at the inception of the contract. The notional amount was the same for both sides of the currency and it was delineated in the same currency. Principal exchange is redundant. However, in the case of a currency swap, principal exchange is not redundant. The exchange of principal on the notional amounts is done at market rates, often using the same rate for the transfer at inception as is employed at maturity. For example, consider the US-based company ("Acme Tool & Die") that has raised money by issuing a Swiss Franc-denominated Eurobond with fixed semi-annual coupon payments of 6% on 100 million Swiss Francs. Upfront, the company receives 100 million Swiss Francs from the proceeds of the Eurobond issue (ignoring any transaction fees, etc.). They are using the Swiss Francs to fund their US operations.

ADVANTAGES OF USING CURRENCY SWAP .FLEXIBILITY Currency swaps give companies extra flexibility to exploit their comparative advantage in their respective borrowing markets.

Interest rate swaps allow companies to focus on their comparative advantage in borrowing in a single currency in the short end of the maturity spectrum vs. the long-end of the maturity spectrum. Currency swaps allow companies to exploit advantages across a matrix of currencies and maturities. The success of the currency swap market and the success of the Eurobond market are explicitly linked.

.EXPOSURE Because of the exchange and re-exchange of notional principal amounts, the currency swap generates a larger credit exposure than the interest rate swap. Companies have to come up with the funds to deliver the notional at the end of the contract. They are obliged to exchange one currency's notional against the other currency's notional at a fixed rate. The more actual market rates have deviated from this contracted rate, the greater the potential loss or gain. This potential exposure is magnified with time. Volatility increases with time. The longer the contract, the more room for the currency to move to one side or other of the agreed upon contracted rate of principal exchange. This explains why currency swaps tie up greater credit lines than regular interest rate swaps.

PRICING We price or value currency swaps in the same way that we learned how to price interest rate swaps, using a discounted cash flow analysis having obtained the zero coupon version of the swap curves. Generally, currency swaps transact at inception with a net present value of zero. Over the life of the instrument, the currency swap can go in-the-money, out-of-the-money or it can stay atthe-money.

CONCLUSION Currency swaps allow companies to exploit the global capital markets more efficiently. They are an integral arbitrage link between the interest rates of different developed countries. The future of banking lies in the securitization and diversification of loan portfolios. The global currency swap market will play an integral role in this transformation. Banks will come to resemble credit funds more than anything else, holding diversified portfolios of global credit and global credit equivalents with derivative overlays used to manage the variety of currency and interest rate risk.

Derivatives Commodities whose value is derived from the price of some underlying asset like securities, commodities, bullion, currency, interest level, stock market index or anything else are known as “Derivatives”. In more simpler form, derivatives are financial security such as an option or future whose value is derived in part from the value and characteristics of another security, the underlying asset. It is a generic term for a variety of financial instruments. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership. In fact, it’s this flexibility that appeals to investors. When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or currency. He bet that the value derived from the underlying asset will increase or decrease by a certain amount within a certain fixed period of time.

‘Futures’ and ‘options’ are two commodity traded types of derivatives. An ‘options’ contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a ‘futures’ contract is obligated to buy or sell the asset. The other examples of derivatives are warrants and convertible bonds (similar to shares in that they are assets). But derivatives are usually contracts. Beyond this, the derivatives range is only limited by the imagination of investment banks. It is likely that any person who has funds invested, an insurance policy or a pension fund, that they are investing in, and exposed to, derivatives – wittingly or unwittingly. Shares or bonds are financial assets where one can claim on another person or corporation; they will be usually be fairly standardized and governed by the property of securities laws in an appropriate country. On the other hand, a contract is merely an agreement between two parties, where the contract details may not be standardised. Derivatives securities or derivatives products are in real terms contracts rather than solid as it fairly sounds.

SIGNIFICANCE OF THE STUDY       

Forex market is changing day by day showing a wide growth in the economy. Forex market is more volatile in nature. There are different factors like speculation, hedging which force different people to enter in different markets. There is risk in Foreign market and various Risk management strategies are there to manage it. Risk management is done in order to minimize the adverse effects of potential losses at the least possible cost. How a person manages risk in foreign market, it depends upon his needs and perception. How a person trades in foreign market.

Due to all these factors, one can interpret that foreign market plays a significant role in economy of any country and risk is managed by different strategies in foreign market to maximize profit in the long run and that give a boost to the economy.

ANALYSIS AND INTERPRETATIONS Understanding Strategy and Analysis All successful traders have a carefully thought out system that they follow to make profitable trades. This system is generally based on a strategy that allows them to find good trades. And the strategy is based on some form of market analysis. Successful traders need some way to interpret and even predict some of the movements of the market. There are two basic approaches to analysing market movements, in both equity markets and the FOREX market. These are technical analysis and fundamental analysis. However, technical analysis is much more likely to be used by traders. Still, it’s good to have an understanding of both types of analysis, so that you can decide which type would work best for your system.

