FX

							  The Forex Market
Diving Into the Deep Blue Sea
                Agenda

• Intro
• The Forex market structure
• Why Forex?
• What influences the markets?
• How do I participate?
              Major Currencies
• The Majors
  –   Dollar (USD)
  –   Euro (EUR)
  –   Yen (JPY)
  –   Pound (GBP)
  –   Australian Dollar
  –   Canadian Dollar (CAD)
  –   Swiss Franc (CHF)
  –   New Zealand Dollar (NZD)
    How to Read a FX Quote

• Bid
• Ask
• The Spread
• Example:
  – USD/CAD: 1.2389/1.2394
  – GBP/USD: 1.9185/1.9190
  – NZD/USD: 0.7235/0.7217
The Interbank Market
          Banks: The Sharks

• “ I think Salomon’s a bit like a shark, in a
  way. You know, sharks have to eat, they
  have to keep swimming, keep moving all
  the time, or else they die.”
                               -Tom Klaffky –
         Sharks Have to Eat

• “The first $100 million is always the bank’s”
• “In some markets it’s called front running,
 and it’s illegal. In the interbank market,
 it’s not.”
                               - Bill Lipschutz -
             Hedge Funds

• Smaller
• Faster
• Speculative
• 1992: Raid on the British Pound
• 1997: Asian currency crisis
     Central Banks: Poseidon

• Guardians of the sea
• True movers of the market
• Political motifs
• The Battle Marne River
  – Raymond Poincare government
  – 50:1 to 25:1
Market Makers: The Sea Turtles

• Provides access into the interbank market
• Bid/Ask spread
Why the FX Market?
The Rise of the FX Market
    But I am an INVESTOR~!!!
• “Through the spring of 2002, I had lived nearly
  72 years without purchasing a foreign currency.
  Since then Berkshire has made significant
  investments in-and today holds-several
  currencies. I won't give you particulars; in fact,
  it is largely irrelevant which currencies they are.
  What does matter is the underlying point: To
  hold other currencies is to believe that the dollar
  will decline.”

               - Warren Buffet, October 6, 2003 -
     Biggest Market in the World
   1977         1987          1992         2004
$5 Billion   $600 Billion $1 Trillion   $2.7 Trillion

• NYSE: $25 to $50 Billion
• Global Equities: $191 Billion
• Global Derivatives $437 Billion
• Larger than the total reserves of all central
   banks in the world.
The Market Never Sleeps
         Level Playing Field

• Transparency of Information
• Insiders have less power
      Low Transaction Costs

• No commissions
• Pay the spread
• And carrying cost
               Hedging

• Foreign currency denominated stocks
• International businesses
       Ease of Going Short

• Short anytime
• No up-tick rule
             Diversification

• Low correlation to specific stocks
What Moves the FX Market?
   Currents and Under Currents
        Geo-Political Events

• Safe Haven
• Instability
    Government Intervention

• Through the central bank
• Political pressure
• The Plaza Accord (1985)
          Macroeconomics

• Strength of the economy
• Often causes the biggest “jumps”
• Intermarket Cycles
How Do I Enter the FX Market???

  90% of All 1st time participants lose all
    their money in the first 3 months
        To Swim in the Sea

• Do take your losses
• Do look for clear and fixed spreads
• Do look for “No slippage”
• Do be aware of correlation b/w your
  positions
• Do paper trade
To Survive in the Sea

• Don’t ignore counter party risk
• Don’t over leverage
• Don’t be short term