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Wednesday, December 19, 2007
Weekly Country Focus: Switzerland
The economy of Switzerland is one of the world's most stable economies. Its policy of long-term monetary security and bank secrecy has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment. Because of the country's small size and high labour specialisation, industry and trade are the keys to Switzerland's economic livelihood.
GDP Ranking (2007)
36th
GDP (2006)
CHF486.2, $371.5 billion
GDP growth rate (2006)
4.9% nominal, 3.2% real
GDP per Capita (Q2 '04 annualised)
$33,800
GDP by sector (2004)
agriculture (1.5%), industry (34.0%), services (64.5%)
Inflation rate (Q1 2006)
1.4%
Pop below poverty line (2005)
3.3%
Labour force (June 2004)
NA million (includes unemployed)
Labour force by occupation (2002)
agriculture (4.6%), industry (26.3%), services (69.1%)
Unemployment rate (2007 est)
2.5%
Main Industries
machinery, chemicals, watches, textiles, precision instruments
Trade
Apart from industry, trade has been the key to prosperity in Switzerland. The country is dependent upon exports to generate income and on imports for raw materials and goods. With the notable exception of a strict policy of agricultural protectionism, Switzerland has liberal trade and investment policies. An expansive commercial and bank law system makes Switzerland one of the most secure investment places in the world. The Swiss franc is one of the world's soundest currencies, and the country is known for its high standard of Swiss banking and financial services.
The machinery, metals, electronics, and chemicals sectors are known for precision and quality. Together, they account for well over half of Switzerland's export revenues. The country is approximately 60% self-sufficient, taking only 7.5% of its imports from the U.S.
Switzerland ranks 18th among the main trading partners of the U.S. worldwide. The Swiss economy earns roughly half of its corporate earnings from the export industry and about 70% of Swiss exports are destined for the EU market.
The United States is the second-largest importer (9.1%) of Swiss goods after Germany (20.0%). Germany, on the other hand, exports more to Switzerland each year than to all the countries of the former Soviet Union and Eastern Europe combined. In addition, the United States is the largest foreign investor in Switzerland, and conversely, the primary destination of Swiss foreign investment. It is estimated that 200,000 American jobs depend on Swiss foreign investments. Total U.S.-Swiss bilateral trade, nevertheless, decreased by 12% to $17.16 billion during 2002 compared to the previous year.
Economic policy
Terrorism
Through the United States-Swiss Joint Economic Commission (JEC), Switzerland has passed strict legislation covering anti-terrorism financing and the prevention of terroristic acts, marked by the implementation of several anti-money laundering procedures and the seizure of al-Qaeda accounts. Continued relationship with the United States through the JEC has brought the Swiss economy into closer proximity with that of the Western world, with mutualistic goals in terrorism prevention providing the impetus.
European Union
With exception of agriculture, economic and trade barriers between the European Union and Switzerland are minimal. In the wake of the Swiss voters' rejection of the European Economic Area Agreement in 1992, the Swiss Government set its sights on negotiating bilateral economic agreements with the EU. Four years of negotiations culminated in Bilaterals, a cross-platform agreement covering seven sectors: research, public procurement, technical barriers to trade, agriculture, civil aviation, land transport, and the free movement of persons. Parliament officially endorsed the Bilaterals in 1999 and it was approved by general referendum in May 2000. The agreements, which were then ratified by the European Parliament and the legislatures of its member states, entered into force on June 1, 2002. The Swiss government has since embarked on a second round of negotiations, called the Bilaterals II, which will further strengthen the two organisations' economic ties.
Switzerland has since brought most of their practices into conformity with European Union policies and norms in order to maximise the country's international competitiveness. While most of the EU policies are not contentious, police and judicial cooperation to international law enforcement and the taxation of savings are controversial, mainly because of possible side effects on bank secrecy.
Swiss and EU finance ministers agreed in June 2003 that Swiss banks would levy a withholding tax on EU citizens' savings income. The tax would increase gradually to 35% by 2011, with 75% of the funds being transferred to the EU. Recent estimates value EU capital inflows to Switzerland to $8.3 billion.
To learn more about Switzerland:
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Tuesday, December 18, 2007
Best Business Books for 2007
Amazon.com has released a list of the best business books for 2007. These books give great insight into the business-world and corporate strategy. They may not necessarily be 'Forex' related but they are still a good read. Being that it is that time of year again, these may be a good Christmas present for someone looking to venture into the corporate world.
Check these books out
At the same time, check out ForexCT and start trading now!
Check these books out
At the same time, check out ForexCT and start trading now!
Monday, December 17, 2007
Market Wrap 17/12/07
Dollar
What happened?
Dollar rallied across the board against all majors as data was much above expectations thus giving a perfect excuse to the market, who have been looking to lock some Dollar short profits ahead of the holidays. Consumer Price Inflation recorded its largest increase in two years while a weak Dollar is providing the much needed impetus to the U.S. manufacturing sector with Industrial Production came in much higher than expected thanks to overseas demand for cheap US goods.
What next?
In this scenario it will be very hard for the Fed to cut rates aggressively thus adding to the woes of the embattled average American home owner struggling to pay its mortgage, Subprime concerns are here to stay and with holidays upon us expect sharp volatile moves in the market. Dow’s gains from the previous day were wiped out in no time and expect further correction in the equity markets.
Euro
What happened?
Like other majors the Euro tracked general Dollar strength and has fallen by over 350 pips in the last few trading days recording its biggest one day decline in over 2 years. While the market has been eagerly awaiting a break out in this pair with many gunning for the 1.50 mark constant failure in achieving that figure increased the profit taking liquidation on longs. Euro – Zone inflation came in higher than expected which is likely to keep the ECB hawkish.
What next?