Fundamental Analysis In fundamental analysis, you are basically valuing either a business, for equity markets, or a country, for FOREX. If you think it's hard enough to value one company, you should try

valuing a whole country. It can be quite difficult to do, but there are indicators that can be studied to give insight into how the country works. A few indicators you might want to study are: Non-farm payrolls, Purchasing Managers Index (PMI), Consumer Price Index (CPI), Retail Sales, and Durable Goods. Most traders in the FOREX market only use fundamental analysis to predict long-term trends. However, some traders do trade short-term based on the reactions to different news releases. There are also quite a variety of meetings where you can get quotes and commentary that can affect markets just as much as any news release or indicator report. These meetings are often discuss interest rates, inflation, and other issues that have the ability to affect currency values. Even changes in how things are worded in statements addressing these types of issues, such as the Federal Reserve chairman's comments on interest rates, can cause volatility in the market. Two important meetings that you should watch for are the Federal Open Market Committee and the Humphrey Hawkins Hearings. Just by reading the reports and examining the commentary, a FOREX fundamental analyst can get a better understanding of most long-term market trends. Keeping up on these developments will also allow short-term traders to profit from extraordinary happenings. If you do decide to follow a fundamental strategy, you will want to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also be able to provide you with real-time access to this kind of information.

Technical Analysis Just like their counterparts in the equity markets, technical analysts in the FOREX market analyze price trends. The only real difference between technical analysis in FOREX and technical analysis in equities is the time frame. FOREX markets are open 24 hours a day. Because of this, some forms of technical analysis that factor in time have to be modified so that they can work in the 24-hour FOREX market. Some of the most common forms of technical analysis used in FOREX are: Elliott Waves, Fibonacci studies, Parabolic SAR, and Pivot points. A lot of technical analysts combine technical indicators to make more accurate predictions. (The most common tendency is to combine Fibonacci studies with Elliott Waves.) Others prefer to create entire trading systems in an effort to repeatedly locate similar buying and selling condition.

FINDINGS Trading by Numbers – Eighteen Tips You can never have too many tips or tricks up your sleeve when you are trading. Most of the tips I’m including here are received wisdom, trading truisms that you should remember. They apply to all markets, but are particularly useful in a volatile and technical market like the FOREX 1. Pay attention to the market. Exit and enter trades based on market information. Don’t wait for a price you think the currency should hit when the market has changed direction on you. 2. There are times when, due to a lack of liquidity or excessive volatility, you should not trade at all. On a similar note, never trade when you are sick. You can’t count on yourself to be alert to the shifts of the markets, and make good decisions.

3. Trading systems that work in an up market may not work in a down market, and a system that works for trending markets, or for range bound markets may not work in other markets. Have a system for each type of market. 4. Up market and down market patterns are ALWAYS there, but you have to look for the dominant trends. Always select trades that move with the trends 5. During the blowout stage of the market, either up or down, the risk managers are usually issuing margin call position liquidation orders. They don't generally check the screen to see what’s overbought or oversold; they just keep issuing liquidation orders. Make sure you stay out of their way. 6. Trust your instincts. If something feels wrong about a trade, don’t make it. It’s better to be superstitious than to loose money. 7. Rumour is king. Buy when you hear the rumour, sell when you hear the news. 8. The first and last ticks are always the most expensive. Get in the market late, and out early. And never trade in the direction of a gap, either opening or closing. 9. When everyone else is in, it's time for you to get out. If a stock or currency is overbought, it’s time to exit your position. 10. Don’t worry about missing out on an opportunity to trade. There will always be another good one just around the corner. If the trade you are considering doesn’t meet all your entry signals but it seems to good to pass up, remember, you’re never going to run out of trades you can make. 11. Don’t get too confident. No one can predict the market with 100% accuracy. You need to always expect the unexpected. If you become uneasy, or the market becomes choppy, exit your trades. 12. Don't turn three losing trades in a row into six. When you’re off, turn off the screen, do something else. Often the best way to break a streak of consecutive loses is to not trade for a day. 13. But, don't stop trading when you’re on a winning streak. 14. Measure your success by the profit made in a day, not on a trade. It’s even better to measure it over two or three days. A successful trader’s goal is to make money, not to win on every trade. 15. Scalpers reduce the number of variables affecting market risk by being in a position only for a few seconds. Day traders reduce market risk by being in trades for minutes. If you convert a scalp or day trade into a position trade, you probably didn’t analyze the risks of the trade properly. 16. There is no secret to understanding the market. You can spend much of your valuable time and money looking for these kinds of secrets. It’s better to take the time to create a solid trading system, and realize that the secret to success is hard work. 17. Never ask for someone else's opinion, they probably didn’t do as much homework as you did anyways. 18. When the market is going up, say it out loud. When the market is going down, say that out loud too. You’ll be amazed at how hard it is to say what is going on right in front of you when you want it the market to be doing something else.

