Internship Project Report - Nabeel Tahir Siddiqui

RISK MANAGEMENT IN FOREX MARKET
A Project Report for the partial fulfilment of the requirement for

Post-Graduate Diploma in Management
APPROVED BY
ALL INDIA COUNCIL FOR TECHNICAL EDUCATION (AICTE)
Submitted by: Nabeel Tahir Siddiqui (Reg. No.: 1427698009)

Mobile: +91 9977829199 Email: nabeelsiddiqui31@gmail.com
Under the supervision of

Mr. K.N. Swamy, Assistant Professor,
REGIONAL COLLEGE OF MANAGEMENT

PLOT NO. 34/4 & 34/5
MUDUGURKI, DEVANAHALLI BENGALURU 562110, INDIA
WWW.RCMB.IN
STUDENT’S DECLARATION
The undersigned a student of Regional College of Management, Bangalore hereby declare that
the project report entitled “Risk Management in Forex Market “is submitted in partial
fulfilment of the requirement for the Corporate Internship Program 2019 during the Post-
Graduation diploma in Management.
This is my original work and has not been previously submitted as a part of any other degree
or diploma of another Business School or University. The Findings and conclusion of this
report are based on my personal study and experience.
Nabeel Tahir Siddiqui

(Reg. No.: 1427698009)
Regional College of Management
Bengaluru
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ACKNOWLEDGEMENT
It was great opportunity to work with Kalpataru Multiplier Ltd., Bhopal. I am using this
opportunity to express my gratitude to everyone who supported me throughout the course of
this Corporate Internship. I am thankful for their aspiring guidance, invaluably constructive
criticism and friendly advice during this period. I am sincerely grateful to them for sharing their
truthful and illuminating views with me and without whom the completion of this project would
have been virtually impossible.
I would like to extent my gratitude to my company mentor Mr. Anupam Tamrakar (Branch
Head) who encouraged me to complete the assign task in a better manner.
I take this opportunity to extend my sincere thanks to Prof. S.R. Mandal, Founder President at
Regional College of Management, Bangalore for offering a unique platform to earn exposure.
I wish to thank my faculty mentor Assistant Prof. K.N. Swamy for his guidance and valuable
advice throughout the course of completion of my project. He has been guiding, inspiring and
clearing doubts all the way through this Project. His constant support has helped me to
understand many things and gain knowledge.
I am also indebted to my Parents and to our Beloved Friends for their care and encouragement.
Nabeel Tahir Siddiqui

(Reg. No.: 1427698009)
Bengaluru
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MENTOR’S CERTIFICATE
This is to certify Mr. Nabeel Tahir Siddiqui (Reg. No.: 1427698009) is a bonafide student
of Regional College Of Management, Bangalore and is presently pursuing a Post-Graduation
Program in Management.
Under my guidance he has submitted this project report titled “Risk Management in Forex
Market” in partial fulfilment of the requirement for the Corporate Internship Program 2019
during the Post Graduate Diploma in Management.
To the best of my knowledge, this report not has been previously submitted as part of another
degree or diploma of another Business School or University.
Prof. K.N.Swamy
(Assistant Professor)
Internal Guide
Bengaluru
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Learning Experience
The project has been a great learning experience. It has provided me with learning opportunities
about currency market and various currency exchanges. The project involved gaining
information about various currency exchanges and getting awareness about various
terminologies associated with them.
The currency market trends, the rising currency prices giving rise to inflation, how some
currency are linked with an economy also helped me a lot to gain more knowledge about
currency market. By handling the project under the guidance of company guide and faculty
guide has given me exposure of organizational culture and environment.
On the whole, I understood the psyche of prospective and current trends of the market.
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TABLE OF CONTENTS
I. EXECUTIVE SUMMARY .............................................................................................. 1
II. INDUSTRY ANALYSIS ................................................................................................. 3
a. Forex History........................................................................................................ 4
b. Forex Market Size Stats ....................................................................................... 4
c. Significance of Forex Market ............................................................................... 5
d. Currency Stats ...................................................................................................... 5
e. Facts Based on Research ...................................................................................... 5
f. Forex Technology Stats ........................................................................................ 6
g. Forex Trader Stats ................................................................................................ 6
h. Forex Broker Stats ................................................................................................ 6
i. UK Spread Betting Stats ...................................................................................... 7
j. Pestle Analysis of Forex Industry ........................................................................ 7
III. OBJECTIVE OF THE PROJECT- ................................................................................ 10
IV. LIMITATION OF THE PROJECT- .............................................................................. 12
V. INTRODUCTION TO THE COMPANY- .................................................................... 14
a. Company Overview............................................................................................ 15
b. Our Valuable Team Members ............................................................................ 16
c. Our Field of Operations...................................................................................... 16
VI. INTRODUCTION TO THE FOREX MARKET- ......................................................... 18
a. Swot Analysis ..................................................................................................... 20
b. Pestle Analysis ................................................................................................... 21
c. Forex Market in India ......................................................................................... 22
VII. RISK /MONEY MANAGEMENT ................................................................................ 25
a. Type of Exposure in Forex Market .................................................................... 26
i. Transactional Exposure- ......................................................................... 26
ii. Translational Exposure - ........................................................................ 27
iii. Economic Exposure- .............................................................................. 27
b. Foreign Exchange Risk Management Strategies ................................................ 27
i. Spot transaction: ..................................................................................... 27
ii. Forward contract: ................................................................................... 28
iii. Options: .................................................................................................. 29
VIII. TYPES OF ANALYSIS- ............................................................................................... 31
a. Technical Indicators ........................................................................................... 32
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i. Moving average: ..................................................................................... 32
ii. Exponential Moving Average: ............................................................... 33
iii. Commodity channel indicator (CCI): ..................................................... 33
iv. Average Directional Movement Index (ADX) Indicator: ...................... 34
v. Stochastic Oscillator Indicator: .............................................................. 35
vi. Bollinger Bands Indicator: ..................................................................... 37
vii. Moving Average Convergence-Divergence (MACD) Indicator:........... 37
viii. Fibonacci Levels: ................................................................................... 38
ix. Pivot Point: ............................................................................................. 38
x. Relative Strength Index: ......................................................................... 39
xi. Japanese Candle Sticks: ......................................................................... 40
b. Fundamental Analysis: ....................................................................................... 41
i. Fundamental Analysis in Forex Market: ................................................ 42
ii. So, what Does Fundamental Analysis Mean? ........................................ 42
iii. Fundamentals: Quantitative and Qualitative .......................................... 44
iv. Quantitative Meets Qualitative: ............................................................. 44
v. Top down Analysis: ............................................................................... 45
vi. Bottom-Up Analysis:.............................................................................. 45
vii. Balance Of Trade and Interest Rates: ..................................................... 45
viii. The Forces Driving Demand and Supply: .............................................. 45
c. Primary Fundamental Information Types: ......................................................... 46
d. Key Economic Factors: ...................................................................................... 47
e. Other Factors: ..................................................................................................... 48
f. Money Supply: ................................................................................................... 49
g. Unemployment Statistics: .................................................................................. 50
h. Central Bank Interest Rates: ............................................................................... 52
i. Balance Of Payments: ........................................................................................ 55
j. Inflation: ............................................................................................................. 56
k. Oil Prices and Inflation: ..................................................................................... 57
l. How Gold Affects the Forex Market: ................................................................ 58
i. Indications that the gold price is a bubble: ............................................. 60
m. Central Bank Decisions: ..................................................................................... 62
n. Foreign Exchange Reserves: .............................................................................. 62
o. Capital Flows: .................................................................................................... 64
i. Causes of a Nation's Currency Appreciation or Depreciation - ............. 65
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p. Tariffs: ................................................................................................................ 70
q. Quotas: ............................................................................................................... 70
r. Voluntary Export Restraints (VERs): ................................................................ 71
s. Gross Domestic Product (GDP): ........................................................................ 71
IX. STEPS TO BE TAKEN TO MAKE PROFITS THROUGH FUNDAMENTAL
ANALYSIS - .................................................................................................................. 74
a. 1st Step: Study the Macroeconomic Arena ........................................................ 75
i. Decide on the phase of the cycle. ........................................................... 75
ii. Conclude the first Step: .......................................................................... 76
b. 2nd Step: Study Global Monetary Environment ................................................ 76
i. Study the interest rate policies of major global powers ......................... 76
ii. Compare money supply expansion and credit standards with the
previous period: ...................................................................................... 76
iii. Analyse the VIX, developed market loan default rates of corporate and
private sectors. ........................................................................................ 77
iv. Conclude the second step: ...................................................................... 77
c. 3rd Step: Choose Currencies and Time Period to Maintain the Position ........... 77
i. Examine the interest rate differentials of nations: .................................. 78
ii. Compare the balance of payments of the currencies: ............................. 78
iii. Trade the third step:................................................................................ 78
X. CONCLUSION- ............................................................................................................. 79
a. Step 1: Identify Type of Risk to Hedge.............................................................. 81
b. Step 2: Identify What Needs to be hedged ......................................................... 81
c. Step 3: Identify What Tools you can use to Hedge ............................................ 81
XI. REFERENCES: .............................................................................................................. 82
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CHAPTER - I
Regional College of Management Page 1 of 83

I. EXECUTIVE SUMMARY
In this report I will cover mainly type of forex market exposure, hedging tools, fundamental
aspects of Forex analysis and the risk management technique. I will broadly describe a social
economic system, different markets, and money management principles. Finally, I have
explored the possibilities of auto-trading and provided documentation for an indicator and an
expert adviser developed in MQL4.
I have covered all the factors affecting currency markets. An economic system is the
combination of the various agencies, or entities that provide the economic structure that defines
a social community. These agencies are joined by lines of trade and exchange along which
goods, money etc. are continuously flowing. The markets we use today are a specific type of
economic system in which goods and currency are traded worldwide. The different markets we
use trade different things but are all part of the social economic system that structures our
economy.
Trading is done with the combination of two currencies. But two sides of trade are always there
i.e. long (bought) and short (sold) and that is when the fundamentals relating to both the
currencies come into picture. Not always, but generally, the trade currency is with the highest
value. Different interest rates are paid by different currencies.
There are also other basics of Forex trading, but one thing is definite – the size of Forex has
now made any other investment market smaller to a great extent.
We discuss the different markets, what they trade, and their benefits and how the different
factors effect it. We go into further depth with the fundamentals related to forex market, as this
was the market, we chose to trade in. We discuss how to trade in the forex market, all of the
currencies that make up the forex market, and how volatile the forex market can be. We
emphasize that this market is very difficult to make a profit in but can be the most rewarding.
I will cover the benefits and pitfalls of each market, and why we chose the forex market over
the others.
Another important part of our project is the development of the customized indicators and
expert advisors in MT4 using MQL4. We learned the language from scratch, and at the end of
the project.

CHAPTER - II

II. INDUSTRY ANALYSIS

The foreign exchange market is the most actively traded market in the world. More than $5
trillion are traded on average every day. By comparison, this volume exceeds global equities
trading volumes by 25 times.
Forex History
The gold standard was set in 1880, the year which many people hold as the start of modern
Forex. The amount traded in Forex increased by 10.8% between 1899 and 1913, but holdings
of gold experienced an increase in only 6.3%. Clearly, Foreign Exchange began to gain more
and more strength. It was the Bretton Woods agreement that gave way to forex trading. Prior
to 1971, speculation in currency markets was not permitted. The world’s first real ‘bank’ was
Monte Dei Paschi di Siena founded in 1472 in Tuscany, Italy, and is still in operation today.
By 1913, almost half of global foreign exchange was traded using the Sterling. While the
Sterling was the main currency in Forex trading, the most active centers were New York, Berlin
and Paris. London, for the most part wasn’t a major player in the trading world until 1914.
While we think of currency markets as a relatively new invention, money changers were first
mentioned in the Talmud, which dates back to biblical times. The money changers charged a
commission. The Forex markets, surprisingly, were forced to close sometime during 1972 and
March 1973 due to the ineffectiveness of the Bretton Woods Accord and the European Joint
Float. During the 17th and 18th centuries, Amsterdam maintained an active Forex market.
Exchange took place between agents and merchants acting in the interest of their respective
nations, England and Holland. The US Federal Reserve only came into existence in 1908.
Before that, any US bank could issue their own money.
Forex Market Size Stats
The trading volume of the Forex market is 4X the global GDP1 $5.3 trillion dollars per are
traded every day in the forex market. More than 85% of the global forex market transactions
happens on only 7 currency pairs known as the majors (EURUSD, USDJPY, GBPUSD,
AUDUSD, NZDUSD, USDCAD, and USDCHF) Ex: If a person wants to invest one dollar
every second around the clock, it would take 31,688 years to spend a trillion dollars. Therefore,
to spend $5.3 Trillion, the value of Forex, would take that person to 126,118 years.

