Wednesday, September 29, 2010
Excess reserves
Costs, benefits, and criticisms
There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but if the U.S. dollar weakens on the exchange markets, the decline results in a relative loss of wealth for China. In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets.
Changes in reserves
The quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations to maintain the targeted exchange rate within the prescribed limits .
Foreign exchange operations that are unsterilized will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect monetary policy and inflation: An exchange rate target cannot be independent of an inflation target. Countries that do not target a specific exchange rate are said to have a floating exchange rate, and allow the market to set the exchange rate; for countries with floating exchange rates, other instruments of monetary policy are generally preferred and they may limit the type and amount of foreign exchange interventions. Even those central banks that strictly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements.
To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, although eventually the increased domestic money supply will result in inflation and reduce the demand for the domestic currency (as its value relative to goods and services falls). In practice, some central banks, through open market operations aimed at preventing their currency from appreciating, can at the same time build substantial reserves.
In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors (domestic demand, production and productivity, imports and exports, relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts (such as inflation) can take many months or even years to become evident, changes in foreign reserves and currency values in the short term may be quite large as different markets react to imperfect data.
Foreign exchange reserves
History
Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves.
Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic currency.
Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.
Foreign exchange controls
Common foreign exchange controls include:
Banning the use of foreign currency within the country
Banning locals from possessing foreign currency
Restricting currency exchange to government-approved exchangers
Fixed exchange rates
Restrictions on the amount of currency that may be imported or exported
Countries with foreign exchange controls are also known as "Article 14 countries," after the provision in the International Monetary Fund agreement allowing exchange controls for transitional economies. Such controls used to be common in most countries, particularly poorer ones, until the 1990s when free trade and globalization started a trend towards economic liberalization. Today, countries which still impose exchange controls are the exception rather than the rule.
Managed currency mortgages
There are risks associated with these types of mortgages and the borrower must be prepared to accept an (often limited) increase in the value of their debt if there are adverse movements in the currency markets.
A successful currency manager may be able to use the currency markets to pay off a borrower's loan (through a combination of debt reduction and interest rate savings) within the normal lifetime of the loan, while the borrower pays on an interest only basis.
Foreign currency mortgage
The interest rate charged on a Foreign currency mortgage is based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower's own domestic currency. Therefore, a Foreign currency mortgage should only be considered when the interest rate on the foreign currency is significantly lower than the borrower can obtain on a mortgage taken out in his or her domestic currency.
Borrowers should bear in mind that ultimately they have a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower's domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. Therefore, in effect, the borrower makes a capital saving.
Conversely, if the exchange rate of borrowers domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. Therefore, the borrower makes a capital loss.
When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging
Physical balance of trade
Milton Friedman on trade deficits
Prof. Friedman argued that trade deficits are not necessarily important as high exports raise the value of the currency, reducing aforementioned exports, and vice versa for imports, thus naturally removing trade deficits not due to investment. Milton Friedman's son, David D. Friedman, shares this view and cites the comparative advantage concepts of David Ricardo.
In the late 1970s and early 1980s, the U.S. had experienced high inflation and Friedman's policy positions tended to defend the stronger dollar at that time. He stated his belief that these trade deficits were not necessarily harmful to the economy at the time since the currency comes back to the country (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). However, it may be in one form or another including the possible tradeoff of foreign control of assets. In his view, the "worst case scenario" of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation. This position is a more refined version of the theorem first discovered by David Hume. Hume argued that England could not permanently gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in England; therefore, the prices of English goods would rise, making them less attractive exports and making foreign goods more attractive imports. In this way, countries' trade balances would balance out.
Friedman believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to encourage or discourage imports in favor of the exports, reversing again in favor of imports as the currency gains strength. In the real world, a potential difficulty is that currency markets are far from a free market, with government and central banks being major players, and this is unlikely to change within the foreseeable future. Nevertheless, recent developments have shown that the global economy is undergoing a fundamental shift. For many years, the U.S. has borrowed and bought while in general, the rest of the world has lent and sold. However, as Friedman predicted, this paradigm appears to be changing.