HOW TO AVOID TYPICAL PITFALLS AND START MAKING MORE MONEY IN YOUR FOREX TRADING 1. Trade pairs, not currencies - Like any relationship, you have to know both sides. Success or failure in forex trading depends upon being right about both currencies and how they impact one another, not just one.

2. Knowledge is Power - When starting out trading forex online, it is essential that you understand the basics of this market if you want to make the most of your investments. 3. Unambitious trading - Many new traders will place very tight orders in order to take very small profits. This is not a sustainable approach because although you may be profitable in the short run (if you are lucky), you risk losing in the longer term as you have to recover the difference between the bid and the ask price before you can make any profit and this is much more difficult when you make small trades than when you make larger ones. 4. Over-cautious trading - Like the trader who tries to take small incremental profits all the time, the trader who places tight stop losses with a retail forex broker is doomed. As we stated above, you have to give your position a fair chance to demonstrate its ability to produce. If you don't place reasonable stop losses that allow your trade to do so, you will always end up undercutting yourself and losing a small piece of your deposit with every trade. 5. Independence - If you are new to forex, you will either decide to trade your own money or to have a broker trade it for you. So far, so good. But your risk of losing increases exponentially if you either of these two things: Interfere with what your broker is doing on your behalf (as his strategy might require a long gestation period); Seek advice from too many sources - multiple input will only result in multiple losses. Take a position, ride with it and then analyse the outcome - by yourself, for yourself. 6. Tiny margins - Margin trading is one of the biggest advantages in trading forex as it allows you to trade amounts far larger than the total of your deposits. However, it can also be dangerous to novice traders as it can appeal to the greed factor that destroys many forex traders. The best guideline is to increase your leverage in line with your experience and success. 7. No strategy - The aim of making money is not a trading strategy. A strategy is your map for how you plan to make money. Your strategy details the approach you are going to take, which currencies you are going to trade and how you will manage your risk. Without a strategy, you may become one of the 90% of new traders that lose their money. 8. Trading Off-Peak Hours - Professional FX traders, option traders, and hedge funds posses a huge advantage over small retail traders during off-peak hours (between 2200 CET and 1000 CET) as they can hedge their positions and move them around when there is far small trade volume is going through (meaning their risk is smaller). The best advice for trading during off peak hours is simple - don't. 9. The only way is up/down - When the market is on its way up, the market is on its way up. When the market is going down, the market is going down. That's it. There are many systems which analyse past trends, but none that can accurately predict the future. But if you acknowledge to yourself that all that is happening at any time is that the market is simply moving, you'll be amazed at how hard it is to blame anyone else. 10. Trade on the news - Most of the really big market moves occur around news time. Trading volume is high and the moves are significant; this means there is no better time to trade than when news is released. This is when the big players adjust their positions and prices change resulting in a serious currency flow. 11. Exiting Trades - If you place a trade and it's not working out for you, get out. Don't compound your mistake by staying in and hoping for a reversal. If you're in a winning

trade, don't talk yourself out of the position because you're bored or want to relieve stress; stress is a natural part of trading; get used to it. 12. Don't trade too short-term - If you are aiming to make less than 20 points profit, don't undertake the trade. The spread you are trading on will make the odds against you far too high. 13. Don't be smart - The most successful traders I know keep their trading simple. They don't analyse all day or research historical trends and track web logs and their results are excellent. 14. Tops and Bottoms - There are no real "bargains" in trading foreign exchange. Trade in the direction the price is going in and you're results will be almost guaranteed to improve. 15. Ignoring the technicals- Understanding whether the market is over-extended long or short is a key indicator of price action. Spikes occur in the market when it is moving all one way. 16. Emotional Trading - Without that all-important strategy, you're trades essentially are thoughts only and thoughts are emotions and a very poor foundation for trading. When most of us are upset and emotional, we don't tend to make the wisest decisions. Don't let your emotions sway you. 17. Confidence - Confidence comes from successful trading. If you lose money early in your trading career it's very difficult to regain it; the trick is not to go off half-cocked; learn the business before you trade. Remember, knowledge is power.