The volume of retail forex trading represents just 5.5% of the whole foreign exchange market.
Forex trading daily volume is about 53 times more than the New York stock exchange.
Deutsche Bank is the world’s largest foreign exchange dealer with over 21% in market share.
Significance of Forex Market
There are over 170 different currencies around the world today that make up the Forex market.
Forex is the only market that runs for 24 hours per day. The Forex market is the most liquid
market in the world. The Forex market is 12times larger than the futures market and 27 times
larger than the equities (stock) market.
Currency Stats
The US Dollar is the most traded currency, being part of almost 90% of global trades.
The GBP/USD is known as the ‘cable’. Why do we have such a name for it? Simply because,
before the creation of global communication satellites and the fibre optic technology, the
London and New York stock exchanges were connected by a giant steel cable, immersed in the
Atlantic Ocean.
Table: On the basis of mostly traded currency
Name of the currency Position

Euro (EUR, 33.4%) Third
British Pound (GBP, 11.8%) Fourth
Australian Dollar (AUD, 8.6 %) Fifth
Swiss Franc (CHF, 5.2%) Sixth
Canadian Dollar (CAD 4.6%) Seventh
Mexican Peso (MXN 2.5%) Eigth
Chinese Renminbi (CNY 2.2%) Ninth
New Zealand Dollar (NZD 1.4%) Tenth
Facts Based on Research
In May 2017, there were more searches in Google around trading Bit coin than there were for

searches around trading gold or oil, according to Google Trends.
Forex Technology Stats
Today new Forex trading platform is launched is called as MT5. Which is much faster and
comfortable than MT4 but earlier MT4 is the most popular Forex trading platform in the world.
Its closest competitor is MT5, which as the name implies, is also built by Meta Trader. Over
35% of traders search for a broker using a mobile or tablet device. Traders prefer Android over
iOS. 56.1% of traders have an Android phone, while 41.8% use iOS. Samsung is the most
popular brand among traders using Android. 90% of successful Forex traders these days use
robots (sometimes called ‘expert advisors ‘) to help them make money. In Binary option trading
every trade lasts from less than 10 minutes to a maximum of 19 minutes. Auto trading began
in the Chicago mercantile exchange as early as the 1970’s but became common with retail
trading around 1999 when online retail platforms started appearing. 60% of all Forex
transactions are conducted in either the UK (41%) or the United States (19%).The 5 most
popular cross rates, according to research are: EUR/JPY, EUR/GBP, EUR/CHF, GBP/JPY and
GBP/CHF.
Forex Trader Stats
A recent research study undertaken by Ph.D. researcher John Forman, reveals that 99.6% of
retail Forex traders are unable to achieve more than 4 back-to-back profitable quarters. Sound
strategy or not, losses are apparently inevitable. There has been a rise in the number of female
traders – 46% more women opened accounts in January – March 2015 than January – March
2014. Despite this, women still only represent 10.9% of all traders, according to our own
research here at Broker Notes. Traders at getting started at a younger age. 43.5% of traders in
2017 were aged 25-34. This is up by almost 1% compared to 2016. Some banks are known to
allocate as much as 20-30% of their funds into the Forex market and generate between 40-60%
of their total profits through trading currencies. This is by far their most lucrative endeavour.
Forex Broker Stats
The largest company in the industry is IG Index, which is listed on the London Stock Exchange
with a market value of around £1 billion. It now has over 72,000 clients worldwide, making

approximately one million transactions a month – over 90% of them online. Approximately
90% of spread betting trades are buy positions. Binary options typically pay out around 80% if
a person win, and return only about 10% if that person lose. Add 80% + 10%, and that person
will get 90%, with a gap in the broker’s favour. IG reported an 18% rise in third-quarter revenue
as traders speculated more because of increased stock market volatility (March 2016).
UK Spread Betting Stats
According to the Financial Times the profile of the average spread better remains white, male,
middle-aged and professional. Although IG Index says that about 3,000 people open an account
with them each month, spread betting is still not a mainstream activity. Profits from spread
betting are currently free of capital gains/income tax in the UK. Around 92,000 people in the
United Kingdom were spread betting in 2012. About 35,000 people stopped spread betting in
the United Kingdom in the year to July 2012 (compared to 32,000 in the same period of July
2011), while around 23,000 traders switched providers. The growth over the period 2009 and
2012 has been modest with just 9,000 new traders. According to research specialist Investment
Trends spread betting client numbers rose to 88,000 in November 2011 compared to 83,000
recorded in October 2010 while those trading CFDs reached 26,000, up from 25,000.Financial
spread betting has been around in the UK and in Ireland for about 40 years but has experienced
an impressive rise in popularity in the last decade.
Pestle Analysis of Forex Industry
In order to externally and strategically analyses the attractiveness of forex retail trading market
and its different macro environmental factors an analysis based on PESTEL framework was
conducted for understanding market movements, business potential and further directions for
operations. At odds the forex market is equally positively affected through political,
environmental and economic factors over large and abrupt changes. Abruptness and
uncertainty create volatility thus rapid movements on currency markets which attracts
speculative capital. For example, in contrary to expectations the ongoing crisis has fueled the
market.
Political factors: In general FX markets are lightly political because developed nations want
to release restrictions on the flow of global capital (Galant and Dolan). For example, after China
relaxed forex controls in 2005 (Country Commerce: 85), the daily average trade of Renminbi

9-folded during 18 months (BIS). Because of its global size local political factors usually have
little long-term impact to the market. For example, if UK would join euro zone then the global
forex trade would decline only 2% (BIS). I think in next five years the political intervention to
the forex market fundamentals will continually diminish.
Economic factors: Forex market is global, borderless and liquid financial market that operates
24 hours a day (NFA). According to Keynes macroeconomic uncertainty (crises) lead people
to stay or invest in more liquid instruments because of its high liquidity, growth and profit
potential, easy entry and exit. Forex retail market is continuously attractive market in next five
years. Fierce cost competition will be opposed with value adding knowledgeable trading
services with an aim to attract customers over higher profit potential. As a zero-sum game,
trading needs discipline and comprehensive market context analysis and therefore the service
of proprietary trading will have significant role in growth potential.
Social factors: Retail forex trades are not guaranteed by a clearing organisation and forex arena
has not been the safest for participants (Salcedo). Over the last few years, there has been a sharp
rise in foreign currency scams (NFA). This ethical issue has alerted governments to regulate
the market. Although in U.S. NFA tries to regulate it, the global openness has enabled them to
regulate many but not all forex firms (NFA). Despite additional regulation will most probably
appear in next five years, the „increased legitimacy and transparency should fuel forex’s
continued growth.
Technological factors: Trading in the FX spot market is typically commission-free when done
over electronic trading systems, and the spread has fallen dramatically over the last five years
as a result of improved technology. “Trading systems have been so far the collection of
indicators and chart patterns that one examines to determine when to enter or exit a particular
market”.
The speculative nature of the market is interested in relative movements of currencies. The
latter depends on large amount of information and variables. Winners are those who can
interpret them quicker and more accurately. In the future computerised analysing tools will
play very significant role. The future of electronic trading systems is related to how quickly
and in which quantity and quality information is interpreted in order to be winner in this zero-
sum profit market. Better handling of information is vital in order to maintain and attract
customers.

Legal factors: Forex has so far been largely unregulated marketplace. Low transparency and
legitimacy will lead to additional regulation in order to protect newcomers and relatively small
participants in forex trading industry. Especially it will take place in proprietary trading where
traders collect customer’s money for speculation on behalf of customers over their own
account. This trend will result in higher regulatory and capital need barriers to entry the market.
For example in U.S. a person wants to apply for membership in NFA and obey their regulation
in the market, e.g. net capital has to equal at least $20,000,000 (NFA).
Conclusion: The PESTEL analysis shows that the market should stay attractive during next
five years. The continued growth potential and fierce cost competition will lead to attaching
value added services to trading systems. Proper information synthesis of the currency markets
impacts customer profitability which will become the driver of scaling the volume of trading.
Higher needs for comprehensive market knowledge and professional approach increase
customers demand for proprietary service. The latter impacts more intense regulatory activity

CHAPTER - III

III. OBJECTIVE OF THE PROJECT-
The primary objective is to understand the trend of the price movements of the currencies and
commodities in the Forex Market and predict future price movements of the same.
This internship helped me in developing the ability to understand the Forex market and trade
accordingly with real accounts opened by the potential clients and gain practical experience in
Forex trading.
➢ To analysis and understand the forex market.

➢ To study and analyse the revenues of the investors when the exchange rates fluctuate.
➢ To study the different types of foreign exchange exposure including risk and risk
management techniques which the investors is using to minimize the risk.
➢ To get the knowledge about the hedging tools used in foreign exchange.
➢ To develop techniques to analyse the market more efficiently and enter into trade thus,
increasing profits for the traders.

CHAPTER - IV

IV. LIMITATION OF THE PROJECT-
➢ The study is based only on the past historic data. As such it is subject to the limitations
of the secondary data.
➢ The time period taken for the study was for less time and the results depicted would
vary if the research is taken for a longer period of time or year.
➢ Due to fast and high volatility in the forex market predicting or interpretation may not
be 100% accurate.

CHAPTER - V

V. INTRODUCTION TO THE COMPANY-
Kalpataru Multiplier Ltd.

Share broker, Investment Advisors & D.P.,
Bhopal, Madhya Pradesh
Company Overview
Kalpataru is a wishful Devine Tree and in present context a widely Trusted, Time tested and
Transparent Share Broker, Investment Advisor and D.P. of this region. Kalpataru offers a
complete solution to all your Investment problems, needs and requirements since 1992.
Kalpataru is a spectrum of vision, vibgyor , style, standard, creativity, craze and honesty. All
the seven colours of share business can be felt and enjoyed in Kalpataru. Our field of operation
is Share Trading, Commodity, Derivative (F&O) Trading, Currency, IPO, Demat, Mutual
Fund and Pan Card Services.
So, when ever and where ever you need, you will find Kalpataru at your door step to help you
trade and transact with any stock exchange in India or abroad.
We "KALPATARU" are the first since our inception and till today Clearing Member of
Bombay Stock Exchange Ltd. (BSE) National Stock Exchange Ltd. (NSE)
SEBI Regn. No. INB011115236 SEBI Regn. No. INB-231115230
MEMBER ID: 3016 MEMBER ID: 11152
MCX Stock Exchange Ltd. (MCX-SX) Multi Commodity Exchange (MCX)

SEBI Regn. No. INE – 261115230 FMC Regn. No. MCX/TCM/PROP/0834
MEMBER ID : 53100 FMC Regn. No. MCX/TCM/PROP/0834
National Commodities Exchange of India (NCDEX) Depository Participant

FMC Regn. No. NCDEX/TCM/PROP/0896 (DP) of CDSL
MEMBER ID : 00921

Our Valuable Team Members
Ramesh Manya Jain Aditya Manya Jain Amitabh Manya Jain

Chairman Vice Chairman Managing Director
Sharda Manya Jain Savita Manya Jain Lalit Manya Jain

Director Director Director
Our Field of Operations

We at Kalpataru aim at exceeding expectation of our client, who happen to be our patrons, on
all service parameters, with this objective in mind, We provide you a variety of conveniences
and bring to you Top Quality Personalized Service and Satisfaction in Share Trading.
• Main Activity: Main Activity of Kalpataru is Online Share Broking and Investment
Advisory Service Through Satellite based VSAT instrument/equipment.
• Derivative Futures & Options (F&O): Online through VSAT instrument.
• Commodity Derivatives: Commodity Derivatives, Futures & Options, Currency

Derivative F&O through MCX, NCDEX, MCX-SX.
• Depository Participant (DP): Service (DEMAT) through CDSL (Central Depository

Services Ltd.) We are First DP of CDSL in Bhopal.
• Internet Trading: Kalpataru provides you hassle free facility to trade through us on
Internet. You need not come to our Office, Terminal or Work Station at all. You can
transact online with KML on BSE, NSE, MCX, NCDEX, and MCX-SX and even settle

your DP Account, DP Holding, and Portfolio with your DP etc. You can do it from your
Office, Home, Train, Plane, Car, Yacht, Garden or Agriculture field.
• SMS Services (DP): Every morning 7:00AM to 3:30 PM you will get information, Tips,
Probabilities of Market Trend, Buy and Sell Recommendations on your mobile, for share,
commodity DP IPO and others.
• New Issue: Primary Market Services, IPO of all most all reliable and good Companies and
PSU under Disinvestments Policy of the Govt.
• Investment Advisory Services: We are prominent Financial and Investment advisor of

this region. We provide Ready-made and Tailor made Investment Advice that which suits
to your Need.
• PAN Card Service Center: UTI has selected Kalpataru after many acid tests, Goodwill,
Turnover, Fair Practice and Capacity to handle the most critical identification card of
national value.
• Value Added Services: Life Insurance LIC Pension fund, Education fund, Dividend fund
Children care fund and Housing loan schemes.
Recently Directors of Kalpataru have started giving guest lectures to business Management
School students on the request of Business Management Institutions. We are in heavy demand.
We provide those students Live Demonstration, on the job training that, which is compulsory
to undergo as part of their curriculum of their training. We provide a certificate after successful
completion of their training to that effect. Training certificate from KML is supposed to be the
most valuable achievement of the trainee concerned.

CHAPTER - VI

VI. INTRODUCTION TO THE FOREX MARKET-
Foreign Exchange is the process of conversion of one currency into another currency. For a
country, its currency becomes money and legal tender. For a foreign country, it becomes the
value as a commodity. Since the commodity has a value its relation with the other currency
determines the exchange value of one currency with the other. For example, the US dollar in
USA is the currency in USA but for India it is just like a commodity, which has a value which
varies according to demand and supply.
Foreign exchange is that section of economic activity, which deals with the means, and methods
by which rights to wealth expressed in terms of the currency of one country are converted into
rights to wealth in terms of the current of another country. It involves the investigation of the
method, which exchanges the currency of one country for that of another. Foreign exchange
can also be defined as the means of payment in which currencies are converted into each other
and by which international transfers are made; also, the activity of transacting business in
further means.
Most countries of the world have their own currencies The US has its Dollar, France its Franc,
Brazil its Cruzeiro; and India has its Rupee. Trade between the countries involves the exchange
different currencies. The foreign exchange market is the market in which currencies are bought
and sold against each other. It is the largest market in the world. Transactions conducted in
foreign exchange markets determine the rates at which currencies are exchanged for one
another, which in turn determine the cost of purchasing foreign goods; financial assets.
The Foreign Exchange Market (Forex, FX, or currency market) is a global decentralized market
for the trading of currencies. This includes all aspects of buying, selling and exchanging
currencies at current or determined prices. In terms of volume of trading, it is by far the largest
market in the world, followed by the Credit market. The main participants in this market are
the large international banks. Financial canters around the world function as anchors of trading
between a wide range of multiple types of buyers and sellers around the clock, with the
exception of weekends. The foreign exchange market does not determine the relative values of
different currencies, but sets the current market price of the value of one currency as demanded
against another.