As of October 2007, the U.S. dollar weakened against the euro, British pound, and many other currencies. For instance, the euro hit $1.42 in October 2007, the strongest it has been since its birth in 1999. Against this backdrop, American exporters are finding quite favorable overseas markets for their products and U.S. consumers are responding to their general housing slowdown by slowing their spending. Furthermore, China, the Middle East, central Europe and Africa are absorbing more of the world's imports which in the end may result in a world economy that is more evenly balanced. All of this could well add up to a major readjustment of the U.S. trade deficit, which as a percentage of GDP, began in 1991.
Friedman and other economists have pointed out that a large trade deficit (importation of goods) signals that the country's currency is strong and desirable. To Friedman, a trade deficit simply meant that consumers had opportunity to purchase and enjoy more goods at lower prices; conversely, a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy, while paying high prices for the goods they actually received.
Friedman contended that the structure of the balance of payments was misleading. In an interview with Charlie Rose, he stated that "on the books" the US is a net borrower of funds, using those funds to pay for goods and services. He essentially claimed that the foreign assets were not carried on the books at their higher, truer value.
Friedman presented his analysis of the balance of trade in Free to Choose, widely considered his most significant popular work.
Frédéric Bastiat on the fallacy of trade deficits
The 19th century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France, and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit against the ledger of France.
By reductio ad absurdum, Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, affirmed by economist Milton Friedman.
Warren Buffett on trade deficits
The successful American businessman and investor Warren Buffett was quoted in the Associated Press (January 20, 2006) as saying "The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them." Buffett has proposed a tool called Import Certificates as a solution to the United States' problem and ensure balanced trade.
John Maynard Keynes on the balance of trade
In the last few years of his life, John Maynard Keynes was much preoccupied with the question of balance in international trade. He was the leader of the British delegation to the United Nations Monetary and Financial Conference in 1944 that established the Bretton Woods system of international currency management.
He was the principal author of a proposal — the so-called Keynes Plan —— for an International Clearing Union. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by 'creating' additional 'international money', and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principal of equality of treatment so novel in debtor-creditor relationships".
His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos."
These ideas were informed by events prior to the Great Depression when — in the opinion of Keynes and others — international lending, primarily by the U.S., exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending.
Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, An Outline of Money, devoted the last three of its ten chapters to questions of foreign exchange management and in particular the 'problem of balance'. However, in more recent years, since the end of the Bretton Woods system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concerns — and particularly concerns about the destabilising effects of large trade surpluses — have largely disappeared from mainstream economics discourse and Keynes' insights have slipped from view. They are receiving some attention again in the wake of the Financial crisis of 2007–2010.
Adam Smith on trade deficits
Conditions where trade imbalances may not be problematic
In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue until such reserves are depleted. At such a point, the importer can no longer continue to purchase more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus economy’s currency will change the relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction.
More complexly, an economy may be unable to export enough goods to pay for its imports, but is able to find funds elsewhere. Service exports, for example, are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. Finally, there are some economies where transfers from nationals working abroad contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are examples of transfer-rich economies.
Conditions where trade imbalances may be problematic
Since the stagflation of the 1970s, the U.S. economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing trade deficit with China. Over the long run, nations with trade surpluses tend also to have a savings surplus. The U.S. generally has lower savings rates than its trading partners which tend to have trade surpluses. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run.
Few economists believe that GDP and employment can be dragged down by an over-large deficit over the long run. Others believe that trade deficits are good for the economy. The opportunity cost of a forgone tax base may outweigh perceived gains, especially where artificial currency pegs and manipulations are present to distort trade.
Wealth-producing primary sector jobs in the U.S. such as those in manufacturing and computer software have often been replaced by much lower paying wealth-consuming jobs such those in retail and government in the service sector when the economy recovered from recessions. Some economists contend that the U.S. is borrowing to fund consumption of imports while accumulating unsustainable amounts of debt.
In 2006, the primary economic concerns focused on: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP), high trade deficits, and a rise in illegal immigration.These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address. On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the U.S. to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand.
Balance of trade
Early understanding of the functioning of balance of trade informed the economic policies of Early Modern Europe that are grouped under the heading mercantilism. An early statement appeared in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them.