Data from the Euro-Zone should continue to outperform the U.S data and bottom pickers could come in at this level to send the Euro back into range trading mode. Today’s manufacturing and services PMI data should remain steady around current levels. Its cross against the Yen could see further liquidation which could weigh in on the Euro.
Yen
What happened?
Yen pared back its recent gains against the Dollar but strengthened against its crosses which were largely due to the losses in the equity markets and the corresponding carry trade liquidation. Yen was on the back foot all day due to the lower than expected result in the Q4 Tankan surveys which fell for the first time in more than 6 months. Corporate and Consumer sentiment is uncertain given the likelihood of a recession in the U.S. economy and its high correlation with the Japanese economy.
What next?
This morning’s Tertiary Industry index rose by 1.1% in line with expectations while business confidence should remain on the low side. But the Yen should continue to strengthen against high yielders with a fair chance of large scale liquidation in carry trades
Pound
What happened?
Pound crashed by 300 pips against the Greenback, sinking towards it lowest level in two years. Its decline was based on broad based Dollar strength rather than its own fundamentals. This morning’s data will not help its case either with the under pressure housing sector showing another decline in house prices as it recorded its sharpest monthly decline since the series began in January 2002. It was also stated that house prices will not rise in 2008
What next?
All eyes will be on Bank of England’s meeting minutes to be released this week, if the statement is not as dovish as expected it could lead to a relief rally in the Pound. A paper released by BoE stated that mortgage holders were not struggling to make repayments as the interest rate increases over the last few years have been in a gradual manner .
Aussie & Kiwi
What happened?
The Aussie and the Kiwi got sold off due to the general liquidation on carry trades however they have bounced well in early Asian trading. This morning’s data showed that the number of private housing starts rose which reinforces the view that the housing market down under is on much better footing than its counterparts in U.S. and U.K. Inflationary pressures in the New Zealand are likely to keep interest rates high well into the next year.
What next?
This is a busy data week for the commodity currencies, with the RBA policy meeting minutes likely to be hawkish in line with concerns of inflationary pressures. In New Zealand Business Confidence could inch lower on high interest rates and GDP could show a decline as well.
What happened?
Dollar rallied across the board against all majors as data was much above expectations thus giving a perfect excuse to the market, who have been looking to lock some Dollar short profits ahead of the holidays. Consumer Price Inflation recorded its largest increase in two years while a weak Dollar is providing the much needed impetus to the U.S. manufacturing sector with Industrial Production came in much higher than expected thanks to overseas demand for cheap US goods.
What next?
In this scenario it will be very hard for the Fed to cut rates aggressively thus adding to the woes of the embattled average American home owner struggling to pay its mortgage, Subprime concerns are here to stay and with holidays upon us expect sharp volatile moves in the market. Dow’s gains from the previous day were wiped out in no time and expect further correction in the equity markets.
Euro
What happened?
Like other majors the Euro tracked general Dollar strength and has fallen by over 350 pips in the last few trading days recording its biggest one day decline in over 2 years. While the market has been eagerly awaiting a break out in this pair with many gunning for the 1.50 mark constant failure in achieving that figure increased the profit taking liquidation on longs. Euro – Zone inflation came in higher than expected which is likely to keep the ECB hawkish.
What next?
Data from the Euro-Zone should continue to outperform the U.S data and bottom pickers could come in at this level to send the Euro back into range trading mode. Today’s manufacturing and services PMI data should remain steady around current levels. Its cross against the Yen could see further liquidation which could weigh in on the Euro.
Yen
What happened?
Yen pared back its recent gains against the Dollar but strengthened against its crosses which were largely due to the losses in the equity markets and the corresponding carry trade liquidation. Yen was on the back foot all day due to the lower than expected result in the Q4 Tankan surveys which fell for the first time in more than 6 months. Corporate and Consumer sentiment is uncertain given the likelihood of a recession in the U.S. economy and its high correlation with the Japanese economy.
What next?
This morning’s Tertiary Industry index rose by 1.1% in line with expectations while business confidence should remain on the low side. But the Yen should continue to strengthen against high yielders with a fair chance of large scale liquidation in carry trades
Pound
What happened?
Pound crashed by 300 pips against the Greenback, sinking towards it lowest level in two years. Its decline was based on broad based Dollar strength rather than its own fundamentals. This morning’s data will not help its case either with the under pressure housing sector showing another decline in house prices as it recorded its sharpest monthly decline since the series began in January 2002. It was also stated that house prices will not rise in 2008
What next?
All eyes will be on Bank of England’s meeting minutes to be released this week, if the statement is not as dovish as expected it could lead to a relief rally in the Pound. A paper released by BoE stated that mortgage holders were not struggling to make repayments as the interest rate increases over the last few years have been in a gradual manner .
Aussie & Kiwi
What happened?
The Aussie and the Kiwi got sold off due to the general liquidation on carry trades however they have bounced well in early Asian trading. This morning’s data showed that the number of private housing starts rose which reinforces the view that the housing market down under is on much better footing than its counterparts in U.S. and U.K. Inflationary pressures in the New Zealand are likely to keep interest rates high well into the next year.
What next?
This is a busy data week for the commodity currencies, with the RBA policy meeting minutes likely to be hawkish in line with concerns of inflationary pressures. In New Zealand Business Confidence could inch lower on high interest rates and GDP could show a decline as well.
Sunday, December 16, 2007
Weekly Country Focus: Australia
The Economy of Australia is a prosperous, Western-style market economy dominated by its services sector (68% of GDP), though the agricultural and mining sectors (29.9% of GDP combined) account for 65% of its exports. Rich in natural resources, Australia is a major exporter of agricultural products, particularly grains and wool, and minerals, including various metals, coal, and natural gas.
Australia occupies a continent close to the size of the contiguous United States. Service industries have expanded in recent decades at the expense of the manufacturing sector, which now accounts for just under 12 per cent of GDP.