Swot Analysis
Strength weakness
Opportunities Threats
Strengths:
➢ Average 3%-5% monthly return and 36% -60% annually which is 6 times higher as
compared to domestic market.
➢ 23-hour market from 3:30 am to 2:30 am whereas domestic market is a 6 hour market
i.e. 9:15am 3:30 pm IST.
Weaknesses:
➢ Amount of investment to be made by an investor is higher as compared to domestic

market.
➢ There is a risk of 30% of the total investment; varying as per the company policies.
Opportunities:
➢ With the times of high competition in the financial market reliability of investors
withdrawing capital is natural. In such cases companies have a great opportunity to
work and collaborate with competitor companies.
➢ Survey shows that only 2% of population in India invest in stocks and supplementary
market. Hence there exists an opportunity to create a market for the people who don’t
invest.

Threats:
➢ Since any financial market are subjected to market risk, requires due guidelines with
SEBI, RBI & corresponding matters non-compliance of which welcomes criminal
proceedings. Since company deals with FOREX currency market for which compliance
with international law becomes mandatory and rebates and taxes duly filed with
appropriate government.
Pestle Analysis
Environment
Technolog
Econom
Politica
y
Social
Legal
y
l
Political Factors:
Political factors have huge impacts on Markets. The factors are:
➢ Elections Surveys,
➢ Election polls.
➢ Wars and Strikes.
Economic Factors:
The Economic factors which influence the market are:
➢ Gross Domestic Product (GDP) growth rate.

➢ Monetary and Fiscal policy changes.
➢ Consumer Price Inflations (CPI).

Social Factors:
The Social factors which affects market are:
➢ Unemployment Rate.
➢ Human Development Index (HDI).
Technological Factors:
The Technological factors affecting markets are:
➢ New technological advancements affect the currency price of that economy. E.g.
Japan.
➢ Adopting advanced technology affect prices of companies working with outdated
technology Ex: Introduction of cleaner technologies.
Legal Factors:
Markets affect due to the following Legal factors:
➢ Compliance with law of the land. Ex: FCRA.

➢ Pending Court cases to launch new product and services.
Environmental Factors:
The Ecological factors affecting Market are:
➢ Compliance with environmental standards ex: Corporate social responsibility and

adopting paperless world.
➢ Compliance with National Green Tribunal (NGT) on the grounds of keeping city
green and clean.
Forex Market in India
➢ In recent years, we have seen a significant shift from voice trading to electronic trading,
especially for foreign exchange (FX) trading across the globe, and in Asia.
➢ Financial institutions and corporations are increasingly moving to electronic platforms for
the benefits they bring in terms of operational efficiency and market transparency
➢ The Foreign Exchange market is the world’s largest and most liquid market and operates 24

hours a day, five days a week. In one day, the average amount of FX trading totals $5.1 trillion
a day, 30 times more than the entire daily volume at the New York Stock Exchange,
according to industry experts.
➢ The India rupee is the 20th most actively traded currency globally averaging at
approximately $53 billion a day.
➢ Volume continues to grow, even as the market is changing structurally. Regulations such
as Basel III are requiring increased levels of capital, credit, and risk controls, forcing many
banks to reassess their appetite for broad participation across all market segments.
➢ Regulation can help bring stability, transparency and a more level playing field, and they
also mean that FX professionals have to adopt the additional burden to meet compliance
mandates and increased IT costs. In addition, there is still a significant need for clarity and
consistency across jurisdictions. Either way, everyone accepts that regulations are not going
away and firms need to innovate to keep up with the global markets.
➢ The biggest industry trend is the move to technology and automation to “electrify” the
currency market. Today, nearly 70 percent of FX trades globally are done via electronic
trading, according to industry sources. In India however, the reverse rings louder with
majority of the market still on voice trading and confirmation.
➢ Those who have embraced newer technology say it helps reduce operational risk, improves
operational efficiency, and reduces costs. Some regional market players have been hesitant
to move away from voice trading and adopt electronic trading, but that is changing.
➢ In a new, more conservative risk environment, electronic trading offers significant

advantages over legacy practices such as phone trading. The current practice of trading over
the phone is subject to price slippage during volatile markets, and this puts manual traders
at a distinct disadvantage. Phone trading can also have a greater margin for
misunderstanding due to language barriers. Electronic trading can help eliminate verbal
misunderstandings. With e- trading, users can compare quotes from several banks in real
time, which improves price discovery, follows best practice and results in better pricing for
the customer.
➢ Electronic trading doesn’t need to come at the expense of client relationships either. The

close, personal business relationships developed over many years are still important in these
markets. Technology can provide automation and efficiency without compromising
preferred business relationships. As local markets expand it is also important to
accommodate local market practice and conventions, in order to gain wider adoption.
➢ Bloomberg convened over 300 banking and foreign exchange executives at an FX16 India
event to gauge the opportunities and challenges that firms in India face. The two biggest
issues were ‘managing currency exposures’ that 34% of the respondents voted for and
‘hedging against market volatility’ by 29% of all respondents polled.
➢ All these factors coupled with the increasing globalization of markets clearly demonstrate
the case for India to embrace electronic trading as it strives to create a vibrant and liquid
marketplace.

CHAPTER – VII

VII. RISK /MONEY MANAGEMENT
Money and risk management are essential for forex companies because in order to be
marketable and successful the trading has to be consistent and the easiest way to do this is have
a system. The money and risk management is driven by a good trading plan. This plan starts
by simply defining a trading methodology. Included in the methodology are what currency
pairs will be traded and what times they will be traded. Also included in the trading
methodology would be goals of trading, both short and long term.
Traders should have goals for each day a set number of pips they want to earn. If they make
their goal, they stop trading this prevents excess trading and creating more risk needed. It also
will help eliminate greedy trading, both things you want to keep out your company. The long-
term goals are to keep traders motivated. Along with the goals the types of analysis that each
individual trader will use needs to be documented. Traders should not be switching analysis
tools they use when trading for the company unless they are tested prior. After these are defined
there need to be rules established to go with the trading plan. These rules must be followed by
traders at all times in order to keep consistency throughout the company. To go along with the
trading plan a risk and loss management plan should also be created. This plan would include
things such as stop loss size. A limit for number of “bad” trades made in a row before no longer
being allowed to trade again for that day or even week. There is a sample trading plan in the
results section of this paper.
The first step in the process is to identify the different types of FX exposure, all of which can
be managed in a number of different ways.
At Clear Treasury, we can identify the source of the FX exposure, assess the materiality of the
risk and propose strategies to mitigate the risk. We can price benchmark transactions to ensure
that our clients receive the best possible price, alongside reviewing foreign currency risk
management policies to ensure that they are fit for purpose.
Type of Exposure in Forex Market

1. Transactional Exposure-
Primarily associated with imports and exports due to undertaking transactions in a currency
other than your domestic currency, transaction risk is the risk of an exchange rate changing
between the date of transaction and final settlement date – this can result in a gain or loss at the

conversion stage.
2. Translational Exposure -
A major threat if your organisation is conducting business in foreign markets, translation risk
occurs when your company has any assets and liabilities denominated in a foreign currency
which may, in turn, shift in value due to exchange rate changes.
3. Economic Exposure-
Economic risk is caused by unexpected changes in exchange rates on your company’s future
cash flows from foreign operations. Affecting both revenues and operating expenses, economic
exposure can be difficult to manage through hedging strategies as it deals with unanticipated
changes in FX rates.
Foreign Exchange Risk Management Strategies
There are a number of strategies, methods and tools available for hedging FX risks. Aside from
internal strategies (like invoicing in your domestic currency or diversifying your supply chain
in terms of location), we can advise on external hedging instruments to reduce the impact on
your near-term cash flow and longer term strategic decisions in relation to corporate foreign
exchange risk management. These Hedging tools are: -
1. Spot transaction:
The forex spot rate is the current exchange rate at which a currency pair can be bought or sold.
The spot forex rate differs from the forward rate in that it prices the value of currencies
compared to foreign currencies today, rather than at some time in the future. The spot rate in
forex currency trading, is the rate that most traders use when trading with an online retail forex
broker.
Breaking Down 'Forex Spot Rate':

The forex spot rate is the most common transaction in the forex market, more so than an FX
forward and FX swap. The global forex spot market has a daily turnover of more than $5
trillion, which makes it bigger than both the equity and bond market.
The standard delivery time for a forex spot rate is T+2 days, which is where there is no
adjustment for interest rate differentials. Should a counterparty wish to delay delivery, they
will have to take out a forward contract. For example, if a EUR/USD trade is executed at

1.1550, this will be the rate at which the currencies are exchanged on the spot date. However,
say European interest rates are lower than they are in the U.S. this rate will be adjusted higher
to account for this difference. So if a counterparty wishes to own EUR and short USD for a
period of time it will cost them more than the spot rate.
A handful of currencies have shorter spot days, such as USD/CAD and USD/TRY.
Although the forex spot rate calls for delivery within two days, this rarely occurs in the trading
community. Traders that hold a position for longer than two days will have their trades "reset"
by the broker, i.e. closed and reopened at the same price, just prior to the two-day deadline.
However, when these currencies are rolled there will be a premium or discount attached,
depending on the difference in interest rates, via the short-term FX swap.
Because the spot rate is the rate of delivery with no adjustment for interest rate differential, it
is the rate quoted in the retail market. The retail forex market is dominated by travelers who
wish to buy and sell foreign currency whether it through their bank or a currency exchange.
2. Forward contract:
A forward contract is a customized contract between two parties to buy or sell an asset at a
specified price on a future date. A forward contract can be used for hedging or speculation,
although its non-standardized nature makes it particularly apt for hedging. Unlike standard
futures contracts, a forward contract can be customized to any commodity, amount and delivery
date. A forward contract settlement can occur on a cash or delivery basis. Forward contracts
do not trade on a centralized exchange and are therefore regarded as over-the-counter (OTC)
instruments. While their OTC nature makes it easier to customize terms, the lack of a
centralized clearinghouse also gives rise to a higher degree of default risk. As a result, forward
contracts are not as easily available to the retail investor as futures contracts.
Breaking Down 'Forward Contract':

Consider the following example of a forward contract. Assume that an agricultural producer
has 2 million bushels of corn to sell six months from now, and is concerned about a potential
decline in the price of corn. It therefore enters into a forward contract with its financial
institution to sell 2 million bushels of corn at a price of $4.30 per bushel in six months, with
settlement on a cash basis.
In six months, the spot price of corn has three possibilities:
It is exactly $4.30 per bushel: In this case, no monies are owed by the producer or financial

institution to each other and the contract is closed.
It is higher than the contract price, say $5 per bushel: The producer owes the institution $1.4
million, or the difference between the current spot price and the contracted rate of $4.30.
It is lower than the contract price, say $3.50 per bushel: The financial institution will pay the
producer $1.6 million, or the difference between the contracted rate of $4.30 and the current
spot price.
The market for forward contracts is huge, since many of the world’s biggest corporations use
it to hedge currency and interest rate risks. However, since the details of forward contracts are
restricted to the buyer and seller, and are not known to the general public, the size of this market
is difficult to estimate. The large size and unregulated nature of the forward contracts market
means that it may be susceptible to a cascading series of defaults in the worst-case scenario.
While banks and financial corporations mitigate this risk by being very careful in their choice
of counterparty, the possibility of large-scale default does exist.
Another risk that arises from the non-standard nature of forward contracts is that they are only
settled on the settlement date, and are not marked-to-market like futures. What if the forward
rate specified in the contract diverges widely from the spot rate at the time of settlement? In
this case, the financial institution that originated the forward contract is exposed to a greater
degree of risk in the event of default or non-settlement by the client than if the contract were
marked-to-market regularly.
3. Options:
An option is a Contractual agreement that gives the option buyer the right, but not the
obligation, to purchase (in the case of a call option) or to sell (in the case of put option) a
specified instrument at a specified price at any time of the option buyer’s choosing by or before
a fixed date in the future. Upon exercise of the right by the option holder, and option seller is
obliged to deliver the specified instrument at a specified price.
➢ The option is sold by the seller (writer)

➢ To the buyer (holder)
➢ In return for a payment (premium)
➢ Option lasts for a certain period of time – the right expires at its maturity
Options are of two kinds:

➢ Put Options: The buyer (holder) has the right, but not an obligation, to sell the

underlying asset to the seller (writer) of the option.

➢ Call Options: The buyer (holder) has the right, but not the obligation to buy the underlying
asset from the seller (writer) of the option.

CHAPTER – VIII

VIII. TYPES OF ANALYSIS-
Technical Indicators
1. Moving average:
One of the most popular indicators used by traders is the moving average. Moving averages
show the historical value, of a currency pair, over some period of time. This allows for trends
and market strength to be recognized. When the moving average is upward sloping there is an
upward trend, and when the moving average is downward sloping there is a downward trend.
The strength is identified by the slope of the moving average the steeper the slope the stronger
the trend. When the slope is very small there is little to no strength in the trend. There are two
well-known types of moving averages; simple and exponential. For a simple moving average
you are just plotting the average value of the last “x” data points. The simple moving average
is abbreviated as SMA. The simple moving average has some “lag” because it is just the
average of the price. The simple moving average is calculated by finding the average price of
the currency pair over a set period of time.
Formula for a simple moving average: (P1 +P2+P3+…+Pn) *1/n
In the formula the P’s stand for the prices one through n, in an n sized period. As you can see
from the formula to calculate the simple moving average you just sum the prices and divide by
the number of prices in the period, hence just averaging the prices.