Definition
The balance of trade forms part of the current account, which includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.
The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stock, nor does it factor in the concept of importing goods to produce for the domestic market).
Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by almost 1%; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.
Factors that can affect the balance of trade include:
The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;
The cost and availability of raw materials, intermediate goods and other inputs;
Exchange rate movements;
Multilateral, bilateral and unilateral taxes or restrictions on trade;
Non-tariff barriers such as environmental, health or safety standards;
The availability of adequate foreign exchange with which to pay for imports; and
Prices of goods manufactured at home (influenced by the responsiveness of supply)
In addition, the trade balance is likely to differ across the business cycle. In export-led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.
Since the mid 1980s, the United States has had a growing deficit in tradeable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption. The U.S. has a trade surplus with nations such as Australia. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.
Economies such as Canada, Japan, and Germany which have savings surpluses, typically run trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower savings rate has tended to run high trade deficits, especially with Asian nations.
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Plus500 interface
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What is a Forex Chart?
Forex trading involves the sale of a currency, and the simultaneous purchase of another with the aim of closing the position at a later date at a profit. Unlike the stock or commodity markets, where prices are given regularly in USD, the price of one currency into another currency due to the substantial barter nature of currency transactions, where to live, as well as historical forex charts are listed in order identifytrends and use entry / exit points for trades.
The foreign exchange market is the most liquid and active market in the world. Every second, a tremendous amount of transactions carried out regularly to achieve the total daily turnover estimated trillion dollars. If we do not use this, an analytical tool such as a Forex chart to the data in a more compact form if it can be visually inspected and analyzed in place, we would be in possession of a vast sea of be difficult to interpret numbers. The currency trading chart, is a visual aid, which makes the detection of trends and patterns in general easier and makes the application of technical tools of analysis at all possible.
Charts are categorized according to the price action is thus presented and reviewed the time frame for the period. Imagine that we are four-hour candlestick chart of the EURUSD pair have. This means that each candle on the chart, the price data of a four-hour long period presented in compact form. What happened this time is irrelevant. If we had an hour chart, each candlestick would be elected on the chart above are replaced by four chandeliers.
There are many ways to represent the price action on a forex trading chart. Bar charts, candlestick charts, diagrams, online forex trading are a few of the many possibilities, with each offering its own advantages in certain aspects of the analysis and utility. But they all do the same thing: They planned the prices for a day (or some mathematical manipulation of the price data) to the time series on the horizontal axis, which will be by the merchants used to evaluate and understand the market action for the purpose of to make a profit.
Since currencies are traded in pairs, it is impractical and not very useful for a mere USD Forex chart to draw. Instead, we have the possibility of drawing (or rather with the software of the plot for us) a chart of the USDJPY pair, or the AUDUSD pair, since it is only possible to cite one currency to another. On the other hand, there are some forex charts, the weighted average of these currency pairs to take to derive an overall index for a currency. The famous U.S. dollar index is a good example.
Charts are the keys that allow us the secrets of forex trading. The theme covers a wide ground, and only through constant practice we can expect that the need of fluency and to acquire expertise in the assessment. The language of Forex Charts is really the language of currency trading. It will take some time to learn it, but if you are a native speaker, so to speak, your imagination and creativity are the only limits your options.
The Forex Marketing Today
There are many factors that the current structure of the Forex market have been conducted ..
Since the early 1970s the Forex market has grown in size, structure, and changed the way it operates. These transformation resulted from changes in the global financial systems. A primary cause of the increase in foreign exchange trading was the rapid development of the Euro-Dollar market, where US dollars are deposited into central and local banks outside of the United States. Similarly, it is typical for countries within the European markets to have their assets deposited outside the currency of origin.
To contrast this concept, during the start of the Cold War in the mid 1950s, all the money made by Russia from the sale of oil (which came in the form of US Dollars) was deposited in banks that were outside of the US for fear that the US Government would freeze the funds. This helped bring about a large amount of dollars that were not in the control of the US authorities.
