February 2nd 2012

FX market, the fastest growing investment market

FX market

1.1 What is FX and FX market 1.2 Uniqueness of FX market 1.3 Why FX market exists? 1.4 Understand the FX quotes 1.5 Major currencies 1.6 Analysing the FX market

1.1 The FX market

• Foreign exchange market: the market currencies are exchanged for each other

• Foreign + Exchange FOREX

1.2 The Uniqueness of FX market

o Largest financial market o Most liquid financial market o Most flexible financial market o 24/7 financial market o OTC market

1.2 The Uniqueness of FX market

• King of the financial market! • Bank for International Settlement (BIS)：

Market FX Global stocks

April 2007 3 Trillion 0.9 Trillion

August 2010 4.3 Trillion 1.1 Trillion

1.2 The Uniqueness of FX market

High volume – high liquidity Advantage of high liquidity: Fast execution Place trade at nearly all prices No “gaps”

BHP 1H chart

AUD/USD 1H Chart

1.2 The Uniqueness of FX market

• Highly flexible market: Long or Short Long AND short Full range of trading tools: Spot FX, FX

forward, FX option, FX swap and FX Margin trading

1.2 The Uniqueness of FX market

Asian session：NZD, AUD, JPY HKD, SGD GMT 19:00 – 7:00

European session：EUR, GBP, CHF, JPY,XAU GMT 6:00 – 17:00

American session：USD,EUR, GBP, CAD, JPY, XAU, OIL GMT: 13:00 – 21:00

1.2 The Uniqueness of FX market

• IBS: UK US Switzerland Japan

• Best FX time zone? EU and US

1.2 The Uniqueness of FX market

• FX market is OTC market – Over the counter • No central exchange • London metal exchange, Chicago Board

Options Exchange

• Advantages: Low or no transaction cost Highly flexible products

1.3 Why FX market exists?

• International trade and currency exchange • Risk management • Investment and Speculation

1.3 Why FX market exists?

• Investment risk – purchase Google stocks GOOG 3rd June 2009

28th Nov 2011

Profit

Price 262 USD 445 USD

Shares 500 500

USD value 131,000 USD 222,500 USD 91,500 USD

Exchange rate 0.63 0.8235

AUD value 207,936 AUD 270,188 AUD 62,252 AUD

Losses due to FX risk

36,560 AUD

1.3 Why FX market exists?

• Banks, hedge funds, investment firms and individuals invest and speculate on FX market for profits

• IMF data: 90% daily FX transactions are for investment

or speculation purposes

AUD/USD Weekly chart

1st June 2010：0.8457

1st June 2011：1.0708

Appreciation：26.62%

100:1 leverage：2620.62%

Interest rate：4%

1.4 FX quotes

• Currencies trade in pairs: EUR/USD USD/JPY GBP/CHF

• Commodity currency or Base Currency • Quote Currency or Term currency

1.4 FX quotes

EUR/USD 1.32

1 EUR equals to 1.32 USD In TERMS of USD, EUR equals to 1.32

EUR – Commodity currency USD – Quote currency

EUR/USD 1.33

EUR/USD 1.31

EUR appreciates in value against USD

EUR depreciates in value against USD

1.4 FX quotes

• American quotes: AUD/USD, EUR/USD, XAU/USD, OIL/USD

• European quotes: USD/CHF, USD/JPY, USD/CAD

1.4 FX quotes

Bid : the price to sell Commodity currency

Offer: the price to buy Commodity currency

Spread: the difference between bid and offer rate

1.4 FX quotes

• EUR – commodity currency • Buy EUR/USD at 1.3203 • Sell EUR/USD at 1.3201 • Spread: 1.3203 – 1.3201 = 0.0002 • 0.0002 is know as 2 points, or 2 pips • Tip: buy high and sell low

Bid Offer EUR/USD 1.3201 1.3203

1.4 FX quotes

1.5 Major currencies

• IMF report: USD 44.5% EUR 21% GBP11% JPY 7% AUD 3% CHF 2.8% CAD 2.5% NZD 1.9%

1.5 Major currencies

• Most traded currency pairs: EUR/USD GBP/USD USD/JPY AUD/USD USD/CHF

1.6 Analysing the FX market

• Fundamental analysis • Technical analysis • Behavioral analysis

1.6 Analysing the FX market

• Fundamental analysis – analysing the economic conditions of different countries, invest into the currency which has stronger economic fundamentals in predicating the appreciation of value.

• Better economic condition – more demand for investment

1.6 Analysing the FX market

• Better economic condition and higher interest rate in Australia will result in more demand of AUD

• AUD/JPY appreciates in value

Australia Japan Interest rate 3.75% 0.1% GDP 2.5% 0.8%

1.6 Analysing the FX market

• Technical analysis – analysing the currency movement by using charting and statistically indicators

• Trend and momentum

1.6 Analysing the FX market

• Behavioral analysis – analysing the repeating behaviours of investors, to invest on behavioural or psychological patterns

1.6 Analysing the FX market

• It took 6 years (2002 – 2008) for AUD/USD to increase from 0.6 to 0.98, but only 4 months to give the profit back – the Panic effect

• Monday has a statistically low return comparing to the other weekdays – the Monday effect

FX market

1.1 What is FX and FX market 1.2 Uniqueness of FX market 1.3 Why FX market exists? 1.4 Understand the FX quotes 1.5 Major currencies 1.6 Analysing the FX market

QA

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