2. Exponential Moving Average:

This is similar to the linearly weighted moving average however this one takes the more recent
data points and gives them an exponential weight so that it has a more dynamic movement with
what is happening in the market at the moment.
The Exponential Moving Average is found from applying a few formulas, because it is
recursive in nature. It must have a starting point, which can have a number of ways. I will just
let the starting point be the Simple Moving Average after n periods. Then you must determine
the multiplier, which is the value that allows the decrease in weight.
This is somewhat of a tougher way to find it, but is also simple enough for the average trader
to understand.
3. Commodity channel indicator (CCI):

The description of this indicator seems very simple. It will show the overbought or oversold
conditions of a currency pair. It can be good for identifying cycles in trends because a trader
can see the potential peaks or troughs in a price line and to estimate changes in the direction of
a trend. It is an indicator that shows levels of +100 and -100. These levels represent when there
is a strong upward or downward trend respectively. The indicator will move well above these
values but they are used as reference for when there are strong trends.
When the level goes above the +100 level, you would want to enter a long trade and then close
when it comes back down to the +100 level. When it is at the -100 level you would want to

enter a short trade and close it when it comes back to the -100 level.
This indicator can be used to identify reversal. One way is to use a trend line on the CCI chart.
When the trend line is broken, it is usually a good indicator that the market will move in that
direction. Another way is called CCI divergence. This is when the price is making lower lows
and the CCI will be making higher lows. This is a sign of positive divergence and means that
there might be an upward trend. When the prices are making higher highs, and the CCI is
making lower highs, this is called negative divergence and means that there might be a
downward movement. And lastly CCI can be used as an overbought or oversold indicator. If
the level reaches above the +200 mark, then it means that it’s in an overbought zone and will
be a good time to place a short trade when it moves below the +100 mark. When the indicator
moves below the -200 mark, it means the market is oversold and will be a good time to place
a long trade when it comes up to the -100 level.
4. Average Directional Movement Index (ADX) Indicator:

This indicator was created to determine if there is a presence of a trend. It can be used to
determine when to enter the market, when the trend is stagnating, or when the trend is reversing.
It is on a scale from 0 to 100. The indicator consists of three lines. One line is the index itself
and the other two lines are the directional movement indicators.
The ADX index is the moving average of the directional movement indicators as seen by the
white line below. It is a non-directional indicator, meaning that the line doesn’t show the
direction that the trend is heading. It only shows the strength of a trend. If the ADX moves
above the 25 it means that there is a strong trend going on and must be determined which
direction by the two other lines.

The +DI line is the positive direction indicator and is used to measure an uptrend. The steeper
the slope upward it means that there is a stronger trend in the upward direction. The – DI line
is the negative direction indicator line and is used to signal a downward trend. The same applies
for the negative. The steeper the slope as it rises means that the downward trend is getting
stronger.
It shows how the indicator will look. You can see where the ADX line moves above the 25
markers, where the +DI directional indicator is above the –DI line as the price moves up quite
a bit over the course of a couple months. This shows that there was a strong trend at that time.
You can also use the divergence of this indicator to help tell when the market is going into
reversal. Again, like the previous two indicators, when the highs are rising each time for the
price, the ADX highs will be decreasing each time, and this is a good indication that the market
will reverse and to exit the market for a long. This is also a good way to check whether a
breakout is valid or not, by making sure that the indicator is moving up and going above the 25
mark, while an invalid one will go below the 25 mark while decreasing.
5. Stochastic Oscillator Indicator:

The stochastic oscillator was developed in the late 1950s by George Lane. It presents the
location of the closing price of a stock in relation to the high and low range of the price of a
stock over a period of time. The oscillator follows the speed or momentum of price. As a rule,
the momentum or speed of the price of a stock changes before the price changes itself. In this
way, the stochastic oscillator can be used to foreshadow reversals when the indicator reveals

bullish or bearish divergences.
The stochastic oscillator can play an important role in identifying overbought and oversold
levels, because it is range bound i.e. from 0 - 100. This range remains constant, no matter how
quickly or slowly a security advances or declines. Considering the most traditional settings for
the oscillator, 20 are typically considered the oversold threshold and 80 is considered the
overbought threshold. However, the levels are adjustable to fit security characteristics and
analytical needs. Readings above 80 indicate a security is trading near the top of its high-low
range; readings below 20 indicate the security is trading near the bottom of its high-low range.
Using a scale to measure the degree of change between prices from one closing period to the
next, the Stochastic Oscillator attempts to predict the probability for the continuation of the
current direction trend. Traders look for signals generated by the actions of the stochastic lines
as viewed on the stochastic scale.

6. Bollinger Bands Indicator:
Bollinger Bands are a technical chart indicator popular among traders across several financial
markets. Generally, on a chart, Bollinger Bands are two “bands” that sandwich the market price
but, three bands are used with a period 20 as it helps is deciding the range more precisely for an
intraday trader as compared with two bands.
7. Moving Average Convergence-Divergence (MACD) Indicator:

This is a lagging indicator used to determine changes in strength, direction, momentum, and
duration of a trend. It computes the difference between two exponential moving averages of a
close price or one of many possible set prices. It can be used to predict the next movements, by
using momentum and market sentiment.

It uses the two exponential moving averages of different period lengths such as one of 26
periods and one of 12 periods, where the 26 period exponential averages will be less prone to
quick changes. It will also use a 9 period exponential moving average for a signal line. It will
then display a histogram of the difference between the MACD line and the trigger line.
8. Fibonacci Levels:
The Fibonacci studies are popular trading tools. Understanding how they are used and to what
extent they can be trusted is important to any trader who wants to benefit from the ancient
mathematician’s scientific legacy. While some traders unquestionably rely on Fibonacci tools
to make major trading decisions, others see the Fibonacci studies as exotic scientific baubles,
toyed with by so many traders that they may even influence the market.
Forex traders use Fibonacci retracements to pinpoint where to place orders for market entry,
for taking profits and for stop-loss orders. Fibonacci levels are commonly used in forex trading
to identify and trade off of support and resistance levels.
There are five types of trading tools that are based on Fibonacci’s discovery. They are:
➢ Arcs
➢ Fans
➢ Retracements
➢ Extensions
➢ Time zones
Fibonacci retracements identify key levels of support and resistance. Fibonacci levels are
commonly calculated after a market has made a large move either up or down and seem to have
flattened out at a certain price level. Traders plot the key Fibonacci retracement levels of 38.2%,
50% and 61.8% by drawing horizontal lines across a chart at those price levels to identify areas
where the market may retrace to before resuming the overall trend formed by the initial large
price move. The Fibonacci levels are considered especially important when a market has
approached or reached a major price support or resistance level.
The lines created by these Fibonacci studies are believed to signal changes in trends as the
prices draw near them. 61.8% is considered to be a golden level.
9. Pivot Point:
Trading requires reference points (support and resistance), which are used to determine when
to enter the market, place stops and take profits. However, many traders focus on technical

indicators such as Moving Averages and Relative Strength Index (RSI) and fail to identify a
point that defines risk.
Unknown risk can lead to margin calls, but calculated risk significantly improves the odds of
success over the long haul.
One tool that actually provides potential support and resistance and helps minimize risk is the
pivot point and its derivatives. A combination of pivot points and traditional technical tools is
far more powerful than technical tools alone and this combination, can be used effectively in
the forex market.
Generally, for trading 3 levels of resistance and 3 levels of support is found. In order to compute
Pivot point, high, low and close values of a daily or weekly or monthly candle is taken for daily
weekly and monthly pivot points respectively.
Formula- (Opening + Closing + High + Low)/4
10. Relative Strength Index:

The relative strength index (RSI) is a momentum indicator developed by noted technical
analyst Welles Wilder that compares the magnitude of recent gains and losses over a specified
time period to measure speed and change of price movements of a security. It is primarily used
to attempt to identify overbought or oversold conditions in the trading of an asset.
The RSI provides a relative evaluation of the strength of a security's recent price performance,
thus making it a momentum indicator. RSI values range from 0 to 100. The default time frame
for comparing up periods to down periods is 14, i.e., 14 trading days.
For trading, RSI is analysed by taking 3 levels at 70, 50 and 30. If RSI is above 70 then, it
shows that the currency or commodity is overbought and the price is expected to go down.
Similarly, if it is below 30 it is said that the currency or commodity is oversold and it is expected
that the price will go up. More extreme high and low levels—80 and 20, or 90 and 10—occur
less frequently but indicate stronger momentum.
The relative strength index is calculated using the following formula:
RSI = 100 - 100 / (1 + RS)
Here,
RS = Average gain of up periods during the specified time frame / Average loss of down
periods during the specified time frame.

11. Japanese Candle Sticks:

A candlestick chart (also called Japanese candlestick chart) are thought to have been developed
in the 18th century by Munehisa Homma, a Japanese rice trader of financial instruments. They
were introduced to the Western world by Steve Nison in his book, “Japanese Candlestick
Charting Techniques”. They are often used today in stock analysis along with other analytical
tools.
It is a style of financial chart used to describe price movements of a security, derivative, or

currency. Each "candlestick" typically shows one day; so, for example a one-month chart may
show the 20 trading days as 20 candlesticks. It can be 1 min, 15 mins, 30 mins, 1 hr, 4 hrs,
daily, weekly & monthly.
Figure:
It is like a combination of line-chart and a bar-chart: each bar represents all four important
pieces of information for that day: the open, the close, the high and the low. Being densely
packed with information, they tend to represent trading patterns over short periods of time,
often a few days or a few trading sessions.

Fundamental Analysis:
Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic

value, by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts’ study anything that can affect the security’s value, including
macroeconomic factors such as the overall economy and industry conditions, and
microeconomic factors such as financial conditions and company management. The end goal
of fundamental analysis is to produce a quantitative value that an investor can compare with a
security’s current price, thus indicating whether the security is undervalued or overvalued.
Fundamental analysis determines the health and performance of an underlying company by

looking at key numbers and economic indicators. The purpose is to identify fundamentally
strong companies or industries and fundamentally weak companies or industries. Investors go
long on the companies that are strong, and short the companies that are weak. This method of
security analysis is considered to be the opposite of technical analysis.
Fundamental analysis uses real, public data in the evaluation a security’s value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security. For example, an investor can perform fundamental analysis on a
bond’s value by looking at economic factors such as interest rates and the overall state of the
economy. He can also look at the information about the bond issuer, such as potential changes
in credit ratings.
For stocks and equity instruments, this method uses revenues, earnings, future growth, return
on equity, profit margins and other data to determine a company's underlying value and
potential for future growth. In terms of stocks, fundamental analysis focuses on the financial
statements of the company being evaluated. One of the most famous and successful
fundamental analysts is the so-called "Oracle of Omaha", Warren Buffett, who is well known
for successfully employing fundamental analysis to pick securities. His abilities have turned
him into a billionaire.

*Because two currencies are involved in each transaction, the sum of the percentage shares of
individual currencies totals 200% instead of 100%
Fundamental Analysis in Forex Market:

Fundamental analysis is often used to analyse changes in the forex market by monitoring
factors, such as interest rates, unemployment rates, gross domestic product (GDP) and many
other economic releases that come out of the countries in question. For example, a trader
analysing the EUR/USD currency pair fundamentally, would be interested in the interest rates
in the Eurozone, compared to those in the U.S. They would also want to be on top of any
significant news releases coming out of each country in relation to the health of their
economies. In this, the Economic factors i.e. both Micro and Macro factors related to the
country and their respective currencies are studied in order to predict the price movement of
the currency prices.
So, what Does Fundamental Analysis Mean?

A method of evaluating a security by attempting to measure its intrinsic value by examining

related economic, financial and other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value, including macroeconomic
factors (like the overall economy and industry conditions) and individually specific factors
(like the financial condition and management of companies).
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price in hopes of figuring out what sort of position to take
with that security (under-priced = buy, overpriced = sell or short).
This method of security analysis is considered to be the opposite of technical analysis.

Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for just
about any type of security.
For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and information
about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data
to determine a company's underlying value and potential for future growth. In terms of stocks,
fundamental analysis focuses on the financial statements of the company being evaluated.
One of the most famous and successful users of fundamental analysis is the Oracle of Omaha,
Warren Buffett, who has been well known for successfully employing fundamental analysis to
pick securities. His abilities have turned him into a billionaire.
When talking about stocks, fundamental analysis is a technique that attempts to determine a
security’s value by focusing on underlying factors that affect a company's actual business and
its future prospects. On a broader scope, you can perform fundamental analysis on industries
or the economy as a whole. The term simply refers to the analysis of the economic well-being
of a financial entity as opposed to only its price movements.
Fundamental analysis serves to answer questions, such as:

1) Is the company’s revenue growing?
2) Is it actually making a profit?

3) Is it in a strong-enough position to beat out its competitors in the future?
4) Is it able to repay its debts?
5) Is management trying to "cook the books"?

Fundamentals: Quantitative and Qualitative

One can define fundamental analysis as “researching the fundamentals”, but that doesn’t tell
you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,
the big problem with defining fundamentals is that it can include anything related to the
economic well-being of a company. Obvious items include things like revenue and profit, but
fundamentals also include everything from a company’s market share to the quality of its
management.
The various fundamental factors can be grouped into two categories: quantitative and
qualitative. The financial meaning of these terms isn’t all that different from their regular
definitions. Here is how the MSN Encarta dictionary defines the terms:
Quantitative – Capable of being measured or expressed in numerical terms.
Qualitative – Related to or based on the quality or character of something, often as

opposed to its size or quantity.
In our context, quantitative fundamentals are numeric, measurable characteristics about a

business. It’s easy to see how the biggest source of quantitative data is the financial statements.
You can measure revenue, profit, assets and more with great precision.
Turning to qualitative fundamentals, these are the less tangible factors surrounding a business
thing such as the quality of a company’s board members and key executives, its brand name
recognition, patents or proprietary technology.
Quantitative Meets Qualitative:

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many
analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the
Coca-Cola Company, for example. When examining its stock, an analyst might look at the
stock’s annual dividend pay-out, earnings per share, P/E ratio and many other quantitative
factors. However, no analysis of Coca-Cola would be complete without taking into account its
brand recognition. Anybody can start a company that sells sugar and water, but few companies
on earth are recognized by billions of people. It’s tough to put a finger on exactly what the
Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the
company’s ongoing success.
The idea behind this type of analysis is that if a country’s current or future economic outlook
is good, their currency should strengthen.