The US government tired to impose laws restricting the loaning of dollars internationally. The Euro markets were particularly attractive because they had far fewer regulations and offered a much higher yield. Towards the end of the 1980’s, US companies began borrowing offshore and this is the norm today. Investors and savers find the Euro markets a lucrative and safe area to put their excess liquidity. In turn, these deposits provide short-term loans and finances import and export activities.
London was the principal offshore market, as it remains even now. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds. This allowed them to maintain their leading position in global finance. London’s convenient geographical location allows it to operate during Asian, Pacific and American market hours as well.
As Forex trading has grown, several international cities have emerged as market leaders. Currently, London, England has the greatest share of transactions with over 32% of the total trade volume. Other leading trading centers listed in order of volume are New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris, and Sydney.
Currently, the Forex market has expanded from consisting of only banks to one where many other kinds of institutions participate. The evolution of the Forex – from a range of loosely connected national financial centers to a single integrated international market – brought about a system that offers means of trading to not only financial professionals but also individuals who began trading and investing, and one that also plays an important role in our economies – both individual and national.
Since the late 1970s the Forex has seen an influx of financial entities, such as banks, hedge funds, and broker trading houses, as well as individual traders enter the Forex arena. Today, instead of being controlled by national banks and governments, the main factor that drives today’s Forex markets is supply and demand. The free-floating system is ideal for today’s Forex markets as international trade and commerce are abundant in the 21st century. The tremendous growth and application of technology in the Forex market broke down all barriers between nations, as well as time zone barriers eventually resulting in a 24 hour market throughout the American, European, and Asian time zones. Through the popularization of the internet, the trading of Forex online has enabled the average investor to reach this vital and practical market.
Bretton Woods Agreement
The Bretton Woods Agreement, was designed to bring stability to bring the money system and to limit speculation in the world currencies.
As an economy strengthened, imports would increase. This action depleted he reserves of gold required to cover the valuation of its money. This caused the money supply to constrict, interest rates would rise and economic activity could slow to the extent of recession – (a period defined by 3 straight fiscal quarters of gross domestic product losses – in which unemployment and low consumer spending are high). Eventually, the prices of goods had to define a bottom and become palatable to other countries. These countries would start buying the currency en masse, injecting the economy with significant amounts of gold, enough to lead to an increase in the money supply. This drove interest rates down and helped to create wealth within the economy.
This was a pattern that was relived over and again through history until the outbreak of World War I practically closed trading routes and the free exchange of gold and silver. This of course was followed by ‘The Great Depression’, which quite arguably was ended by World War II.
After the Second World War, the Bretton Woods Agreement was established., Participating countries agreed to try and maintain the value of their currency with a small margin against the US dollar, economically, the largest country, and a corresponding rate of gold. Governments were not allowed, under the agreement, to devalue their currency in order to bring on an advantage in trade. If absolutely necessary, they were allowed to play with their valuations as long as it did not cause more than a 10% change. Throughout the 1950s, the increase in global trade brought on massive capital transfers created by post-WWII construction. This caused foreign exchange rates under the Bretton Woods agreement to become unstable.
By 1971, the global situation had inevitably caused a move away from Bretton Woods. US President, Richard Nixon had taken the dollar off the gold standard in order to be able to print more money to fund the Vietnam War. This marked a change in government policy in which a debt/credit system was born. By 1973, the currencies of major industrialized nations became free floating, and in part became more subject to the prices set for them in the Forex market. Prices fluctuated each day, with trading volumes and price volatility increasing throughout the 1970s IT was these drastic changes that gave rise to new financial instruments, market liberalization and deregulation.
With the growth in the telecommunication and computer industries in the early 1980’s, the global financial markets surged and the world grew smaller. All markets became accessible to everyone, no matter what time zone, no matter what time of day.
Transactions in the Forex market increased from about $68 billion per day in the early 1980s, to over $3 trillion a day in 2006.
The History of Forex Currency Trading
The Forex online market was created in 1971, although it was only possible through a combination of technical, communicative and political progress. To understand and how they trade in foreign exchange is a crucial element in a successful, intelligent, Traders. It is important to know that it should be a major event with one of these factors, so currencies are concerned – to be on each side of the profit line. The goal of every trader should, in order to understand the market to know what all the statistics mean and how can one important messages countries currency swings, by strengthening or diluting its value.