SUGGESTIONS 1. Take it like a man - If you decide to ride a loss, you are simply displaying stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Sticking to a bad position ruins lots of traders - permanently. Try to remember that the market often behaves illogically, so don't get commit to any one trade; it's just a trade. One good trade will not make you a trading success; it's ongoing regular performance over months and years that makes a good trader. 2. Focus - Fantasizing about possible profits and then "spending" them before you have realized them is no good. Focus on your current position(s) and place reasonable stop losses at the time you do the trade. Then sit back and enjoy the ride - you have no real control from now on, the market will do what it wants to do. 3. Don't trust demos - Demo trading often causes new traders to learn bad habits. These bad habits, which can be very dangerous in the long run, come about because you are playing with virtual money. Once you know how your broker's system works, start trading small amounts and only take the risk you can afford to win or lose. 4. Stick to the strategy - When you make money on a well thought-out strategic trade, don't go and lose half of it next time on a fancy; stick to your strategy and invest profits on the next trade that matches your long-term goals. 5. Trade today - Most successful day traders are highly focused on what's happening in the short-term, not what may happen over the next month? If you're trading with 40 to 60-point stops focus on what's happening today as the market will probably move too quickly to consider the long-term future. However, the long-term trends are not unimportant; they will not always help you though if you're trading intraday. 6. The clues are in the details - The bottom line on your account balance doesn't tell the whole story. Consider individual trade details; analyse your losses and the telling losing streaks.

7. Generally, traders that make money without suffering significant daily losses have the best chance of sustaining positive performance in the long term. 8. Simulated Results - Be very careful and wary about infamous "black box" systems. These so-called trading signal systems do not often explain exactly how the trade signals they generate are produced. Typically, these systems only show their track record of extraordinary results - historical results. Successfully predicting future trade scenarios is altogether more complex. The high-speed algorithmic capabilities of these systems provide significant retrospective trading systems, not ones which will help you trade effectively in the future. 9. Get to know one cross at a time - Each currency pair is unique, and has a unique way of moving in the marketplace. The forces which cause the pair to move up and down are individual to each cross, so study them and learn from your experience and apply your learning to one cross at a time. 10. Risk Reward - If you put a 20 point stop and a 50 point profit your chances of winning are probably about 1-3 against you. In fact, given the spread you're trading on, it's more likely to be 1-4. Play the odds the market gives you. 11. Trading for Wrong Reasons - Don't trade if you are bored, unsure or reacting on a whim. The reason that you are bored in the first place is probably because there is no trade to make in the first place. If you are unsure, it's probably because you can't see the trade to make, so don't make one. 12. Zen Trading- Even when you have taken a position in the markets, you should try and think as you would if you hadn't taken one. This level of detachment is essential if you want to retain your clarity of mind and avoid succumbing to emotional impulses and therefore increasing the likelihood of incurring losses. To achieve this, you need to cultivate a calm and relaxed outlook. Trade in brief periods of no more than a few hours at a time and accept that once the trade has been made, it's out of your hands. 13. Determination - Once you have decided to place a trade, stick to it and let it run its course. This means that if your stop loss is close to being triggered, let it trigger. If you move your stop midway through a trade's life, you are more than likely to suffer worse moves against you. Your determination must be show itself when you acknowledge that you got it wrong, so get out. 14. Short-term Moving Average Crossovers - This is one of the most dangerous trade scenarios for non professional traders. When the short-term moving average crosses the longer-term moving average it only means that the average price in the short run is equal to the average price in the longer run. This is neither a bullish nor bearish indication, so don't fall into the trap of believing it is one. 15. Stochastic - Another dangerous scenario. When it first signals an exhausted condition that's when the big spike in the "exhausted" currency cross tends to occur. My advice is to buy on the first sign of an overbought cross and then sell on the first sign of an oversold one. This approach means that you'll be with the trend and have successfully identified a positive move that still has some way to go. So if percentage K and percentage D are both crossing 80, then buy! (This is the same on sell side, where you sell at 20). 16. One cross is all that counts - EURUSD seems to be trading higher, so you buy GBPUSD because it appears not to have moved yet. This is dangerous. Focus on one cross at a time - if EURUSD looks good to you, then just buy EURUSD. 17. Wrong Broker - A lot of FOREX brokers are in business only to make money from yours. Read forums, blogs and chats around the net to get an unbiased opinion before you choose your broker.

18. Too bullish - Trading statistics show that 90% of most traders will fail at some point. Being too bullish about your trading aptitude can be fatal to your long-term success. You can always learn more about trading the markets, even if you are currently successful in your trades. Stay modest, and keep your eyes open for new ideas and bad habits you might be falling in to. 19. Interpret forex news yourself - Learn to read the source documents of forex news and events - don't rely on the interpretations of news media or others.

BIBLIOGRAPHY      

www.google.com GOOGLE SEARCH ENGINE Dr. G. KOTRESHWAR, RISK MANAGEMENT, HIMALAYA PUBLISHING HOUSE, MUMBAI. A.K.SETH, INTERNATIONAL FINANCIAL MANAGEMENT. LEVY, INTERNATIONAL FINANCIAL MANAGEMENT. V.K.BHALLA, INTERNATIONAL FINANCIAL MANAGEMENT. SHAPIRO, INTERNATIONAL FINANCIAL MANAGEMENT.

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