The better shape a country’s economy is, the more foreign businesses and investors will invest
in that country. This results in the need to purchase that country’s currency to obtain those
assets.
Forex and CFD prices are impacted by macro and micro-economic data, geo-political events
and their linkages. These factors may include for example, GDP growth rates, potentially
disruptive geopolitical events, employment statistics, interest rates, and balance of trade reports
among others.
Top down Analysis:

Begins by analysing broad brush macroeconomic factors and aggregates of data working
downwards narrowing and refining the search to include only those currency pairs that present
a profit potential.
Bottom-Up Analysis:
Conversely, this type of analysis starts with analyzing the currency pair working upwards to
aggregate macroeconomic information.
Balance Of Trade and Interest Rates:

These factors are key drivers for currencies. If a country has a trade surplus this implies there
is a high demand for its goods and services, consequently a greater demand for its currency
thus driving up relative value? Similarly, higher relative interest rates lead to cash inflows, thus
driving up the value of a currency.
The Forces Driving Demand and Supply:

These have a significant impact on the valuation of commodities. For example, a growth of
international conflict may result in increased demand for nickel, which is used in armaments
and ammunition manufacturing driving up prices.
What actually moves FOREX markets and how different markets behave
under different situations?
➢ Medium- and Long-term factors
➢ Short-term factors
When it comes to forecasting forex rates, the science of fundamental analysis involves taking
into account a variety of relevant economic and political factors for one currency relative to the
other currency in each currency pair considered.

A fundamental analyst will review as many of these items as possible on a regular basis for
each currency and then compare the two to obtain a forecast. Generally, such forecasts are not
specific objective numbers for the exchange rate, but instead an overall directional outlook on
the currency pair.
For example, their outlook might be positive, negative or neutral after the analysis. This would
mean that the analyst expects the exchange rate for the currency pair to rise, fall or stay roughly
constant respectively.
Furthermore, when some new fundamental information enters the forex market in a sudden
way, it can prompt significant market moves and volatility as traders react to the new
information. At such times, one of the most basic assumptions of technical analysis – the idea
that “price discounts all” – breaks down until the new information has been duly assimilated.
If you have a trading system based on purely technical indicators this is really important, as a
number of key fundamental factors can and often do influence market moves, which may
produce unexpected results when trading using systems based on technical analysis.
As a result, it really pays to know what the likely effects of such key fundamental information
could be so that a quick assessment of probably future direction can be made.
Primary Fundamental Information Types:

The types of fundamental data items which will most impact a country’s currency along with
a brief description of its likely effect include the following:
1. Growth: Changes in the country’s Gross Domestic Product or GDP that gives a useful
measure of growth. A growing economy tends to strengthen a currency.
2. Rates: The level of short term interest rates, such as the Fed Funds rate, in the
currency’s country of origin affect forex rates because higher rates provide an
investment incentive that should strengthen the currency.
3. Trade: The country’s trade and current account balance can have an impact on forex
rates since persistent trade or current account deficits will tend to depreciate that
country’s currency.
4. Economy: The general economic outlook for one country in relation to that of the other
country can affect forex rates. The forex market tends to value currencies of peaceful
countries with growing economies and stable politics over the currencies of less stable
countries that are at war or having their national security threatened in some other way.

Key Economic Factors:

Many forex traders perform a daily review of economic calendars for the currency pairs they
maintain positions in. They do so since the release of such key information can often result in
considerable short-term volatility in the currency market, as well as prompt shifts in market
sentiment. A list of key economic factors that are routinely covered in the current news and
which can move the market when they are released includes the following:
1. Interest Rates: A key element in evaluating one currency against another. If interest
rates are increased, the currency of the country becomes more attractive against other
currencies offering lower interest rates.
2. Inflation: If the country is in an inflationary economic cycle indicated by the Consumer

and Producer Price Indexes, CPI and PPI, this would make it more likely that the central
bank of that country would tighten interest rates in order to stem the increase in
inflation. An increase in rates would tend to make the currency appreciate.
3. Trade or Currency Account Balance: A trade or current account surplus or deficit will
either favor the currency rate for the country with a surplus or weaken the rate for the
country with a trade deficit.
4. Credit: Another economic factor that will influence exchange rates directly. If a
country has borrowed excessively large sums of money from other nations or from the
IMF, its currency will surely reflect the serious level of debt the country is in.
5. Gross Domestic Product (GDP): Represents the total of goods and services a country
produces and reflects the level of growth in the economy.
6. Commodity Prices: Can affect exchange rates when the country is a producer and net
exporter of commodities and if the country imports commodities.
7. Employment Data: If a country has an increasing percentage of its citizens employed

that will tend to strengthen its currency. This key data typically comes in the form of
jobless claims, payrolls statistics or the unemployment rate for a country.
8. Industrial Production: A strong industrial base will tend to strengthen a nation’s currency.
9. Retail Sales: A strong retail sales figure is generally favorable for a currency and the
country’s overall economy.
10. Consumer Price Index (CPI): A measure of inflation. Rising inflation in a country
indicates that interest rates may soon be tightened by the national central bank and so

will tend to make its currency appreciate.
Other Factors:
1. Supply and Demand Effects: Substantial flows of capital into one currency and out of
another currency, perhaps as a result of large corporate transactions or managed
portfolio shifts, can shift the exchange rate for the currency pair to favour whichever
currency sees the higher demand.
2. Monetary Policy: Because of the effect of monetary policy on interest rates, this makes
up an important element in the valuation of a currency. Tighter monetary policy
implying higher interest rates, while dovish or looser monetary policy indicating lower
interest rates.
3. Political Influences: Countries with stable governments tend to have their currencies
favoured over those of countries with less favourable political situations. Greater fiscal
responsibility also tends to support a country’s currency, while excessive government
spending will tend to depreciate its currency.
4. Commodity Price: The prices of key commodities like gold and oil tend to affect the
valuation of the currencies of their primary exporters and importers. For example,
higher oil prices help the British Pound and the Canadian Dollar, while they hurt the
U.S. Dollar and the Japanese Yen, whose countries net import oil. Furthermore, higher
gold prices tend to favorably impact the Australian Dollar, and by close association the
New Zealand Dollar, since Australia exports that precious metal and so its currency will
benefit from a rise in gold’s value.
The most important driver of a currency’s value is the main rate set by the central bank
controlling the supply of the currency. Central banks are the only source of coins and
banknotes, they also decide on the price the cheapest loans that nations can make. In a healthy,
growing economic environment, higher interest rates will lead to currency appreciation, while
lower rates will cause depreciation.
Fundamental analysis in forex aims to measure supply and demand for a particular currency.
Supply and demand of course depend on a large number of factors, but at the most basic level,
they are related to the amount of money that is out there. Thus, we need to first characterize
the concept of money supply, and by understanding it and examining how it’s influenced by
fundamental changes in a nation’s economy, we can understand how and why a currency

appreciates. We can then turn our knowledge into profit.
Money Supply:
Money supply is a measure of the amount of money circulating in a given nation’s currency.
It’s not only paper money or coins, but also bank deposits, repossessions, money market fund
accounts and other forms of financial activity. The basic principles behind its calculation are
very simple, and the data is provided by government sources on a regular basis. We won’t go
into the details of how and why money supply is important in the calculations of central banks
here, but we can safely say that regardless of the school, the character and history of the
institution in question, money supply always plays an important role in determining interest
rate policies and consequently, currency prices.
The coins and bank notes part of money supply:

In modern economies, money has different forms, but in fact, it can be characterized as any
sort of legal medium for borrowing and lending. We’re most used to regarding money supply
(and therefore the supply of a currency in the global markets) as being largely represented by
coins and banknotes (known as M1 in technical parlance), but in fact, the total amount of money
that can be used to expand borrowing greatly exceeds the supply of coins and banknotes,
because the modern banking system allows financial institutions to lend values that are
multiples of the actual cash they hold in reserve. So the reader must keep in mind that the
following discussions are mostly about M1, the coins and banknotes part of money supply.
Otherwise, we’d have to incorporate interest rates to our discussion, which would complicate
the subject unnecessarily.
The calculation of money supply varies among central banks, and the importance attached to
this particular indicator also differs. The trader need not know the intricacies of all the
calculations, but perhaps understanding the basic principle is necessary. If you can do basic
arithmetic, such as division, multiplication and addition and subtraction, this will be child’s
play for you:
M*V = P*Q or M*V=GDP
The simple equations above state that the total quantity of money (M) multiplied by the speed
of circulation of money (“How many times does money change hands?” = V) is equal to
nominal GDP, that is, the average price of all goods and services in an economy (P) multiplied
by their quantity (Q).

First, notice how important this equation is. In essence, it allows us to relate the quantity of
money to the GDP of a nation (which is easily measured), and as the quantity of money is of
utmost importance to us forex traders (because it directly influences supply and demand), it’s
clear that we must understand this concept well.
Significance of money supply for a forex trader:

• First, all things being equal the currency of a nation with a faster money supply growth
will tend to depreciate against that of a nation with slower growth. This is the simple result
of supply and demand: The more of a currency in the supply, the less value it will have.
Nonetheless, the market is very reluctant to punish a currency on increasing money supply,
if, as we’ll soon examine, the productivity and economic production of a nation are healthy
and expanding.
• Second, contraction in money supply can often be a sign of major problems in a nation’s
economy. Such contractions usually lead to interest rate reductions, and in a healthy global
economy, cause the currency to depreciate. Conversely, broad money supply growth (termed
M2) in the high single digits in developed economies, and in the double digits in emerging
markets, is a sign that the economy is booming, and interest rates may need to be increased as
a result. In a healthy, growing global economic environment, this would lead the currency to
appreciate.
Unemployment Statistics:
Apart from the methodological differences in the measurements of different institutions,
unemployment statistics measure what they are named after: Whether the economy is gaining
jobs or losing them; how long the unemployed must search before finding a job; the
demographic aspect of unemployment trends, and a number of other issues which are useful to
policy makers, but not as much to traders.
In the US the unemployment data are updated weekly and monthly through the publication of
non-farm payrolls and weekly jobless claims. Non-farm payrolls measure the payroll changes
of non-farming related firms, including both the government and private sector, while weekly
jobless claims report on the applications for unemployment benefits. It’s important to note that
the BLS in the US tends to underestimate job losses during the beginning of a recession, and
job gains during the beginning of a period of boom.
Why are unemployment numbers so important for both policy makers and market participants?
Because, as creators of economic activity, consumers — be they scientists or construction

workers — have a very important role in determining the velocity component of the money
supply equation we discussed before. The fewer actors there are in an economy, the slower the
velocity of money will be. And, all else being constant, slower velocity will lead to slower GDP
growth, and even stagnation.
In a consumer-oriented economy, such as the US economy of past decades, the detrimental

impact of high unemployment is even greater. Since such an economy depends on consumption
to a much greater extent than an economy dependent on trade, government spending or tourism,
higher unemployment is sure to create longer-lasting and deeper problems.
In our example above where we discussed the role of money supply and its relationship to
GDP, we can discuss the impact of unemployment by increasing the number of actors. Some
of the additional characters we could add would be able to produce additional products, and
their employees would later start their own businesses, all adding up to the GDP of Sample
land. Conversely, when firms lay off workers, some of the demand created by circulation of
money would disappear, causing some of the producer firms to become bankrupt, eventually
contracting the GDP.
In a positive employment environment, John and Rich’s firms would each have to enlist
additional workers, the Central Bank would have to issue additional dollar bills to make sure
they’re all paid (increasing the money supply) and John and Rich would have to create more
products so that their new employees would be able to satisfy their cravings for food and
education. All that would naturally lead to an increase in GDP, and would eventually lead to
even greater prosperity, as some of the more innovative workers would start their own firms,
and create even more products for consumption.

The significance of high unemployment for forex traders lies in its relationship to the interest
rate policies of banks and economic decisions of politicians. In general, high unemployment is
a very good leading indicator for the depreciation of a currency, because central banks respond
to the development by lowering interest rates, and governments respond by borrowing more,
which all lead to greater supply of the underlying currency, versus others.
Central Bank Interest Rates:

This is perhaps the most important data released by news agencies, and it’s loudly trumpeted
all over the world on TV screens, radios, and the Internet. The interest rates that central banks
set define the cost of the cheapest money available in an economy. Since the central bank is
the major source of all currency and related credit in a system, the rates that they set basically
decide the availability of credit to all kinds of end-users: consumers, firms or banks. Interest
rates are perhaps the single most important indicator that influence currency trends, because:
• Interest rates directly influence money supply and velocity of money by increasing or
reducing the quantity and cost of borrowing in a financial system. Thus, even if there’s no
major economic change taking place, the central bank can control the value of its currency
simply by modifying its supply (the money supply). A good example of this kind of direct
and intentional tempering with a national currency is seen in the actions of the Central Banks
of major exporter nations in Asia, such as Japan, Singapore or China.
• Interest rates define the competitiveness of a currency in attracting excess cash that cannot
be channeled to business or investment, but must somehow be utilized to create returns. For
example, the enormous amounts of forex reserves accumulated by exporter nations such as
China or by commodity producers such as Saudi Arabia or Russia, all have to be channeled
somewhere else, because the depth and complexity of the domestic economies of these
nations does not allow them to create good returns. By offering a high interest rate on
dormant money,
so, to speak, the central bank creates an attraction center for the excess cash floating around,
which creates money inflows to its currency, which causes the currency to appreciate.
Domestically, as we already hinted, interest rates determine the dynamism of a nation’s

economy. Currency traders of all sizes, including giant banks, can position themselves to
participate and profit from a nation’s economic upswing by purchasing that nation’s assets,
creating demand for the nation’s currency and causing it to appreciate. The anticipation of such
an upswing or downswing, is often dependent on central bank interest rates.