The idea of a foreign currency is imported from the Middle Ages, when the first paper money was, and represents a transferable payments for merchants and traders – such as an IOU, a promissory note. National governments, provinces and municipalities began to store gold, silver and other items of value, and bonds issued against a specified value. The problem was, that could change on a given day the value only to the decisions of kings and governors.
By the end of World War I (WWI), the Forex markets have remained relatively inactive and stable. But after the First World War, the strong volatility of the foreign exchange market increased, and investors speculated. From the mid-1870s until shortly after the First World War, the international monetary systems ran out of the principles of the gold exchange model. As a result of hard by the value of gold, paper money, supports currencies, as it was called, witnessed a healthy life for this gold standard. (The term often used to describe a value of currency in direct proportion to the price of a fixed weight of gold). The gold standard helped end the practice of the monarchs and dictators money indiscriminately degrading, and that was set is an important cause of inflation.
But how much of a step-up to the stability of the currency, as it was, the gold standard has many problems such as the Industrial Revolution had progressed. The main problem was the model that the continuous redistribution of wealth would see within the countries of the world. The peaks and valleys of these countries had many experienced due, in large part to the economic instability caused by a lack of gold reserves and a depreciation of the other raw materials.
Recession was not kind to many of the early speculators who some believe that due to these high speculations and assumptions, which ultimately brought about the Great Depression. And as a result of what began a very difficult time teaching the people the necessary progress. Policy makers and politicians realized finance the weight of the world in foreign exchange markets and in 1931 began a period of redefinition of the Forex and monetary policy
Forex Order Types
Market Order
Market order is an obligation to buy or sell the currency at the current market price. The execution of this command will result in immediate opening of a trading position. Currency pairs are bought at a price and selling a BID ASK price.
Pending Order
Pending order is the client’s commitment to buy or sell a currency pair at a pre-defined price in the future. This type of orders is used for opening of a trade position provided the future quotes reach the pre-defined level. There are four types of pending orders available in the terminal:
1. Buy Limit —an order to open BUY a position at a lower price than the price at the moment of placing the order. Orders of this type are usually placed in anticipation of that the security price, having fallen to a certain level, will increase.
2. Buy Stop — an order to open BUY a position at a higher price than the price at the moment of placing the order. Orders of this type are usually placed in anticipation of that the security price, having reached a certain level, will keep on increasing.
3. Sell Limit — an order to open SELL a position at a higher price than the price at the moment of placing the order. Orders of this type are usually placed in anticipation of that the security price, having increased to a certain level, will fall.
4. Sell Stop — an order to open SELL a position at a lower price than the price at the moment of placing the order. Orders of this type are usually placed in anticipation of that the security price, having reached a certain level, will keep on falling.
Financial Software Forex Trading
Those companies and individuals that deal in Forex can benefit a lot from using financial software for Forex trading in
improving their back-office functioning . The main functions that good financial software for Forex trading has to
provide include publishing of trading account statements, overseeing that trading is done according to accepted rules
as well as regulations and it should also provide conclusions regarding trading contracts. Furthermore, financial
software for Forex trading should be able to handle order execution confirmation, and it should handle trading
accounts as well as affect actual transfer of money.
Many Options To Choose From
What’s more, when it comes to picking the right financial software for Forex trading you have many options to choose from including those that deal with the needs of an individual trader and also those that address the needs of large sized institutions that are dealing in Forex. In fact, one of the best ways to do your Forex trading is by using appropriate financial software for Forex trading that in turn will provide useful solutions regarding various aspects of Forex trading including being very helpful in handling disputes that arise between brokerages and trading operations.
In most cases, financial software Forex trading is generally used by corporations and also by dealing rooms as well as those engaged in treasury operations though it is very seldom that individuals are found using such software. When it concerns good financial software Forex trading for the larger institutions options such as Forex-Pro Back Office by ProBanx, Dealer-3 by Digitec and Tradix by Ubitrade are certainly good options.