Australia's emphasis on reforms is often cited as a key factor behind the continuing strength of the economy. In the 1980s, the Australian Labor Party, led by Prime Minister Bob Hawke and Treasurer Paul Keating, commenced the modernisation of the Australian economy by floating the Australian dollar in 1983, leading to full financial deregulation.
Current areas of concern to some economists include Australia's large current account deficit, the absence of a successful export-oriented manufacturing industry, a real estate bubble, and high levels of net foreign debt owed by the private sector.
Trade and economic performance
In the second half of the twentieth century, Australian trade shifted decisively away from Europe and North America to Japan and other East Asian markets.
Despite high global demand for Australian mineral commodities, export growth has remained flat in comparison to strong import growth. Even though Australia enjoys high commodity prices, economists have warned that structural change is needed in order to increase the size of manufacturing sector. The Australian economy has been performing nominally better than other economies of the OECD and has supported economic growth for 16 consecutive years. According to the Reserve Bank of Australia, Australian per capita GDP growth is higher than that of New Zealand, US, Canada and The Netherlands. The performance of the Australian economy is heavily dependent on US and Chinese economic growth.
Currency
Australian Dollar ($A or A$, AU$ or $AU, AUD)
GDP (PPP)
$645.3 billion (2006 est.)
GDP growth
3.8% (Q2 2007)
GDP per capita
$32,900 (2006 est.)
Inflation (CPI)
2.1% (Q2 2007)
Unemployment
4.3% (Q2 2007)
Main industries
Mining, industrial and transportation equipment, food processing, chemicals, steel
Australia occupies a continent close to the size of the contiguous United States. Service industries have expanded in recent decades at the expense of the manufacturing sector, which now accounts for just under 12 per cent of GDP.
Australia's emphasis on reforms is often cited as a key factor behind the continuing strength of the economy. In the 1980s, the Australian Labor Party, led by Prime Minister Bob Hawke and Treasurer Paul Keating, commenced the modernisation of the Australian economy by floating the Australian dollar in 1983, leading to full financial deregulation.
Current areas of concern to some economists include Australia's large current account deficit, the absence of a successful export-oriented manufacturing industry, a real estate bubble, and high levels of net foreign debt owed by the private sector.
Trade and economic performance
In the second half of the twentieth century, Australian trade shifted decisively away from Europe and North America to Japan and other East Asian markets.
Despite high global demand for Australian mineral commodities, export growth has remained flat in comparison to strong import growth. Even though Australia enjoys high commodity prices, economists have warned that structural change is needed in order to increase the size of manufacturing sector. The Australian economy has been performing nominally better than other economies of the OECD and has supported economic growth for 16 consecutive years. According to the Reserve Bank of Australia, Australian per capita GDP growth is higher than that of New Zealand, US, Canada and The Netherlands. The performance of the Australian economy is heavily dependent on US and Chinese economic growth.
Currency
Australian Dollar ($A or A$, AU$ or $AU, AUD)
GDP (PPP)
$645.3 billion (2006 est.)
GDP growth
3.8% (Q2 2007)
GDP per capita
$32,900 (2006 est.)
Inflation (CPI)
2.1% (Q2 2007)
Unemployment
4.3% (Q2 2007)
Main industries
Mining, industrial and transportation equipment, food processing, chemicals, steel
Wednesday, December 12, 2007
Disappointment in Fed Cut: Was it enough?
The Fed's interest rate cut of 0.25%, disappointed many investors, as concerns of recession, the housing slump and the credit crunch grow. Many investors believe that this cut in rates was not enough and 0.5% would have been more appropriate if the Fed was serious about avoiding recession.
The Fed's warning that the turbulence in global credit markets has led to more uncertainty in the economic outlook. This has led to bond traders pricing in a further 0.25% cut when the bank meets again on January 30th.
There is growing concern that the tight credit markets will increase the risks for an economy that is expected to grow a measly 1.8% in 2008.
The Fed's warning that the turbulence in global credit markets has led to more uncertainty in the economic outlook. This has led to bond traders pricing in a further 0.25% cut when the bank meets again on January 30th.
There is growing concern that the tight credit markets will increase the risks for an economy that is expected to grow a measly 1.8% in 2008.
Australian Unemployment: November 2007
Australian unemployment results for November came out today. The market was expecting a figure of around 4.3%, but the actual amount was 4.5%. This had an immediate negative impact on the AUD, as it has fallen to 0.8828 against the USD by 12:14pm Australian EST.
The number of employed increased by 52,600 in November - more than the 20,000 that had been forecast. The seasonally adjusted workforce participation rate increased to 65.3 percent in November - up from 65.0 percent in October.
The number of people employed in November was 10.58 million, marking an rise of 30,000 from October's 10.53 million. The total number of full-time workers in November rose by 8,200 to 7.6 million. The total number of part-time workers was up 44,400 to 2.99 million.
For the latest in economic results and Forex news, register with ForexCT
The number of employed increased by 52,600 in November - more than the 20,000 that had been forecast. The seasonally adjusted workforce participation rate increased to 65.3 percent in November - up from 65.0 percent in October.
The number of people employed in November was 10.58 million, marking an rise of 30,000 from October's 10.53 million. The total number of full-time workers in November rose by 8,200 to 7.6 million. The total number of part-time workers was up 44,400 to 2.99 million.
For the latest in economic results and Forex news, register with ForexCT
Monday, December 10, 2007
Weekly Country Focus: South Africa
South Africa has a two-tiered economy; one rivaling other developed countries and the other with only the most basic infrastructure. It therefore is a productive and industrialised economy that exhibits many characteristics associated with developing countries, including a division of labour between formal and informal sectors--and uneven distribution of wealth and income. The formal sector, based on manufacturing, services, mining, and agriculture, is well developed.