We studied all the different data such as money supply, industrial production and
unemployment statistics, which brings us to the subject of interest rates. One of the most
successful methods for profiting in forex is using interest rate expectations to anticipate a trend,
and then acting on it. All the precautions and notes in the previous part are of course valid, and
the trader should be wary of bubbles and market delusions.
What kind of factors lead central banks to change their rates?
Modern central banks are increasingly moving towards inflation targeting as the main guidance
of their interest rate decisions. The ECB, Bank of Canada, Reserve Bank of Australia, and
central banks of South Africa, South Korea and Turkey among others, use inflation targeting
as their policy compass in setting rates. Since in this model a single indicator carries
overwhelming importance, the central bank has less leeway in deviating from its legally stated
goals without losing credibility, and its actions are in general more predictable.
In inflation targeting, the central bank simply attempts to steer the inflation rate to a legally
mandated target percentage rate set out by the lawgiver.
Some other central banks, mostly located in Asia and in the Middle East, use a fixed exchange
rate, or a floating or fixed currency band as their main gauge in setting policy rates. Examples
of this are Singapore, Saudi Arabia, China and Taiwan. Almost all of these nations are
exporters, and they aim to keep their products competitive by controlling the value of their
currency against the currencies of their major trade partners. In other cases, political
considerations can play a major role, and most Gulf States in the Middle East are examples.

In the US, the Federal Reserve is thought to attach great importance to inflation statistics in
determine policy, but it’s constrained by its “dual mandate” of contributing to price stability
and low unemployment. In practice, the Fed is heavily tilted toward maintaining
unemployment low, and its actions are slightly less predictable as a result.
Regardless of the principles of the central bank in question, inflation always plays a crucial
role in determining the direction of central bank policies. But regardless of the rhetoric
employed by central bank officials while communicating their goals, they can never be
completely insensitive to the expectations and demands of politicians, business leaders and the
consumers in general. Thus, as we examine the historical record of central banks in setting
interest rates, we find that they attach much greater value to healthy GDP growth and
economical buoyancy, and are therefore slower to react to booms and busts. In examining
interest rate trends, the trader should keep inflation in focus during times of healthy economic
growth, but in times of economic slag, he should more or less disregard it in favor of
unemployment statistics and money supply growth values. Central banks would not be willing
to suffer high unemployment or anemic money supply growth for long periods of time, and
under such circumstances rates are highly likely to come down; even more so if the political
leadership of a nation lacks vision and discipline.
How can the trader use interest rate changes and trends to make long term investments
in a currency?
The key to making successful investments in the forex market lies in the ability to isolate
“noise” from data relevant to our analysis. The trader should regard the patchy economic data
coming from a country as being parts of a whole, and he should only make decisions once he’s
able to construct the whole from the incoming pieces of information. We have already stated
that central banks are the main setters of borrowing costs, and as a modern economy functions
on credit, interest rates are by far the most important drivers of forex trends. But we are not
speaking of periods of weeks after rate changes are announced, nor are we speaking of months.
The time period during which the effects of interest rate changes are felt ends only at the time
when central banks reverse the policies in action. In other words, economic activity buoyed or
contracted by central bank policies tends to compound its own effect in time: The effect of a
change in policy will last as long as the financial intermediation system comprised of banks,
money market funds, hedge funds and others is functioning. The rate change is not a one-off
event, but it’s effective throughout the time period during which the central bank maintains it.
Now, once we understand that the supply of a currency is determined by interest rates, and that

interest rate changes have effects that are continuous over the period of time determined by
central bank policies, we are ready to construct a currency strategy. We have not yet discussed
the role of current account and balance of payments on currency trends, but even without them,
we can build a preliminary strategy that’s likely to work well for us in a globalized, free
international economic environment: The trader simply sells a currency of which the central
bank interest rates are low and stable, or going lower still, and buy another where the rates are
high and stable, or going higher.
This is termed the carry trade, but in fact pure carry traders are but a fraction of those who
employ this method on a grand scale. Instead, while the retail trader will buy the high yielding
currency and be content with the interest income over a period of time, the larger, more
important and sophisticated actors like commercial firms, hedge funds or banks will use the
currency they buy to fund investments in the economy that they are entering. They will open
factories, buy stocks, buy out local firms and engage in a great deal of activity with the aim of
participating in the nation’s boom. This kind of circulation can eventually create a self-
sustaining feedback loop of continuous profit for those who are participating in it, but is also
greatly prone to creating bubbles. Nonetheless, the carry trade is an excellent way to exploit
interest rate trends for profit in the currency market as long as the trader is aware of the perils
of this strategy and remains alert on the health of the economy of which he’s holding the
currency.
Balance Of Payments:
Simply put, the balance of payments is the balance sheet of a nation. Current account, capital
account, and the trade balance are all parts of it. What use are they for the forex trader? It’s just
as important as a company balance sheet is (or should be) to the stock trader: They are the most
comprehensive measure of a nation’s economic health. Let’s examine the components of this
important item:
• The trade balance is the most basic component, and it’s simply the difference between the
goods and services imports and exports of a nation. A positive value signifies a surplus,
while a negative value means that the nation is importing more than it can sell. The trade
balance is a part of the current account.
• Current account is the sum of the trade balance with two items added, called net factor
income, and current transfers. Net factor income is simply the cash return from a nation’s
firms’ subsidiaries, worker remittances, income on royalties or licenses, rent on foreign

property owned, and so on. Net transfers constitute in- or outflows that are unilateral, such
as aid. A positive current account suggest that the nation is on net generating more forex
inflows than outflows, and is associated with central bank reserve accumulation. Negative
current account suggests that the nation is in need of additional foreign currency to be
supplied by the other part of the balance of payments, the capital account.
• Capital account is a general term for the change in ownership of a nation’s assets, such as
real estate, factories, stock and bond ownership, bank accounts and loans, and so forth.
Inflation:
Although forex traders do not always have access to oil trading, due to regulatory constraints,
trends in the oil market often have a very direct impact on their trading. The carry trade, for
example, is strongly related to price movements in the commodity market where oil is one of
the most important drivers.
However, even when the carry trade is not the main interest of a trader, oil prices are a major
component of the calculations that determine price trends. To take a closer look at this
relationship, let’s take a brief look at speculation, forex, and the commodity markets.
News releases on inflation report on the fluctuations in the cost of goods over a period of time.
Note that every economy has a level of what it considers 'healthy inflation'. Over a long period
of time, as the economy grows so should the amount of money in circulation, which is the
definition of inflation. The trick is for governments and central banks to balance themselves at
that self-set level.
Too much inflation tips the balance of supply and demand in favour of supply, and the currency
depreciates because there is simply more of it than demanded. The converse side of the inflation
coin is deflation and there is nothing pleasant about it either. During deflation, the value of
money increases, whilst goods and services become cheaper. Sounds good, right? Well, for a
man in the street in the short run, yes. For the economy in the long run, and the same man on
the street, not so much.
Money is fuel for the economy. Less fuel equals less movement. At some point deflation may
bleed the country so bad that there will hardly be enough money to keep the engine running,
let alone to drive the economy forward. Let us take an instance-

Oil Prices and Inflation:

Oil prices not only determine inflation, they are also a common ingredient of a large number
of industrial products and consumer goods. Some of which include bags, tires, bottles, and
myriad other items. As such, it’s safe to say that the price of oil has a direct relationship with
inflation. Especially producer price inflation at the factory level, which determines trends in
the price-pipeline. Also, due to the heavy weighting of fuel in the consumer’s basket, oil prices
have a far greater transmission rate from the wholesale to the retail level. They are also more
relevant to the CPI than other commodities.
All of these make central banks attentive to trends in this market. It is not unusual to see a
particularly hawkish institution acting pre-emptively to forestall anticipated inflation by raising
interest rates in response to oil price trends before such trends are felt in the consumers pocket.
Given how important interest rates are to forex trends, the importance of the oil market is not
difficult to observe.
Although market commentators prefer to explain oil price trends in terms of fundamentals and
supply and demand dynamics over the long term. Reality, as observed in the past decade,
suggests that speculative trends and monetary policy often have a far greater bearing on the
direction of the oil market than any collection of fundamental statistics. Due to the tendency of
oil to generate great returns in a highly volatile environment over a relatively short period of
time, speculators tend to pour in huge amounts of highly leveraged capital into the market in
order to maximize returns.
The subsequent leveraging and deleveraging emphasize price movements in a manner similar
to the gyrations of carry trade currencies. In their turn, stock and public and private debt markets
tend to mirror the oil market on the basis of the rationale explained in the previous paragraph,
leading to highly directional financial markets in multiple asset classes. This, of course, makes
the nature of a bubble much more violent and severe, intensifying profits, but losses, too.
These two factors lead us to conclude that the best way of profiting from oil market trends is
maintaining a balanced portfolio of both producers and consumers to minimize the effects of
volatility, and to capitalize on a small bias in positioning to generate long term returns. If we
choose to form a portfolio purely made of oil producers, you are exposing yourself to a market
that can at times move unbelievably fast, and maintain irrational positions for a long time.
We do not have to trade the commodity itself directly, although that can be an advantage
depending on the circumstances. In fact, it may even be said that trading an oil currency is

better than trading oil futures directly, since the currency has the added support of the economy
of an entire nation. It’s unlikely to lose 90 percent of its value in a short time, which is hardly
unseen in the oil market action.
How Gold Affects the Forex Market:

Gold and other precious metals like silver, platinum and palladium have intrinsic value as hard
physical assets with important industrial applications. They also have value due to their ability
to store a considerable amount of wealth in a rather small space.
As a result, many people keep gold to protect against inflationary pressures and to provide a
means of exchange in tumultuous times that may depreciate the value of paper fiat currencies.
Furthermore, many currencies were at one time or another pegged to gold or the so-called “gold
standard.”
For example, from the mid-1940s to the early 1970s, gold determined the value of most major
currencies in the global forex markets under the Bretton Woods system of exchange rates. This
post-WWII system of fixed exchange rates broke down in the early 1970s as then president
Richard Nixon ordered the U.S. Dollar removed from the gold standard.
The following sections describe some of the more recent trading links between gold and several
major currencies:
1. The Euro and Gold: Since 1980, when gold hit its former record high of $850 an ounce,
the price of gold had declined gradually until 1999 when it had fallen to a low of $257 an
ounce. Interestingly, the low in the price of gold coincided roughly with the introduction of
the Euro in January of 1999.
Furthermore, until the recent Greek debt crisis at least, the E.U.’s Euro has generally risen
in value versus the U.S. Dollar due in part to a relatively modest currency printing program
overseen by the European Central Bank. This contrasts with the more active paper money
printing program overseen by the Federal Reserve in the United States.
2. The Australian Dollar and Gold: Another interesting link between gold and currencies
involves the value of the Australian Dollar. Since as gold rises in value, so generally does
the Australian Dollar.
Basically, this link has to do with the fact that Australia has considerable gold reserves.
Also, Australia is a net exporter of gold, and the precious metal makes up a significant
percentage of its national exports.

These factors make the value of the Australian Dollar especially susceptible to fluctuations
in gold prices, although its value is also affected by the price of oil and other key raw
materials. As a result, the Aussie is often referred to as a commodity currency by forex
traders.
3. The Swiss Franc and Gold: In 2000, the Swiss Franc became the last of the national paper
currencies to be taken off the time-honoured gold standard. Before that time, the Swiss
Franc had the status of being a safe haven currency that maintained intrinsic value when times
became difficult since it was freely convertible into gold.
The Swiss currency still benefits from safe haven buying to a lesser extend due to its long
history of political stability, neutrality and abstention from conflict. Nevertheless, the
currency’s former close relationship to the value of gold has declined considerably.
4. The U.S. Dollar and Gold: Recently, as the U.S. government continues to overspend its
income by a considerable margin, under the guise of stimulating the country’s failing credit-
driven economy, investors increasingly look to gold as a way of hedging against the almost
inevitable inflationary implications of increasing government borrowing to print more
paper money. This has resulted in a recent inverse relationship between the value of the
U.S. Dollar and gold.
Furthermore, as post-WWI Germany learned during its devastating hyper-inflationary

period in the early 1920s, this sort of irresponsible fiscal policy can be a recipe for a
currency’s downfall and eventual replacement by a currency linked to gold – the forex
market’s standard of real value.
One can certainly make a logical case, at least at a basic level, that gold is a play against
inflation, due to its limited supply, and intrinsic value in many cultures. That is indeed the
main basis of the arguments of many people in the financial world. But we at
forextraders.com decided to do away with baseless speculation for a moment, and to subject
the claims of gold bugs to a test through mathematical methods. By checking the cross
correlation between oil, gold, and inflation over a 30-year period, beginning in 1980, and
reaching to our day, we were able to reach at some surprising conclusions.