For the individual trader it makes sense to rely on different back-office solutions that are mostly being used by brokerages. Such solutions are very comprehensive and well worth trying out. GFTForex.com in particular has a back-office account service team that helps Forex traders do all sorts of things including opening an account as well as updating the account and it also helps people learn more about what Forex trading is.
Good financial software Forex trading also has features such as tip generators that are tools that analyze the market and are able to pick out future trends that can then help traders in making the right decisions.
Many first timers to Forex trading may not know what Forex software system trading is. However, those that have some experience in Forex trading know how such software can help them make wise investment decisions that in turn can ensure that they get to earn higher profits and which also helps them get better return on the sums of money they invest. All this is possible because the software helps to minimize risk for the investor.
Many people feel confused when asking for the home loan. The suggestion given by the professional mortgage broker must be helpful.
Ready Trade Currency
Are You Ready To Trade Currency?
I recommend the following steps …
If you are interested in trading currencies, we recommend the following steps.
Lesson 1 Learn the Basics
Why do currency rates fluctuate? How does a forex trading? Learn with the nuts and bolts of trading currencies. By reading this series featured article, you are already on the right track. It is also important to understand that trade means the currency market with a high degree of risk, including the risk of losing money. Any investment should include only foreign currency risk and you should never act with money that you can not afford to lose. Once you know your basics, are you ready to take the next step.
Lesson 2 Subscribe to “8 Steps to Forex Trading”
This e-mail 8-Series is a comprehensive introduction to the trade in foreign exchange. It is presented in cooperation with Interbank FX and is aimed at new dealers. Lessons in detail how Forex trading work, as well as other important concepts such as fundamental and technical analysis
Lesson 3 Test your skills with a demo
One of the best ways to see if Forex trading is right for you is to try a demo trading. You can use your trading techniques with “play money” practice, so there is no risk. What are the benefits? Most Forex dealers offer free demos so you get a lot of free information, and sometimes even free customer support will help facilitate the foreign exchange trading.
Lesson 4 Open a Live Account
If you are willing to trade, there are a lot of forex companies to choose from. Make sure you are comfortable with your chosen broker and do not be afraid to ask questions. Consider your investment objectives, experience, and risk-taking, since the possibility exists that you lose some or all of your initial investment. Do not invest money that you can not afford to lose and be aware of the risks associated with foreign exchange trading. If you have any doubts, consult an independent financial adviser. Good luck!—
Learn Easy Forex
There are a few different markets you can trade, but the Belajar Forex market is definitely one of the most popular options you have here. With the Forex market can really make a killing, unless you know what you do naturally, and as long as you are forex trading correctly.
The best thing a person can do when they get started trading in the Forex market would like, they a class or course to take over it. So they get all the information that they are probably starting to feel, remember to make investments and really are somewhere with this need, and only because it is probably still a little confusing to you at first if this is something that you never before.
Tips and strategies
There are many great tips and strategies for trading on the Forex market belajar that you will be aware of. Certainly you will come to your own as you become a professional, but there are a few in this, have proven to work very well and therefore want to go to use on your own.
For one thing, you want to go, make sure you always look at history of the market, get a better idea of what you should be making investments in the future, will be received. There are always certain trends that you watch that various aspects and go to repeat themselves over and over are again.Forex Malaysia Trading
These are what you use to make your decisions you make here if you want on the Forex trading market Malaysia, so you know, you have the best chance of success. Talking to a professional or at least someone who has been trading in the market for a couple of years now really a good idea to be on your side and to ensure that you are here to do well.
Of course there are some people who simply do not have the luck of the draw and not win a lot of money when they trade in the market, but as long as you are clever with the level of investments you make, you will be in order and should be no major financial problems here.
The best Forex brokers to Malaysia
Best Forex Broker for the Forex trader Malaysia
Instaforex sebuat company is based in Russia. Began operations in 2007. Operating in more than 50 countries including in Europe and Asia. Every day about 300 new trading accounts registered in the world.
Instaforex is a company registered with the relevant bodies in Russia. ECN broker is one that provides a quality service to Forex traders in the world.
