Forex market random

Some news is predictable, at least in terms of the timing of its dissemination. For example, gold mining production figures, as mentioned earlier, are reported monthly by the U.S. Geological Survey. In general, a great many financial and economic numbers, from unemployment data and new job figures, to GDP, international trade imbalances, measures of inflation (such as the Consumer Price Index), corporate earnings, housing starts and new home sales, survey results on consumer confidence, are all reported relatively regularly (although admittedly with a varying degree of reliability depending, for example, on whether the data are compiled from surveys or obtained from the population, on who reports the information, on whether the numbers are subject to frequent and/or significant revision). In short, although the number itself might be in question, there is no uncertainty about the timing of its release.

marketmaking firms (who might be hedge funds, other banks, institutional funds, active corporate treasurers, financial advisors) are presumed to be well informed traders/investors (and therefore, might have a good sense of the direction of the market, in part because it’s their job), whereas a dental firm that purchases gold for its clients’ teeth or a university that periodically gilts the dome of one of its buildings would not be considered “smart paper” (in terms of having a particularly valuable insight into the direction of the market price of gold). As a rule, although marketmakers may acquire inventories (long and/or short), they are generally not investors and therefore are not as “smart” as their clients whose occupations involve knowing what to buy and when to buy it. Reinforcing this notion, one head of FX trading once told his traders, “If you don’t have an opinion, don’t have a position.” In other words, be a marketmaker, not a speculator

Volatility, or the “jumpiness” of market prices, would matter to a marketmaker because if the price of gold tends to move up and down violently (which is what volatility is all about)

An interest rate is the price of money quote you a rate of interest, say, 5.20%. If you decide to borrow USD 100 today, then in one year’s time you would be obliged to pay back USD 105.20. That ratio, USD 105.20/USD 100, reflects the interest rate

That is because interest rates are almost, almost always quoted an annual or annualized or per annum basis

One of the measures of inflation calculated relative to a representative basket of U.S. household consumption goods and services is known as the Consumer Price Index. There are other measures of inflation for different strata of the economy: the Producer Price Index, the Wholesale Price Index, and the GDP Deflator.

What Professor Fisher noted was that if one put one’s money in the bank for a year and received a market rate of interest or nominal rate of interest or money rate of interest (these all mean the same) of r = 5.20%, but inflation was 3.20% during that year, then one’s “real” purchasing power would have grown only at around 2.00%.

The primary objectives identified by most of the major central banks

■ Monitoring and Managing Monetary and Credit Conditions (through Monetary Policy).

■ The Pursuit of Full or Maximum or a High Level of Employment (or the Reduction of Unemployment).

■ Maintaining Stable Prices (or Avoiding Inflation).

■ Preserving the Purchasing Power of the Currency (or Reducing the Volatility of Exchange Rates). ■ Issuing Bank Notes or Currency Consistent with Economic Policy.

■ Encouraging Moderate Long-Term Interest Rates or Controlling the Money Supply. ■ Promoting Real or Sustainable Economic Growth and Development.

■ Improving the Welfare of its Citizens.

■ Ensuring the Soundness and Stability of the Banking and Financial Systems.

■ Providing Financial Services (to the Government, Banks, and other Financial Institutions).

■ Supporting the Smooth Operation of the Payment System.

USD 1 = CHF 1.2500

In essence, although we have emphasized the difference between FX forwards and futures and the idiosyncrasies of the futures contracts, they are very similar in that they both afford opportunities to buy or sell currency at some point in the future at a previously agreed upon (i.e., “locked in”) price. Differences involve where they trade (OTC versus exchange), whether they are individually tailored versus standardized, the nature of the cash flow associated with these trading vehicles (possibly none versus daily—or even intraday—marking-to-market through a margin account), and, empirically, the likelihood of delivery. Volume in the OTC FX forward market greatly exceeds volume traded through FX futures, but the latter can provide a useful source of market data, which explains the number of academic studies that have utilized the available information on these exchange-traded instruments. There is one additional difference between futures and forwards: Currency futures trading is overseen by the Commodity Futures Trading Commission (versus the relatively unregulated OTC FX forward market). Finally, as mentioned, there are options on FX futures, typically traded side-by-side with the underlying futures contracts (on CFTC-regulated exchanges in the United States).

There are many types of foreign exchange swaps. The most common is simply a standard FX forward trade with an offsetting FX spot transaction. The more interesting type of FX swap is the cross-currency swap or cross-currency interest rate swap or bond swap. These are often used in conjunction with international debt issuance and can result in lower borrowing costs both at home and abroad. Having said that, cross-currency swaps may be used to lock in the exchange rate for a series of firm commitment cash flows from operations; they may also be used for speculative purposes. Ultimately, though, cross-currency swaps are simply bundlings of FX forward contracts, and so introduce nothing new beyond our earlier spot-forward valuation relationship (aside from possibly interest rate compounding considerations); it is useful to keep this in mind for currency swap valuation and revaluation purposes.

An option is an instrument that affords one the opportunity, if one wishes, to trade (either to purchase or to sell) a certain amount of a certain asset at a certain predetermined price on or before some date in the future.1

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