We first checked the relationship between year-end gold prices in the period of 1980-2009,
and annual CPI inflation figures in the U.S by introducing a lag of seven years at a
confidence interval of 95%. As you can see in the above graph, there is barely a perceptible
relationship between year-on-year CPI and gold prices. Correlation never rises above 0.2
which is well below the red lines indicating the lack of a statistically significant relationship
between the two measured quantities.
Indications that the gold price is a bubble:

The result must be surprising to many of our readers, but for us, it is not. Gold is just as much
of a speculative instrument, as stocks, commodities, and their derivatives are, and there is
hardly a single reason to justify the blind trust shown by many people in the shine of the metal.
Is it possible that gold can be overpriced? Very few would reject that. Is it possible that it can
be overpriced extremely? This, in fact, did happen in the past, and there is every indication that
we are in another period of a frothy, bubbly gold bubble.
All that is not to say that gold will not rise. There is a significant possibility that gold prices

will bubble up to a few thousand dollars in the next few years, but that will not be result of
prudent investors hedging against inflation in the way that we are told that they are doing. It is
the old-fashioned, vigorous kind of speculative excess that is keeping gold at its present levels.
There is no difference between the forces that drove the DOW above 15,000, and the dynamics
that are now taking gold to beyond $1,000.
A similar, but perhaps more interesting picture exists in the case of oil and the CPI. It is common
wisdom that higher oil prices lead to higher inflation, but as far as the numbers are concerned,
there is no clear relationship. Although the result seems surprising, it is not that surprising if
you consider the enormous swings in the oil market over the past two-three years, and imagine
what would have happened if they had an equally powerful reflection on the overall inflation
that we experience. Clearly, competition in the U.S. is a far more powerful determinant in
determining price pressures than even the wildest swings in the oil market provided, of course,
that remain of short duration.
The one weakness of these results is that the CPI figures are not cumulative. If we had plugged
in a chain-price type index, the cross-correlation comes at slightly above 0.4, which is still not

very significant. Still, we do believe that they demonstrate something: that some commodities
are racing to the skies at the moment is by no means an indication that we are going to face
hyperinflation anytime soon. All the signs are pointing to deflation, and not inflation, and if we
are proven right, this may well be one of the greatest economic surprises of our time.
Central Bank Decisions:

The central bank policy meetings are one of the most important events in the forex markets.
After all, if you scratch the surface, the forex markets move because of interest rates and interest
rate expectations.
The interest rates are set by central bank officials based on the policy-makers assessment of the
economy. Most central banks have a mandate which is inflation targeting. (The Federal Reserve
has a dual mandate of both unemployment and inflation).
Understanding this will help forex traders to focus on the economic reports that matter or will
influence inflation and GDP for example.
The central bank decisions also give out forward guidance. This helps the markets to prepare
for any eventual policy action from the central bank.
The forward guidance can play an important role. Markets tend to typically rally or fall based
on forward guidance. Sometimes, these strong market moves can come purely based on a
misinterpretation of the forward guidance or at times the markets align correctly to the central
banker speeches.
Foreign Exchange Reserves:

Foreign exchange reserves are the foreign currencies held by a country's central bank. They are
also called foreign currency reserves or foreign reserves. There are seven reasons why banks
hold reserves. The most important reason is to manage their currencies' values.
How Foreign Exchange Reserves Work:

The country's exporters deposit foreign currency into their local banks. They transfer the
currency to the central bank.
Exporters are paid by their trading partners in U.S. dollars, euros, or other currencies. The
exporters exchange them for the local currency. They use it to pay their workers and local
suppliers.
The banks prefer to use the cash to buy sovereign debt because it pays a small interest rate.

The most popular are Treasury bills. That's because most foreign trade is done in the U.S.
dollar. That's because of its status as the world's global currency.
Banks are increasing their holdings of euro-denominated assets, such as high-quality corporate
bonds. That continued despite the Eurozone crisis. They'll also hold gold and special drawing
rights. A third asset is any reserve balances they've deposited with the International Monetary
Fund.
There are seven ways central banks use foreign exchange reserves:
• First, countries use their foreign exchange reserves to keep the value of their currencies at
a fixed rate.
A good example is China, which pegs the value of its currency, the Yuan, to the Dollar.
When China stockpiles dollars, it raises the dollar value compared to that of the Yuan. That
makes Chinese exports cheaper than American-made goods, increasing sales.
• Second, those with a floating exchange rate system use reserves to keep their value of their
currency lower than the dollar.
They do this for the same reasons as those with fixed rate systems. Even though Japan's
currency, the yen, is a floating system, the Central Bank of Japan buys U.S. Treasuries to
keep its value lower than the dollar. Like China, this keeps Japan's exports relatively
cheaper, boosting trade and economic growth. Such currency trading takes place in the
foreign exchange market.
• A third and critical, function is to maintain liquidity in case of an economic crisis. For
example, a flood or volcano might temporarily suspend local exporters' ability to produce
goods. That cuts off their supply of foreign currency to pay for imports. In that case, the
central bank can exchange its foreign currency for their local currency, allowing them to
pay for and receive the imports.
Similarly, foreign investors will get spooked if a country has a war, military coup, or other
blow to confidence. They withdraw their deposits from the country's banks, creating a
severe shortage in foreign currency. This pushes down the value of the local currency since
fewer people want it. That makes imports more expensive, creating inflation.
The central bank supplies foreign currency to keep markets steady. It also buys the local
currency to support its value and prevent inflation. This reassures foreign investors, who
return to the economy.

• Fourth reason is to provide confidence. The central bank assures foreign investors that it's
ready to take action to protect their investments. It will also prevent a sudden flight to safety
and loss of capital for the country. In that way, a strong position in foreign currency reserves
can prevent economic crises caused when an event triggers a flight to safety.
• Fifth, reserves are always needed to make sure a country will meet its external obligations.
These include international payment obligations, including sovereign and commercial

debts. They also include financing of imports and the ability to absorb any unexpected
capital movements.
• Sixth, some countries use their reserves to fund sectors, such as infrastructure. China, for
instance, has used part of its forex reserves for recapitalizing some of its state-owned banks.
• Seventh, most central banks want to boost returns without compromising safety. They
know the best way to do that is to diversify their portfolios. That's why they'll often hold
gold and other safe, interest-bearing investments.
Capital Flows:
Current account deficits (or surpluses) and financial deficits (or surpluses) do not directly affect
an economy. In fact, these deficits (surpluses) are actually the result of what is occurring in an
economy, instead of being the cause. Trade deficits often occur when a nation's economy is
growing faster than the economies of its trading partners. Rapid domestic growth increases the
demand for imports, while slow or no growth with foreign economies can cause a decline in
demand for the country's exports.
Trade balances are also affected by capital flows. If a nation's economy offers investment
opportunities that are relatively better than other nations, then capital will flow into the country.
With flexible exchange rates, this capital inflow will tend to increase the value of the nation's
currency.
Economic statistics support the hypothesis that trade deficits are associated with investment
opportunities and economic growth. Between 1973 and 1982, which was a time of stagnant
economic growth for the U.S., trade deficits and net foreign investment were fairly small. As
the U.S. economy grew rapidly after the 1982 recession, net foreign investment greatly
increased. During the recession of the early 1990s, capital inflow greatly decreased and the
current account was actually slightly positive during one of those years. The time between 1993
and 2000 was one of substantial economic growth; net capital inflows greatly increased, which

caused the U.S. dollar to appreciate and the current account ran large deficits.
Budget deficits and trade deficits tend to be linked. An increase in the U.S. government budget
deficit will cause an increase in the real interest rate, which causes additional foreign capital to
flow into the country. The inflow of foreign currencies will cause the value of the U.S. dollar
to increase in relation to other currencies. The increase in value of the U.S. dollar will make
U.S. exports relatively less attractive to foreigners and imports into the U.S. will be relatively
less expensive; therefore, net exports will go down. The increase in the budget deficit leads to
an increase in the trade deficit.
Causes of a Nation's Currency Appreciation or Depreciation -

Factors that can cause a nation's currency to appreciate or depreciate include:
Relative Product Prices: If a country's goods are relatively cheap, foreigners will want to buy
those goods. In order to buy those goods, they will need to buy the nation's currency. Countries
with the lowest price levels will tend to have the strongest currencies (those currencies will be
appreciating).
Monetary Policy: Countries with expansionary (easy) monetary policies will be increasing the
supply of their currencies, which will cause the currency to depreciate. Those countries with
restrictive (hard) monetary policies will be decreasing the supply of their currency and the
currency should appreciate. Note that exchange rates involve the currencies of two countries.
If a nation's central bank is pursuing an expansionary monetary policy while its trading partners
are pursuing monetary policies that are even more expansionary, the currency of that nation is
expected to appreciate relative to the currencies of its trading partners.
Inflation Rate Differences: Inflation (deflation) is associated with currency depreciation

(appreciation). Suppose the price level increases by 40% in the U.S., while the price levels of
its trading partners remain relatively stable. U.S. goods will seem very expensive to foreigners,
while U.S. citizens will increase their purchase of relatively cheap foreign goods. The U.S.
dollar will depreciate as a result. If the U.S. inflation rate is lower than that of its trading
partners, the U.S. dollar is expected to appreciate. Note that exchange rate adjustments permit
nations with relatively high inflation rates to maintain trade relations with countries that have
low inflation rates.
Income Changes: Suppose that the income of a major trading partner with the U.S., such as
Great Britain, greatly increases. Greater domestic income is associated with an increased
consumption of imported goods. As British consumers purchase more U.S. goods, the quantity

of U.S. dollars demanded will exceed the quantity supplied and the U.S. dollar will appreciate.
• Effect of Monetary Policy: Unanticipated changes in monetary policy will produce both
price (substitution) and income effects. For example, suppose monetary authorities begin a
program of expansionary (easy) monetary policy.
We would then expect the following sequence of events to occur with regard to the price effect:
➢ Real interest rates will be reduced.
➢ As real interest rates are reduced, domestic financial and capital assets become less
attractive as a result of their lower real rates of return. Foreigners will reduce their
positions in domestic bonds, real estate, stocks and other assets. The financial account
(or balance on capital account) will deteriorate as a result of foreigners holding fewer
domestic assets. Domestic investors will be more likely to invest overseas in the pursuit
of higher rates of return.
➢ The reduction in domestic investment by foreigners and the country's citizens will
decrease the demand for the nation's currency and increase the demand for the currency
of foreign countries. The exchange rate of the nation's currency will tend to decline.
➢ With no government intervention, the financial account and the current account must
sum to zero. As the financial account declines, the current account will be expected to
improve by an equal amount. In other words, the balance of trade should improve. The
country's export will have become relatively cheaper and imports will be relatively
more expensive.
The effect of an expansionary monetary policy is to lower the exchange rate, weaken the
financial account and strengthen the current account. A restrictive monetary policy would
be expected to result in the opposite: a higher exchange rate, a stronger financial account
and a weaker current account (a more negative, or a less positive balance of trade).
With a program of expansionary (easy) monetary policy, the following sequence of events
would be expected to occur with regard to the income effect:
➢ The domestic GDP will rise.
➢ The rise in domestic GDP will tend to increase the demand for imports. The increase in
imports will cause the current account to deteriorate.
➢ The increase in imports purchased will increase the need to convert domestic to foreign
currency. As a result, the exchange rate of the domestic currency will decrease.

➢ With no government intervention, the financial account must now move toward a
surplus as the financial and current account must sum to zero. Due to the increase in
imports, foreigners will now have a surplus of the nation's currency. If foreigners do
not use that currency to purchase the country's exports (which would improve the
current account balance), they will ultimately need to invest that currency in the assets
of the domestic country. This explains why countries such as China and Japan invest
large sums in assets such as U.S. Treasuries. The holders of the U.S. currency must put
it to work somewhere! Note that foreign investors are often getting better rates of return
than what might be readily apparent because the value of the domestic currency is
falling relative to their own currency.
In summary, the income effect of expansionary monetary policy tends to lower the domestic
currency exchange rate, weaken the current account and work to improve the financial
account. A restrictive monetary policy tends to cause the opposite due to the income effect.
The domestic currency exchange rate increases, the current account improves and the
financial account weakens.
As both price and the income effects of monetary policy move in the same direction
regarding their impact on the exchange rate, it is clear that expansionary (restrictive)
monetary policy will lower (raise) the country's exchange rate. The effect of monetary
policy on the current and financial accounts is not so clear because the price and income
effects move in opposite directions. For example, the price effect of easy money on the
current account tends to strengthen it, while the income effect tends to weaken the current
account. Since the effects move in opposite directions, it is not immediately clear what the
ultimate impact will be.
We should note that investors can buy and sell financial assets such as stocks and bonds
more quickly than producers and consumers can sell and buy physical goods. So initially,
interest rate (substitution) effects would be expected to dominate. An unanticipated increase
in the money supply will cause the exchange rate to go down, the financial account to
weaken and current account to gain strength. Over time, the income effect will come into
play. A rising GDP will cause both the trade balance and financial account to weaken.
Some argue that for an economy with a foreign sector, monetary policy can create cyclical
movements that tend to destabilize an economy. Unanticipated expansionary monetary
policy initially causes the trade balance to improve, but as time progresses, it causes the
trade balance to become more negative. It initially causes the capital account to weaken due

to lower interest rates, but then later tends to improve it. In the long run, the main effect of
the expansionary monetary policy is a lowering of the nation's currency exchange rate,
which is the international equivalent to the long-run effect of expansionary monetary
policy, inflation. Empirical evidence indicates that countries with high rates of monetary
supply growth experience both inflation and declining currency exchange rates. An
important point to consider is the exchange rates of two countries - their relative rates of
money supply growth will help determine how the exchange rate changes.
• Effect of Fiscal Policy: Fiscal policy changes will produce both price (substitution) and
income effects for exchange rates and balance of payments. Suppose government
policymakers enact a program of unanticipated fiscal stimulus. This would be expected to
cause the following sequence of events to occur with regard to the price effect:
➢ Greater government budget deficits caused by tax cuts and/or increased spending will
increase the demand for investable funds, which will cause interest rates to rise. •The
increase in interest rates will cause capital inflows (foreigners will purchase more
domestic financial assets). As a result, the capital account will strengthen (become more
positive or less negative).
➢ Foreign investors will need to exchange their currency for the domestic currency. The
increased demand for the domestic currency will cause its exchange rate to increase. •If
there is no government intervention with the balance-of-payments, the current account
will need to become more negative (or less positive). The trade balance will weaken as
imports increase and/or exports decrease. This makes sense because the strengthening
of the nation's currency will make its exports relatively less attractive to foreigners and
imports will be less expensive relative to the country's consumers and domestic
businesses.
To summarize, the price effect of a simulative fiscal policy is to raise the value of the
domestic currency, strengthen the capital account and weaken the current account. A
restrictive fiscal policy would have the opposite effects: a weaker domestic currency, a
weaker capital account (there would be net capital outflows) and a stronger current account.
With a program of fiscal stimulus, the following sequence of events would be expected to
occur with regard to the income effect:
➢ The tax cuts and/or increase in government spending associated with the fiscal policy,
and the associated multiplier effect, will increase GDP.