South Africa's transportation infrastructure is among the best in Africa, supporting both domestic and regional needs. The OR Tambo International Airport serves as a hub for flights to other Southern African and International countries. South Africa also has several major ports that make it a central point for most trade in the southern African region.
Currency
1 Rand = 100 cents
GDP ranking
24th (2005)
GDP
$576.4 billion (2006)
GDP growth
4.5% (2006 est.)
GDP per capita
$13,000 (2006 est.)
Forex reserves
$20.16 billion (February 2006)
Inflation
5% (2006)
Unemployment
25.5% (2006 est.)
Main industries
Mining (Platinum, Gold, Chromium, Diamonds), Automobile assembly, Metalworking, Machinery, Textile, Iron, Steel, Chemicals, Fertilizer and Foodstuffs
Inflation Targeting and GDP growth
In the February 2000 Budget Speech, the Minister of Finance, announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the consumer price index (CPIX) — a key indicator of inflation — between 3% and 6% average per annum. Although initially successful, the rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.
Since September 2003, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 - 4.3%.
Success in keeping inflation down allowed the Reserve Bank to reduce the prime lending rate — that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).
The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed growth in gross domestic product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. The present business cycle upswing is the longest on record. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004. Growth for 2005 is expected to comfortably exceed 4%, some predicting growth rates greater than 5%. This contrasts sharply with the erratic growth rates of 4.3% in 1996, 2.6% in 1997, 0.5% in 1998 and 2.4% in 1999 under GEAR (baseline 2005).
Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.
In an effort to boost economic growth further and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium, and micro enterprise development. In fact the policy has been condemned and opposed by the ANC (African National Congress) alliance partners, namely the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP).
Some Useful links:
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
Learn more about economic and financial issues at ForexCT!
South Africa's transportation infrastructure is among the best in Africa, supporting both domestic and regional needs. The OR Tambo International Airport serves as a hub for flights to other Southern African and International countries. South Africa also has several major ports that make it a central point for most trade in the southern African region.
Currency
1 Rand = 100 cents
GDP ranking
24th (2005)
GDP
$576.4 billion (2006)
GDP growth
4.5% (2006 est.)
GDP per capita
$13,000 (2006 est.)
Forex reserves
$20.16 billion (February 2006)
Inflation
5% (2006)
Unemployment
25.5% (2006 est.)
Main industries
Mining (Platinum, Gold, Chromium, Diamonds), Automobile assembly, Metalworking, Machinery, Textile, Iron, Steel, Chemicals, Fertilizer and Foodstuffs
Inflation Targeting and GDP growth
In the February 2000 Budget Speech, the Minister of Finance, announced a policy of inflation targeting, helping to bring consumer inflation, which had been running in the double digits for over 20 years, under control. Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the consumer price index (CPIX) — a key indicator of inflation — between 3% and 6% average per annum. Although initially successful, the rand's rapid depreciation in late 2001 led to greater inflationary pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation coming in at an average of 9.3% for the year.
Since September 2003, however, the CPIX inflation rate has remained consistently within the target range. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%, 2004 - 4.3%, 2005 - 4.3%.
Success in keeping inflation down allowed the Reserve Bank to reduce the prime lending rate — that determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).
The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new vehicles reach record levels. This in turn generated much needed growth in gross domestic product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growth consistently above 2%. The present business cycle upswing is the longest on record. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on 2005 market prices) in 2004. Growth for 2005 is expected to comfortably exceed 4%, some predicting growth rates greater than 5%. This contrasts sharply with the erratic growth rates of 4.3% in 1996, 2.6% in 1997, 0.5% in 1998 and 2.4% in 1999 under GEAR (baseline 2005).
Although economic growth has improved, the growth has been largely jobless, and quicker growth is still needed. The South African Government estimates that the economy must achieve growth at an average of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.
In an effort to boost economic growth further and spur job creation, the government has launched special investment corridors to promote development in specific regions and also is working to encourage small, medium, and micro enterprise development. In fact the policy has been condemned and opposed by the ANC (African National Congress) alliance partners, namely the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP).
Some Useful links:
Johannesburg Stock Exchange, South Africa
The South African Futures Exchange(SAFEX), South Africa
Learn more about economic and financial issues at ForexCT!
Major News: Week December 10th, 2007
The Federal Open Market Committee is widely tipped to decrease US interest rates by 25 basis points on Tuesday. There was specualtion earlier in the week that they cut would rates by 50 basis points, however the market has since dismissed this, since US Payrolls results were better than expected on Friday.
The value of the AUD has increased to highs of 0.8886 by late Tuesday afternoon on the back of the carry trades.
For more of the latest, up to the second Free Dow-Jones finance news, please register with ForexCT
The value of the AUD has increased to highs of 0.8886 by late Tuesday afternoon on the back of the carry trades.
For more of the latest, up to the second Free Dow-Jones finance news, please register with ForexCT
Sunday, December 9, 2007
Some New Links
Share Data and Calls for Indian Stock Market - This site is for sharing Historical data and sharing intrday, delivery and futures calls with everyone. You are free to give calls and use others in the forum.
Free Internet Marketing - Provides free internet marketing space such as Free business directory, free link exchange, free advertising forum, free classified ads
Free Internet Marketing - Provides free internet marketing space such as Free business directory, free link exchange, free advertising forum, free classified ads
Thursday, December 6, 2007
How to Exploit Nonrandomness in Currency Returns
Currency returns are positively correlated; that is they trend. Here we describe a trading rule to exploit the nonrandomness of currency returns. For the approach to be useful, the historical presence of trends must, of course, be more than a period-specific phenomenon. One reason to believe that currencies will in fact continue to trend is the conclusion that the trending arises from central bank inteventions. The reasoning for such a conclusion is as follows. Central banks prefer stable exchange rates. Thus, whenever an economic or political shock occurs, they intervene to prevent exchange rates from moving abruptly. Generally, they do not prevent the currency from eventually reaching its market determined price, but by "leaning against the wind," they stretch out the change in a currency's value over time. They cushion its movement to the new price.