Why choose InstaForex
Part of those are a company that provides complete requirements for traders (traders) to face the world Forex business. Among the advantages and privileges available at this company:
1.InstaForex have many representatives of IB in Malaysia. IB will be easy and we do LOCAL DEPOSITS withdrawal quickly, sometimes in less than 24 hours compared directly through the company HQ in need 3-4 days to credit the account of Forex Trading or the local bank like Maybank, CIMB Bank, Public Bank RHB Bank and so on.
2. Using the latest platform InstaTrader fourth in world trade (trading) forex
3. Deposit as low as 1USD for traders (traders) who want to venture into new FOREX
4. One account for all. No account yet standard, mini or micro. With Instaforex you can trade from as low as 0:01 to lots you can afford dagangkan.
5. Prepare leverege 1:500
6. Have Swap Free account for traders (traders) of Islam
7. InsfaForex are registered with the NFA (National Futures Association), the British FSA (Financial Services Authority) and CYSEC Cyprus (Cyprus Securities)
How is Foreign traded?
For example, the EUR / USD rate represents the number of USD can buy per EUR.
If you think you increase the euro value against the U.S. dollar, you buy Euros with U.S. dollars. If the exchange rate rises, you sell back the euro, and your profits in cash. Please note that Forex trading involves a high risk of loss.
Important: Be aware of the risks
Finally, it can not be stressed enough that foreign exchange on margin carries a high risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, experience and risk appetite. Remember, you could make a loss of some or all of the initial investment, which means you do not invest money that you can not afford to lose. If you have any doubts, we recommend that you seek advice from an independent financial adviser.
Thursday, September 16, 2010
Risk aversion in forex
This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.
In the context of the forex market, traders liquidate their positions in various currencies to take up positions in safe haven currencies, such as the US Dollar.
Sometimes the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics.
An example would be the Financial Crisis of 2008. The value of equities across world fell while the US Dollar strengthened. This happened despite the strong focus of the crisis in the USA.
Speculation
Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders" and have a more destabilizing role than larger and better informed actors .
Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.
Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.
In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and foreign exchange speculators made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling, followed by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions.
Financial instruments
A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction.
Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. and forward contract is a negotiated and agreement between two parties.
Future
Foreign currency futures are exchange traded forward transactions with standard contract sizes and maturity dates — for example, $1000 for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.
Swap
The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange.
Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world.
Determinants of FX rates
(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate): This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate): views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as GDP, employment levels, retail sales, capacit utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector.
Trading characteristics
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each currency pair thus constitutes an individual trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter code of the currencies involved. The first currency (XXX) is the base currency that is quoted relative to the second currency (YYY), called the counter currency (or quote currency). For instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US dollars, meaning 1 euro = 1.5465 dollars. Historically, the base currency was the stronger currency at the creation of the pair. However, when the euro was created, the European Central Bank mandated that it always be the base currency in any pairing.
The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive currency correlation between XXXYYY and XXXZZZ.
On the spot market, according to the BIS study, the most heavily traded products were:
EURUSD: 27%
USDJPY: 13%
GBPUSD (also called cable): 12%
and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (17.0%), and sterling (15.0%) (see table). Volume percentages for all individual currencies should add up to 200%, as each transaction involves two currencies.
Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased.
Market participants
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Retail foreign exchange brokers
Retail traders (individuals) constitute a growing segment of this market, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone.
There are two main types of retail FX brokers offering the opportunity for speculative currency trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order and dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, and quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price.
In assessing the suitability of an FX trading service, the customer should consider the ramifications of whether the service provider is acting as principal or agent. When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best available in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.
Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account. Send Money Home offers an in-depth comparison into the services offered by all the major non-bank foreign exchange companies.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money transfer/remittance companies
Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange & Financial Services Ltd.
Market size and liquidity
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York City accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.
FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).
Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. For instance, when the IMF calculates the value of its SDRs every day, they use the London market prices at noon that day.
The ten most active traders account for 77% of trading volume, according to the 2010 Euromoney FX survey. These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market taker will buy ("bid") from a wholesale or retail customer. The customer will buy from the market-maker at the higher "ask" price, and will sell at the lower "bid" price, thus giving up the "spread" as the cost of completing the trade. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EURUSD might be 1.2200/1.2203 on a wholesale broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EURUSD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips