International Banking and Finance

SPECULATION IN THE FOREIGN EXCHANGE MARKET

TRIMESTER 1, 2017

STUDENT DETAILS:

Last Name First Name Student ID

SAWARGAONKAR SHAMIKA 216334536

ACCOUNT DETAILS:

Username Current Password

IBF-149 j8hxok2A

MY CLOSED TRADES (provide the total number of trades in each of the boxes below – except for the last box where you should provide the names of currencies, commodities and indices if any):

Day Trading 15

Forwards 1

Pending Orders(note this will not count toward the 12 required trades)

1

Vanilla Options (note this is not required but you must report if you have traded. Options can be counted toward the 12 required trades)

0

Names of currencies, commodities and indices traded (such as AUD, USD…)(note commodities and indices are not required but you must report if you have traded)

AUD, USD, GBP, JPY, NZD, EUR,CAD

WORD COUNT (excluding executive summary, footnotes and appendices to the report):

Word count 2,042

MPE707 Assignment Cover Sheet

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International Banking and Finance

EXECUTIVE SUMMARY

This assignment helps to understand the behaviour of foreign exchange market. It actually helps students to experience the world of forex market and learning the tools, terms and features without investing any money. Here, a demo account was created to trade in foreign currencies by gaining proper understanding of the market. In this assignment, you can see fifteen day trading transaction, one forward deal and one pending order all done by demo trading on easymarkets.com.au. AU$50,000 were give to invest after studying the market carefully. Earning profit was not the motive of this assignment even though it happened eventually due to proper understanding and investments in various currencies like EUR, USD, AUD, JPY, NZD, GBP and CAD. These were the safest players until a few days. Recently, a sudden change was observed in them which led to many losses as well. But overall, GBP is still safe if not dealt with EUR due to Brexit. USD has always been one of the safest and consistent currencies. Even the Bank of Japan decided to invest in a market which is why since 2-3 days JPY was in a very good position. On the other hand, NZD has seen six continuous losses till date which was unexpected till last month. This currency trading can affect any nation very easily if not done properly. For example, the Asian crisis. Hence, it is very important to study the recent trends of the market before investing in any currency or commodity. The strategies used were pretty simple. Hedging is done in all the transactions. It took some time to understand the tools and terms but once they were understood to a certain extent, earning profit was not a big thing. The closing balance as of 11th May 2017 is AU$50,569.02. As far as the limitations of this assignment are concerned, this assignment had a restricted time. Recently there are a lot of changes in the forex market due to various events happening around the world. The main example for this could be Brexit or Trump. Hence, at this point of time it was difficult to analyse the market and invest in even the safest of the currencies. The forex market is undergoing few changes with interest rates going up by 2-3% next year and GBP getting back in the game after Brexit. Also, the focus was mainly on forex market. Hence, an overview of financial markets cannot be done. There is a lot more to it. Concluding, this assignment has helped a lot to gain inside and practical knowledge of the foreign exchange market.

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APPENDIX

MY STATEMENTS:

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My closed trades:

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International Banking and Finance

INTRODUCTION

This assignment is to understand the foreign exchange market and how to trade there. The foreign exchange market is one of the most traded markets in the world. It can be

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International Banking and Finance

defined as a stock market where currencies of other countries can be sold and bought. It has a turnover of more than US$5.3 trillion per day. It consists of a lot of banks, commercial companies, brokers, hedge funds, central banks etc. Whoever participates in this market can sell, buy, exchange or speculate on currencies. The prices are determined. It is open 24 hours a day, 5 days per week. The massive trading volume of the foreign exchange market attracts a lot of investors. In short, we can say that it has a very high liquidity. The foreign exchange market can be called as the biggest in the world of finance. When it comes to forex market, it is important to understand about hedging and speculation. Hedging is to buy or sell at the same or in a short period in two different markets or just foreign exchange market. Speculation is when trading in an asset or conducting a financial transaction that has a significant risk of losing most or the entire original lay out with the expectation of a substantial gain. In this assignment, I have used hedging and not speculating. Participants take good advantage of market volatility. One simply cannot trade here without having any knowledge of the market. The currency can impact the market in various ways. For example, it can affect the GDP of the nation as the net exports is in inverse correlation with the domestic currency, inflation, decreasing interest rates, decreasing capital flows etc. As soon as I closed my trades, most of the Asian stocks gained profits because of the oil price rise which could not be seen before 5pm on 10 th May 2017. Further in this assignment we will learn about the other forex trade transactions and the final outcome from all of them.

TRADE STRATEGY

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A lot of time was taken to understand the process of foreign exchange trading on easy markets. I took more than 12 days to observe the figures on the website. The most profitable currencies also went through a downfall within minutes. Hence, it became even more confusing for me to understand where to invest my money. I traded for around 2-3 days overall. I did 15 day trading transactions, 1 forward deal and 1 pending order. Among those 15, I also managed to buy 1 commodity (Brent Oil) in USD. The number of currencies that were traded in is 7, namely- US Dollar, Japanese Yen, Australian Dollar, Great Britain Pound, New Zealand Dollar, Canadian Dollar and European Euro. I allocated a lot of fund on buying the above mentioned currencies. I did not focus much on commodities as they did not show any chance of making profit for some time. I invested a lot of my funds in US Dollar and Australian Dollar. I went for the Brent Oil/USD transaction because that was the only profitable area I could see among others. Commodities like Oil, Brent oil etc was very difficult to choose from because they kept on changing within seconds. Brent Oil was profitable when I invested but as soon as I invested, it dropped down from 0.33% to 0.17% which is why I made a loss of AU$435.43 there.

My main strategy was to invest in strong overseas market which is why I was automatically attracted to the US Dollar, European Euro and Great Britain Pound. I refrained from borrowing in low-interest foreign currencies. As everything was new to me, I decided to play safe and buy the Australian Dollar in USD. The open rate was also less (0.7366) and it closed on (0.7376). In this transaction, I earned a profit of AU$135.52. The Japanese Yen was very steady yesterday. It continued to bump along the 114 level against US Dollar. The Dollar was a bit lower against the yen on 10 th

May after being on the top for eight weeks back to back. The Bank of Japan has been trying to stoke some domestic pricing power for years, without notable success. Last week in proclaimed itself confident that prices will rise during this easing cycle but their rate of increase remains far below the Bank of Japan’s 2% target. There was a rise in USD/JPY to 114.36 from 114.27 but it did not last for a long time and the pair was back to what they started as.

According to reports, the US Dollar showed very little consistency in 2017. It lost its value on Wednesday against the euro, yen and swiss franc but gained strength over the sterling. Also, it was a good decision to invest in the US Dollar because if we speculate, the Federal Reserve is going to increase the interest rates next year by 2-3%. So if we look for a long-term investment, US Dollar is the best option for this year.

The Euro rebounded against the US Dollar on Thursday i.e. 10 th May. The currency pair spent most of the day above 1.04 thanks to better-than-expected European data and US Dollar weakness. The European Central Bank has no intention of increasing the interest rates any time soon, Also, European Central Bank President mentioned that it was too early to declare success over the spur inflation. There was not much investment in the New Zealand Dollar as it was showing losses for six days in a row now. I incurred a huge loss after investing in the NZD. The open rate was only 0.6937 which was cheap hence I decided to invest there.

I tried to apply the reverse theory, where some of the transactions were done randomly only to understand the final outcome and study the same before investing any further. The strongest currencies were a bit shaky in the last two weeks. All the

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trading transactions were only done with the motive of learning something new primarily and then earning profit. The Australian Dollar also lowered on Wednesday evening because of the gold prices being under pressure. The GBP was weak because of the Brexit because of which EUR/GBP became the strongest in nearly 3 weeks. But, the pair GBP/JPY came out as a profitable pair with an open rate of 147.32 and a close rate of 147.74 which helped me to earn AU$400.77.

 It is no wonder that the New Zealand Dollar has benefited from the current Euro-Zone crisis. Pairs such as the Australian Dollar and New Zealand Dollar are often viewed as a proxy for Chinese growth and thus have performed well against the Euro in recent years. Although Chinese growth may become a cause for concern as the nation shifts away from export led growth, weakness in the Euro-Zone may cap any significant reversal. The EUR/NZD pair was the most profitable pair for me because unexpectedly I earned AU$1,825.91 when the open rate was just 1.5693 and the close rate 1.5889. Investing in NZD was not at all profitable because of its losing streak currently.

Overall, I had only one unexpected loss of around AU$360 dealing with EUR/USD. EUR was going very strong as compared to the other currencies. Also, as I stated above, reports said that EUR has strengthened in front of USD even then I incurred this loss. The EUR/USD pair continues to be very back and forth, but the market seems to favor sellers in the short run. This is a market that will have a lot of noise associated with the problems in the European Union. On the longer-term the participants have a signal to go lower.

TRADE AND RISK MANAGEMENT TOOLS

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International Banking and Finance

Stop losses and take profit levels are used by forex traders to guard them from needless financial risk and also to ensure that profits are in use for successful trades. Stop losses and take profit levels are both orders which are placed in the market to close an open position. Traders following a particular strategy are likely to propose their stop-loss and take-profit level at the same time as they enter the trade. Both of these types of orders form part of a traders risk management strategy and ensure solid money management in calculating total potential loss and gain for each trade. Whilst stop losses are employed by almost all forex traders, take profit levels may be seen as less essential, although they eliminate many of the problems faced by traders holding winning positions.

Stop losses and take profit levels are significant in helping to remove the necessity to make emotional decisions during real-time trading. The psychology of trading suggests that markets are restricted by fear and greed. While different traders will express different levels of how much they are willing to lose or gain from a trade, stop losses and take profit levels allow this to be programmed. This means that winning trades are less likely to turn in to losing positions and ineffective trades will not result in terrible losses. Stop losses are also vital due to volatility that can occur in forex markets with sudden and impulsive news and events which can cause large moves and cause heavy losses. Although regular stop loss orders are not guaranteed, and can therefore be exposed to similar slippage in fast-moving markets, it is possible to guarantee stops with many brokers which can protect traders against these moves.

FORWARD TRADING:

It is a future contract. Trade in currencies, commodities etc at current market prices to be delivered on a future date. It can be used for hedging as well as speculation. Though because of its non-standardized nature makes it perfect for hedging.

I did only one forward deal EUR/USD where the forward rate was 1.0886 and close rate was 1.0884 transactions as my research about the concept was not enough to invest and earn profit. The future date was 9th June.

PENDING ORDER:

Pending order is an order which is not yet completed or executed. Here, the participant wants to wait till the price of the financial instrument reaches a certain point. The open rate for my pending order (EUR/USD) was 1.14180 and the stop loss rate was 1.15180. The limit rate was 1.1418. Limit rate is nothing but a rate below which one cannot invest.

CONCLUSION

Even though I did not do a lot of transactions, I was able to understand and learn how the forex market actually works. I was able to analyze the behavior of foreign

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exchange market movements to a certain extent. The fifteen day trading transactions completed helped me to understand the key features and also the usage of financial tools and terms. After completing day trading and investing around AU$30,000 in seven different currencies, I managed to earn profit of AU$569.02. Many losses were incurred but I analyzed them and then invested accordingly. The forex market is a complicated but highly liquid place. It has market volatility. One cannot simply start trading without understanding the market. And in recent times, even the unexpected currencies have been going through a rough patch just like USD could not be strong in front of EUR. GBP is at a high position currently but not with EUR. USD is going to be consistent for this year according to reports hence it is a safe option for speculation since the interest rates are also going to go up soon. Demo trading is the best option for beginners. Although the forex market is just not about currencies, investing in the commodities and indices would take up a lot research as compared to the currencies. Understanding the commodities has become a lot more complicated recently. Asian countries profited because of the rise in the oil prices and the other nations witnessed a downfall. According to me, the only way of studying the forex market and start trading is by research through articles from various websites and newsletters. The updates of forex markets are posted and telecasted everywhere. The forex market is a whole new different world where even the winners can lose within seconds and vice versa. Many of the times, the downfall of certain currencies or commodities is already estimated. It is always advisable to research, gain proper knowledge and invest.

REFERENCES

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1) Eun, C. and Resnick, B. (2017). International financial management. 1st ed. New York, NY: McGraw-Hill Education.

2) Dailyfx.com. (2017). Forex Trading News & Analysis. [online] Available at: https://www.dailyfx.com/ [Accessed 11 May 2017].

3) Dailyforex.com. (2017). Forex Reviews, Forex News & Daily Market Analysis | DailyForex.com. [online] Available at: http://www.dailyforex.com/ [Accessed 11 May 2017].

4) Heuer, M. (2016). https://clinmedjournals.org/articles/jcgt/journal-of-clinical-gastroenterology-and-treatment-jcgt-2-027.php?jid=jcgt. Journal of Clinical Gastroenterology and Treatment, 2(2).

5) investing.com. (2017). Investing.com - Stock Market Quotes & Financial News. [online] Available at: https://www.investing.com/ [Accessed 11 May 2017].

6) Investopedia. (2017). Forex – Home | Investopedia. [online] Available at: http://www.investopedia.com/forex/ [Accessed 11 May 2017].

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