If an investor believes that central banks will continue to promote stable exchange rates and accepts the argument that central bank interventions promote currency trending, then that investor will believe a profit can be made by purchasing a currency after it rises and selling it after it falls. The rationale is that, because of the central bank's intervention, the currency's value will continue to move in the direction it has been going until underlying market forces gradually overcome the central bank's dampening efforts.
If currency returns trend, adding value to a buy-and-hold exposure may be possible by following a dynamic strategy that generates a convex payoff function. This is illustrated in the diagram below.
The horizonral axis is the exchange rate of a currency and the vertical axis represents the returns - the conditional return of a buy-and-hold exposure to the currency and the return of a dynamic strategy that produces a convex payoff function. The buy-and-hold strategy produces a straight-line payoff function with a slot of 0.5 (because it is assumed to begin with a 50% exposure to the currency); thus if the currency were to move from a value of 1.0 to 1.2, the buy-and-hold strategy would generate a return of 10%.
As can be seen, the convex strategy outperforms the buy-and-hold strategy when the exchange rate moves significantly away from its value at inception (1.0), and the direction of that move does not matter. Thus, the dynamic strategy is appealing in an environment in which currencies trend, because trending increases the likelihood that the currency's exchange rate will move to one extreme or the other rather than fluctuate within a narrow interval.
An investor can generate a convex payoff fucntion by following a linear investment rule that increases exposure to a currency as it appreciates and decreases exposure to a currency as it depreciates. For example, suppose an investor starts out with 50% exposure to a currency and the currency appreciates 1.2%. The change in the value of the currency by itself increases the buy-and-hold exposure to 50.6%. The investor can increase this exposure exposure by multiplying the currency's return by a multiple greater than 1 and then adding this value to the initial exposure. If the multiple equals 5, the new exposure to the currency would equal 56%; that is , 50% + (1.2% x 5). If the currency declines by 1.2%, the new exposure under this rule would equal 43%. As long as the currency trends, the rule produces a convex pay-off function and adds value to a buy-and-hold strategy.
The value added as the currency trends in one direction is lost, however, during turning points when the trend changes direction unless the investor imposes a ceiling and a floor to constrain the exposure to the currency. Suppose, for example, that the investor's neutral exposure is 50%. The investor may impose a 75% ceiling and 25% floor. As the currency appreicates, the investor increases exposure to the currency unltil the ceiling is reached. As the currency continues continues to trend up, the exposure remains at 75%, thus adding value relative to the buy-and-hold exposure. At some point, the currency changes direction, however, so with this rule, the investor begins to reduce exposure to the currency. During this transition, some of the profits that accrued to the strategy as the currency appreciated are lost, but because the maximum exposure was constrained to 75%, the strategy returns to a neutral exposure relatively quickly, before all of the profits are lost. It then begins to add additional value as the exposure is reduced bellow the neutral exposure. In the same fashion, as the currency's move once again changes direction, the 25% floor serves to protect some of the added value. In general if the ceiling or floor is reached before the trend changes direction, this strategy will add value beyond a buy-and-hold strategy.
If an investor believes that central banks will continue to promote stable exchange rates and accepts the argument that central bank interventions promote currency trending, then that investor will believe a profit can be made by purchasing a currency after it rises and selling it after it falls. The rationale is that, because of the central bank's intervention, the currency's value will continue to move in the direction it has been going until underlying market forces gradually overcome the central bank's dampening efforts.
If currency returns trend, adding value to a buy-and-hold exposure may be possible by following a dynamic strategy that generates a convex payoff function. This is illustrated in the diagram below.
The horizonral axis is the exchange rate of a currency and the vertical axis represents the returns - the conditional return of a buy-and-hold exposure to the currency and the return of a dynamic strategy that produces a convex payoff function. The buy-and-hold strategy produces a straight-line payoff function with a slot of 0.5 (because it is assumed to begin with a 50% exposure to the currency); thus if the currency were to move from a value of 1.0 to 1.2, the buy-and-hold strategy would generate a return of 10%.
As can be seen, the convex strategy outperforms the buy-and-hold strategy when the exchange rate moves significantly away from its value at inception (1.0), and the direction of that move does not matter. Thus, the dynamic strategy is appealing in an environment in which currencies trend, because trending increases the likelihood that the currency's exchange rate will move to one extreme or the other rather than fluctuate within a narrow interval.
An investor can generate a convex payoff fucntion by following a linear investment rule that increases exposure to a currency as it appreciates and decreases exposure to a currency as it depreciates. For example, suppose an investor starts out with 50% exposure to a currency and the currency appreciates 1.2%. The change in the value of the currency by itself increases the buy-and-hold exposure to 50.6%. The investor can increase this exposure exposure by multiplying the currency's return by a multiple greater than 1 and then adding this value to the initial exposure. If the multiple equals 5, the new exposure to the currency would equal 56%; that is , 50% + (1.2% x 5). If the currency declines by 1.2%, the new exposure under this rule would equal 43%. As long as the currency trends, the rule produces a convex pay-off function and adds value to a buy-and-hold strategy.
The value added as the currency trends in one direction is lost, however, during turning points when the trend changes direction unless the investor imposes a ceiling and a floor to constrain the exposure to the currency. Suppose, for example, that the investor's neutral exposure is 50%. The investor may impose a 75% ceiling and 25% floor. As the currency appreicates, the investor increases exposure to the currency unltil the ceiling is reached. As the currency continues continues to trend up, the exposure remains at 75%, thus adding value relative to the buy-and-hold exposure. At some point, the currency changes direction, however, so with this rule, the investor begins to reduce exposure to the currency. During this transition, some of the profits that accrued to the strategy as the currency appreciated are lost, but because the maximum exposure was constrained to 75%, the strategy returns to a neutral exposure relatively quickly, before all of the profits are lost. It then begins to add additional value as the exposure is reduced bellow the neutral exposure. In the same fashion, as the currency's move once again changes direction, the 25% floor serves to protect some of the added value. In general if the ceiling or floor is reached before the trend changes direction, this strategy will add value beyond a buy-and-hold strategy.
Bollinger Bands
Bollinger Bands are a technical analysis tool invented by John Bollinger in the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades.
Bollinger Bands consist of:
Bollinger Bands consist of:
- a middle band being a N-period simple moving average
- an upper band at K times a N-period standard deviation above the middle band
- a lower band at K times a N-period standard deviation below the middle band
Typical values for N and K are 20 and 2, respectively.
95% of price action will take place within the Bollinger bands and thus the Bands act as strong areas of support and resistance when the forex market is without trend. It is possible at times like this to successfully trade the price rising or falling from one Bollinger line to the other. When a trend begins and the volatility of the market increases thus the spacing of the Bollinger Bands will widen, as the trend slows down the Bollinger bands will narrow.
The use of Bollinger Bands varies wildly among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band. Moreover, the use of Bollinger Bands is not confined to stock traders; options traders, most notably implied volatility traders, often sell options when Bollinger Bands are historically far apart or buy options when the Bollinger Bands are historically close together, in both instances, expecting volatility to revert back towards the average historical volatility level for the stock.
Wednesday, December 5, 2007
Hedging Currency Risk
The investor can react to foreign exchange risk in one of two ways. One alternative is to do nothing. In this case, the investor is left with the foreign exchange risk and remains either the gains or losses from the currency exposure. The alternative is to hedge the risk in some way by shifting some of the risk to others. The decisions about whether to hedge or not and, if so, how much to hedge and when can be complex. The choices depend on how much volatility the investor is exposed to, how much the volatility can be reduced, how much it costs to hedge, what expectations the investor is willing to make between the reduction in volatility and the cost of the hedge.
For the investor who has decided to hedge some part of foreign exchange exposure, there are three typical hedge alternatives. The first is a symmetrical hedge using forward or futures contracts to minimize both currency gains and losses. A matched hedge uses the same currency to hedge as the investor is exposed to. A currency-basket hedge uses a portfolio of currencies to hedge the investor's exposure; the portfolio is configured in such a way as to reduce the expected hedging cost while minimizing the tracking error of the hedge.
The asymmetrical hedge uses options. The asymmetry of options is designed to preserve some gains from currency exposure while protecting against losses. The two most common option strategies are the protective put and the range forward or collar. The protective put generarlly the most expensive protection, but it preserves the majority of the gains from favourable currency exposure. The range forward (collar) is somewhat less expensive than the alternativel; it lowers the cost by capturing the gains from favourable currency exposure only up to a certain level.
The final hedge alternative consists of active management of the hedge. In this strategy, currency exposure is left unhedged when currency returns are expected to be favourable and hedged when currency returns are expected to be unfavourable. The goal of active hedge management is to capture the benefits of hedging while paying as little as possible for protection. One might think of it as trying to create the same results as a protective put while minimizing the cost of the put option. Effective active hedge management requires a systematic, on-going evaluation of potential changes in foreign exchange rates.
For all your hedging solutions, register with ForexCT and talk to a highly trained Forex specialist now!
For the investor who has decided to hedge some part of foreign exchange exposure, there are three typical hedge alternatives. The first is a symmetrical hedge using forward or futures contracts to minimize both currency gains and losses. A matched hedge uses the same currency to hedge as the investor is exposed to. A currency-basket hedge uses a portfolio of currencies to hedge the investor's exposure; the portfolio is configured in such a way as to reduce the expected hedging cost while minimizing the tracking error of the hedge.
The asymmetrical hedge uses options. The asymmetry of options is designed to preserve some gains from currency exposure while protecting against losses. The two most common option strategies are the protective put and the range forward or collar. The protective put generarlly the most expensive protection, but it preserves the majority of the gains from favourable currency exposure. The range forward (collar) is somewhat less expensive than the alternativel; it lowers the cost by capturing the gains from favourable currency exposure only up to a certain level.
The final hedge alternative consists of active management of the hedge. In this strategy, currency exposure is left unhedged when currency returns are expected to be favourable and hedged when currency returns are expected to be unfavourable. The goal of active hedge management is to capture the benefits of hedging while paying as little as possible for protection. One might think of it as trying to create the same results as a protective put while minimizing the cost of the put option. Effective active hedge management requires a systematic, on-going evaluation of potential changes in foreign exchange rates.
For all your hedging solutions, register with ForexCT and talk to a highly trained Forex specialist now!
The Black-Scholes Model
"Once a model has been developed, we are able to improve the realism of its assumptions step by step. But unlike physics, which is a science with constant (if poorly understood) laws, the "laws" of economics and finance change constantly, even as we discover them. Sometimes they change because we have discovered them." - Charles Sanford: The Risk Management Revolution
Origins of the Black-Scholes Formula
The roots of the Black-Scholes formula go back to the nineteenth century. In the 1820s, a Scottish scientist, Robert Brown, observed the motion of pollen suspended in water and noticed that the movements followed no distinct pattern, moving randomly, independent of any current in the water. This phenomenon came to be known as Brownian motion. Similar versions of Brownian motion were subsequently discovered by other scientists studying other natural phenomena. In 1990, a French doctoral student Louis Bachelier, wrote his dissertation on the pricing of options in the Paris market and developed a model strikingly similar to the Black-Scholes model. Unfortunately, his dissertation advisor was disappointed because Bachelier's work was orientated toward such a practical issue as pricing a financial instrument. Although Bachelier received his degree, the less than enthusiastic support of his advisor damaged his career, and nothing further was heard from him.
In the early twentieth century, Albert Einstein, working on the foundations of his theories relativity, used the principles of Brownian motion to explain movements in molecules. This work led to several research papers that earned Einstein the Nobel Prize and world renown. By that time, a fairly well developed branch of mathematics, often attributed to American mathematician Norbert Wiener, proved useful for explaining the movements of random particles. Other contributions to the mathematics were made by Japanese mathematician Kiyoshi Ito. In 1951, Ito developed an extremely important result called Ito's Lemma that 20 years later made it possible to find an option price. Keep in mind, however, that these people were working complex problems in physics and mathematics, not finance.
The mathematics that was used to model random movements had now evolved into its own subdiscipline, which came to be known as stochastic calculus. While ordinary calculus defined the rates of change of known functions, stochastic calculus defined the rates of change of functions in which one or more terms were random but behaved according to well-defined rules of profitability.
In the late 1960s, Fischer Black finished his doctorate in mathematics at Harvard. Passing up a career as a mathematician, he went to work for Arthur Little, a management consulting firm in Boston. Black met a young MIT finance professor named Myron Scholes, and the twon began an interchange of ideas on how financial markets worked. Soon Black and Scholes then began studying options, which at that time were traded only on the OTC market. They first reviewed the attempts of previous researchers to find the elusive option pricing formula.
Black and Scholes took two approaches to finding the price. One approach assumed that all assets were priced according to Capital Asset Pricing Theory, a well-accepted model in finance. The other approach used stochastic calculus. They obtained an equation using the first approach, but the second method left them with a differential equation they were unable to solve. The more mathematical approach was considered more important, so they continued to work on the problem, looking for a solution. Black eventually found that the differential equation could be transformed into the same one that described the movement of heat as it travels across an object. There was already a known solution, and Black and Scholes simply looked it up, applied it to their problem, and obtained using the first method. Their paper reporting their findings was rejected by two academic journals before eventually being published in the Journal of Political Economy, which reconsidered an earlier decision to reject the paper.
At the same time, another young financial economist at MIT, Robert Merton, was also working on option pricing. Merton discovered many of the arbitrage rules. In addition, Merton more or less simultaniously derived the formula. Merton's modesty, however, compelled him to ask a journal editor that his paper not be published before that of Black and Scholes. As it turned out, both papers were published, with Merton's paper appearing in Bell Journal of Economics and Management Science at about the same time. Merton, however, did not initially receive as much credit as Black and Scholes, whose names became permanently associated with the model.
Fischer Black left academia in 1983 and went back to work for the Wall Street firm Goldman Sachs. Unfortunately, he died in 1995 at the age of 57. Scholes and Merton have remained in academia but have been extensively involved in real world derivatives applications.
In 1997, the Nobel Committee awarded the Nobel Prize for Economic Science to Myron Scholes and Robert Merton, while recognising Black's contributions.
The model has been one of the most significant developments in the history of pricing of financial instruments. It has generated considerable research attempting to test the model and improve on it. A new industry of derivative products based on the Black-Scholes model has developed. Even if one does not agree with everything the model says, knowing something about it is important for surviving in the finance markets.
Black-Scholes Model - The Theory Behind it
The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. The Black-Scholes formula is a mathematical formula for the theoretical value of European put and call stock options that may be derived from the assumptions of the model.
Origins of the Black-Scholes Formula
The roots of the Black-Scholes formula go back to the nineteenth century. In the 1820s, a Scottish scientist, Robert Brown, observed the motion of pollen suspended in water and noticed that the movements followed no distinct pattern, moving randomly, independent of any current in the water. This phenomenon came to be known as Brownian motion. Similar versions of Brownian motion were subsequently discovered by other scientists studying other natural phenomena. In 1990, a French doctoral student Louis Bachelier, wrote his dissertation on the pricing of options in the Paris market and developed a model strikingly similar to the Black-Scholes model. Unfortunately, his dissertation advisor was disappointed because Bachelier's work was orientated toward such a practical issue as pricing a financial instrument. Although Bachelier received his degree, the less than enthusiastic support of his advisor damaged his career, and nothing further was heard from him.
In the early twentieth century, Albert Einstein, working on the foundations of his theories relativity, used the principles of Brownian motion to explain movements in molecules. This work led to several research papers that earned Einstein the Nobel Prize and world renown. By that time, a fairly well developed branch of mathematics, often attributed to American mathematician Norbert Wiener, proved useful for explaining the movements of random particles. Other contributions to the mathematics were made by Japanese mathematician Kiyoshi Ito. In 1951, Ito developed an extremely important result called Ito's Lemma that 20 years later made it possible to find an option price. Keep in mind, however, that these people were working complex problems in physics and mathematics, not finance.
The mathematics that was used to model random movements had now evolved into its own subdiscipline, which came to be known as stochastic calculus. While ordinary calculus defined the rates of change of known functions, stochastic calculus defined the rates of change of functions in which one or more terms were random but behaved according to well-defined rules of profitability.
In the late 1960s, Fischer Black finished his doctorate in mathematics at Harvard. Passing up a career as a mathematician, he went to work for Arthur Little, a management consulting firm in Boston. Black met a young MIT finance professor named Myron Scholes, and the twon began an interchange of ideas on how financial markets worked. Soon Black and Scholes then began studying options, which at that time were traded only on the OTC market. They first reviewed the attempts of previous researchers to find the elusive option pricing formula.
Black and Scholes took two approaches to finding the price. One approach assumed that all assets were priced according to Capital Asset Pricing Theory, a well-accepted model in finance. The other approach used stochastic calculus. They obtained an equation using the first approach, but the second method left them with a differential equation they were unable to solve. The more mathematical approach was considered more important, so they continued to work on the problem, looking for a solution. Black eventually found that the differential equation could be transformed into the same one that described the movement of heat as it travels across an object. There was already a known solution, and Black and Scholes simply looked it up, applied it to their problem, and obtained using the first method. Their paper reporting their findings was rejected by two academic journals before eventually being published in the Journal of Political Economy, which reconsidered an earlier decision to reject the paper.
At the same time, another young financial economist at MIT, Robert Merton, was also working on option pricing. Merton discovered many of the arbitrage rules. In addition, Merton more or less simultaniously derived the formula. Merton's modesty, however, compelled him to ask a journal editor that his paper not be published before that of Black and Scholes. As it turned out, both papers were published, with Merton's paper appearing in Bell Journal of Economics and Management Science at about the same time. Merton, however, did not initially receive as much credit as Black and Scholes, whose names became permanently associated with the model.
Fischer Black left academia in 1983 and went back to work for the Wall Street firm Goldman Sachs. Unfortunately, he died in 1995 at the age of 57. Scholes and Merton have remained in academia but have been extensively involved in real world derivatives applications.
In 1997, the Nobel Committee awarded the Nobel Prize for Economic Science to Myron Scholes and Robert Merton, while recognising Black's contributions.
The model has been one of the most significant developments in the history of pricing of financial instruments. It has generated considerable research attempting to test the model and improve on it. A new industry of derivative products based on the Black-Scholes model has developed. Even if one does not agree with everything the model says, knowing something about it is important for surviving in the finance markets.
Black-Scholes Model - The Theory Behind it
The Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. The Black-Scholes formula is a mathematical formula for the theoretical value of European put and call stock options that may be derived from the assumptions of the model.
The key assumptions of the Black-Scholes model are:
- The price of the underlying instrument is a geometric Brownian motion, in particular with constant drift and volatility.
- It is possible to short sell the underlying stock.
- There are no riskless arbitrage opportunities.
- Trading in the stock is continuous.
- There are no transaction costs.
- All securities are perfect divisible (e.g. it is possible to buy 1/100th of a share).
- The risk free interest rate is constant, and the same for all maturity dates.
Black-Scholes in practice
The use of the Black-Scholes formula is pervasive in the markets. In fact the model has become such an integral part of market conventions that it is common practice for the implied volatility rather than the price of an instrument to be quoted. (All the parameters in the model other than the volatility - that is the time to expiry, the strike, the risk-free rate and current underlying price—are unequivocally observable. This means there is one-to-one relationship between the option price and the volatility.). Traders prefer to think in terms of volatility as it allows them to evaluate and compare options of different maturities , strikes, etc...
However, the Black-Scholes model can not be modelling the real world exactly. If the Black-Scholes model held, then the implied volatility of an option on a particular stock would be constant, even as the strike and maturity varied. In practice, the volatility surface (the two-dimensional graph of implied volatility against strike and maturity ) is not flat. In fact, in a typical market, the graph of strike against implied volatility for a fixed maturity is typically smile-shaped (see volatility smile). That is, at-the-money (the option for which the underlying price and strike co-incide) the implied volatility is lowest; out-of-the-money or in-the-money the implied volatility tends to be different, usually higher on the put side (low strikes), and call side (high strikes).
Practically, the volatility surface of a given underlying instrument depends among other things on its historical distribution, and is constanty re-shaping as investors, market-makers, and arbitragists re-evaluate the probability of the underlying reaching a given strike and the risk-reward associated to it.
Register Now with ForexCT to put Black-Scholes into practice!
Information taken from Wikipedia - the free encyclopedia
Sunday, December 2, 2007
Some Great Quotes
"Man does not live by stocks and bonds alone" - Chicago Mercantile Exchange advertisement
"Trading is like no other profession I can think of than dragon slaying. Facing that hot breath, and those toothy jaws fearlessly, armed only with a belief in oneself, on a daily basis" - Mara Koppel: Women of the Pits, 1998
"Order and simplification are the first steps toward mastery of a subject - the actual enemy is the unknown" - Thomas Man: The Magic Mountain, 1924
"Models are like cars: you can have the best car in the world, but it won't stop you crashing if you don't drive it properly" - Mahmouh Barakat: Risk, April 1997, p. 6
"A bird in the hand is an apt way to describe the strategy of today's options investor. Taking the immediate income of writing a covered call, the battle-tested investor is strategically managing market risk" - Lawrence Severn: Futures and Options World, October 1995
"You can get as fancy as you want with your option strategies, but in this business, there's no substitute for being right. There's never been a guarantee for incremental returns" - Gene Brody: Risk, June 1995
"Trading is like no other profession I can think of than dragon slaying. Facing that hot breath, and those toothy jaws fearlessly, armed only with a belief in oneself, on a daily basis" - Mara Koppel: Women of the Pits, 1998
"Order and simplification are the first steps toward mastery of a subject - the actual enemy is the unknown" - Thomas Man: The Magic Mountain, 1924
"Models are like cars: you can have the best car in the world, but it won't stop you crashing if you don't drive it properly" - Mahmouh Barakat: Risk, April 1997, p. 6
"A bird in the hand is an apt way to describe the strategy of today's options investor. Taking the immediate income of writing a covered call, the battle-tested investor is strategically managing market risk" - Lawrence Severn: Futures and Options World, October 1995
"You can get as fancy as you want with your option strategies, but in this business, there's no substitute for being right. There's never been a guarantee for incremental returns" - Gene Brody: Risk, June 1995
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Information website on health, selling health products, natural herbal remedies. information is provided on health, beauty, detox. We sell medicine, supplements, vitamins and have a large health shop.
Merchant Account Affiliate
Make residual income on every account. Best support available! We retain 99.4% of our clients, partnered with Wells Fargo to offer new/old businesses merchant accounts.
Music Instruments
Extensive collection of over 7000 music instruments and accessories
Leverantör, Distributör & Förlag - eShare.se
Stort antal varor för distribution i Sverige och norden. Vi erbjuder även dropshippping.
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