➢ The rise in GDP will cause the demand for imports to increase and the current account
will be weakened (become more negative or less positive).
➢ More domestic currency will need to be converted into foreign currencies to purchase
the increased quantity of imports. The increased supply of domestic currency on the
international markets will cause the exchange rate to decline.
➢ With no government intervention, the financial account will need to become more
positive (or less negative) in order to compensate for the weakening of the current
account. Foreigners will be holding more of the domestic currency and are therefore in
a position to purchase more of the nation's financial assets. Also, as the domestic
economy is improving, they may find it more attractive as a place to invest.
To summarize, the income effect associated with fiscal stimulus will tend to lower the
exchange rate of the country's currency, weaken the current account (trade balance) and
strengthen the financial account.
Fiscal policy price and income effects move in the same direction with regard to their
impact on the financial and current accounts. Stimulating fiscal policy will clearly weaken
the current account (balance of trade) and strengthen the capital account. Restrictive fiscal
policy will strengthen the current account (balance of trade) and weaken the capital account.
The impact of fiscal policy on exchange rates is not so clear because the price and income
effects work in opposite directions. The income effect tends to weaken the currency
exchange rate, while the price effect will tend to strengthen the currency exchange rate.
Because foreign investors can trade financial assets (such as stocks and bonds) more quickly
and easily than consumers and producers can alter the purchase and sale of physical assets,
the price effect would be expected to have the larger initial effect. Over time, the income
effect will increasingly come into play.
So initially, the fiscal stimulus should cause the domestic currency to appreciate. Over time,
as the demand for imports is stimulated, the domestic currency will weaken. If the fiscal
stimulus is associated with inflation, there will be a further weakening of the domestic
currency. Note that the fiscal stimulus will also have the effect of worsening the balance of
trade and increasing the financial account in both the short and long run.
A simulative fiscal policy is good for the economy when it is operating below full
employment levels. There are a couple of factors that will mitigate the positive effects. One
factor is that government deficits will work to increase interest rates, which can crowd out

private investment. Another factor is that after foreign capital comes in (due to higher
interest rates), the domestic currency exchange rate rises. This leads to a rise in imports,
which reduces GDP. These two factors lessen the positive effects of fiscal policy stimulus.
Tariffs:
Tariffs are taxes imposed on imported goods; they will increase the price of the good in the
domestic market. Domestic producers benefit because they receive higher prices. The
government benefits by collecting tax revenues.
In the graph above, S0 and D0 represent the original supply and demand curves which intersect
at (P0, Q0). St Shows what the supply curve is with the introduction of the tariff. The market
then clears at (Pt, Qt). Less of the good is produced, and consumers pay higher prices.
Quotas:
Quotas are numerical limits imposed on imported goods. Consumers are harmed by quotas,
while domestic and foreign producers benefit by receiving higher prices.
In the graph above, the market initially clears at P0, Q0. The supply curve Sd+i0 represents the
quantity supplied by both domestic and foreign producers before the imposition of the quota.
D0 is the domestic demand curve. After the quota, the supply curve looks like Sd+i1. Both

foreign and domestic producers receive higher prices while consumers lose out.
Voluntary Export Restraints (VERs):

These restraints limit the quantity of goods that can be exported from the country to one or
more of its trading partners. They are usually "voluntarily" negotiated so that quotas or tariffs
are not imposed.
Gross Domestic Product (GDP):

Gross domestic product is the measurement of all goods and services a country generates within
a given period. GDP is believed to be the best overall economic indicator of the health of the
economy. This can seem odd, considering GDP is basically a measurement of supply of goods
and services, yet it has nothing to do with the demand for these goods and services. The general
idea is that it takes a knowledge of both supply and demand to make reasonable estimations. It
would be unwise to believe that GDP reflects both sides of the market. Therefore, an increase
in GDP without a corresponding increase in gross domestic product demand or affordability,
are the very opposite of a healthy economy from a fundamental Forex analysis perspective.
Interest rates, inflation and GDP are the three main economic indicators employed by Forex
fundamental analysis. They are unmatched by the amount the of economic impact they can
generate compared to other factors such as retail sales, capital flow, traded balance as well as
bond prices and numerous additional macroeconomic and geopolitical factors. Moreover,
economic indicators are not only measured against each other through time, but some of them
also correlate cross-discipline and cross-borders, which is described in more detail in the Best
Forex fundamental indicators explained.
It is important to understand that there is a lot of economic data released that has a significant
impact on the Forex market. Whether you want to or not, you need to learn how to make Forex
fundamental analysis a part of your trading strategy to predict market movements.
Two different approaches are used to calculate GDP. In theory, the amount spent for goods and
services should be equal to the income paid to produce the goods and services, and other costs
associated with those goods and services. Calculating GDP by adding up expenditures is called
the expenditure approach, and computing GDP by examining income for resources (sometimes
referred to as gross domestic income, or GDI, is known as the resource cost/income approach.
Expenditure Approach
The expenditure approach utilizes four main components:

1. Consumption (C) - These are personal consumption expenditures. They are typically
broken down into the following categories: durable goods, non-durable goods, and services.
2. Investment (I) - This is gross private investment; it is generally broken down into fixed
investment and changes in business inventories.
3. Government (G) - This category includes government spending on items that are
"consumed" in the current period, such as office supplies and gasoline; and also capital
goods, such as highways, missiles, and dams. Note that transfer payments are not included
in GDP, as they are not part of current production.
4. Net Exports (X - M) - This is calculated by subtracting a nations imports(M) from

exports(X). Imports are goods and services produced outside the country and consumed
within, and exports are goods and services produced domestically and sold to foreigners.
Note that this number may be negative, which has occurred in the U.S. for the last several
years. Net exports for the U.S. were minus $606 billion during calendar year 2004 (as per
Bureau of Economic Analysis, U.S. Department of Commerce June 29, 2005 press release).
Therefore,
GDP = C + I + G + (X - M)
Resource Cost/Income Approach

To calculate Gross Domestic Income (GDI), first consider how revenues received for products
and services are used:
1) Pay for the labor used (wages + income of self-employed proprietors).
2) Pay for the use of fixed resources, such as land and buildings (rent).
3) Pay a return to capital employed (interest).
4) Pay for the replenishment of raw material used.
Remaining revenues go to business owners as a residual cash flow, which is used to replenish
capital (depreciation), or it becomes a business profit. So with the resource cost/income
approach, GDP (or GDI) is calculated as wages, rent, interest and cash flow paid to business
owners or organizers of production.
So, GDP by resource cost/income approach:
GDP = wages + self-employment income + Rent + Interest + profits + indirect business taxes
+ depreciation + net income of foreigners.

The above formula is probably hard to memorize, so at least try to remember this relationship:
GDI = Wages + Rent + Interest + Business Cash Flow
Total GDP figures should be the same by either method of calculation. But in real life, things
don't always work out this way. Official figures usually have a category called "statistical
discrepancy", which is needed to balance out the two approaches.

CHAPTER – IX

IX. STEPS TO BE TAKEN TO MAKE PROFITS THROUGH

FUNDAMENTAL ANALYSIS -
So how to move on with the fundamental Analysis and trade so as to make profits is the main
objective of the entire project.
1st Step: Study the Macroeconomic Arena

To build our wealth, we must create an analytical structure. To create the structure, we must
first establish its basis. The basis of our analysis will involve the study of macroeconomics at
the global scale. We must establish the background at the highest level to be able to filter the
data and reach at the dynamics of currency pairs at the lowest level. In doing so, we will
examine cyclical dynamics, the monetary policies of major central banks and a few other
indicators. Past behavior of monetary institutions has great relevance to their future choices,
which is why we must keep historical data in mind while analyzing the future direction of the
markets. The first phase is relatively straightforward, since during a boom volatility falls, and
liquidity becomes abundant on a global scale; during a bust the opposite happens. Nonetheless,
it’s very important that the trader know how to isolate the noise from the data, otherwise he
will be a victim of political or media spin, and his analysis will fail.
Decide on the phase of the cycle.

We must first determine the phase of the economic cycle on a global scale. By examining global
default rates, international reserve accumulation and bank loan surveys of major economic
powers it is possible to notice the changing phase of the global economic cycle, even though
these are second-tier indicators, and are a bit late in signaling the phase of the cycle. But they
are still safe, because market actors often refuse to acknowledge the importance of these data
until they are confirmed by falling industrial production and rising unemployment
developments that come quite late in the phase of the cycle.
Examine technological innovations, political environment, emerging market fundamentals

Upon deciding the phase of the cycle, we will try to determine the dynamics that can enhance
productivity and create a period of non-inflationary economic expansion on a global scale.
When emerging economies adopt the new technologies of the developed world, and create a
new basis of industrial production, productivity will increase, and will sustain growth without
creating inflation. Similarly, when new technologies like air travel, mass production, or the
Internet are implemented for the first time, productivity will increase, and wealth and demand
will be generated, leading to a period of non-inflationary growth everything else being constant.
The details of this subject can be studied further in our section on fundamental analysis.

The global political environment also has a great influence on international currency
fluctuations for obvious reasons. The high inflation era of the 1970s, for instance, was caused
by a number of political events influencing economic fundamentals. Similarly, hyperinflation
in Germany in the aftermath of the First World War was also caused by political developments
that perverted the natural course of economic events.
Conclude the first Step: Productivity gains will ensure a growing global environment (a boom
phase) until the technological innovations are fully absorbed; but they are greatly prone to
creating bubbles. If the cycle is going through the bust phase, all speculative activity must be
curbed. Carry trades and aggressive emerging market plays must be reduced, leverage must
come down and long-term positions must be established as currency pairs reach bottom. If the
cycle is going through the boom phase, it is time to build our risk portfolio and manage our
risk allocations through correlation studies and money management methods. Once we decide
on this aspect of our trades, we can move to the second step, and have a closer look at the
monetary environment.
2nd Step: Study Global Monetary Environment

In the second step, we move from the generalized studies of the first step to a more specific
discussion of the developed world economies. In the first step we examined the factors that
influence the economic state of all nations. Now we will take a closer look at the monetary
policy, and attempt to determine the length and depth of the current phase of the cycle.
Study the interest rate policies of major global powers

In light of their past behaviour we will examine the policy biases of major central banks, such
as the Bank of Japan, the Federal Reserve, and the ECB. Our study will take into account the
policy biases and legal mandates of these institutions, along with their independence. By
studying and clarifying their policy biases, we can have an idea on money supply growth, which
will help us decide such variables as emerging market growth potentials, stock market volatility,
and the interest rate expectations in a local market, which can translate into critical rate
differentials when compared to other countries.
Compare money supply expansion and credit standards with the previous period:
Once we understand the policies of global central banks, we must compare these policies with
their precursors, and decide on their possible impact on the global economy. Easy money
coming out of a recession is normal, and if credit channels are functioning, it should alert us to
increase the risk tolerance of our portfolio. Conversely, tight monetary policy, following a

period of economic boom, would mean that the global economy will go through a period of
reorganization, which would lead us to reduce the risk tolerance of our portfolio. A continued
period of lax monetary policy (low rates) would imply that the forex market will develop risk
bubbles, that is, currencies of nations with weak fundamentals will appreciate way beyond their
equilibrium value, which is a contrarian trade opportunity for shorting them. A continued period
of tight monetary policy by a majority of the developed world’s central banks will force
speculators to reduce leverage, and hence reduce the impact on the currency markets. So, as
currencies of nations with strong fundamentals appreciate way beyond their equilibrium value,
we will have another contrarian trade opportunity for shorting their currencies.
Exploding bubbles, commodity shocks and major political events can create exceptions to the
above scenario.
Analyse the VIX, developed market loan default rates of corporate and private sectors.
We are aware of the phase of the cycle, but we must also find a way for determining the volatility
tolerance of our portfolio. Stock market volatility and the loan default statistics of corporations
have an important role in determining forex market volatility, as low risk perception in the
economy at large allows all actors to increase leverage and liquidity, which leads to a generally
safer environment for forex traders. Of course, like everything else in the markets, low or high
volatility are temporary phenomena. The trader must not only analyze present volatility but also
its causes, the actors that help reduce it, and the factors that can neutralize their impact on the
markets. Knowledge of these will allow us to react quickly to market shocks, and help us reduce
our losses when they inevitably occur eventually.
Conclude the second step: This step will allow us to understand where in the cycle we are.
Toward the peak of the boom phase, VIX, default rates and interest rates will all be quite low,
allowing us maximal profit from the risky positions we had assumed (for example by longing
the AUD, while shorting the yen.) Conversely, towards the peak of the bust phase, all those
values will register extremes; and by expressing a negative view of risk in our portfolio, we will
be able to protect our capital; and while pocketing good profits as other financial actors reach
the same conclusions with us.
3rd Step: Choose Currencies and Time Period to Maintain the Position
Finally, in the third step we will decide on the actual currencies we will buy or sell, and on how
long we’ll maintain our positions. We will simplify the process here, but the most important
indicators that must be studied are:

Examine the interest rate differentials of nations:
In light of unemployment statistics, capital expenditure and output gap, since most of the time
markets attach the greatest importance to interest rate differentials between currencies, we must
form an opinion on the direction of central bank interest rates. This can be done by studying
unemployment statistics and the output gap. As capacity constraints in an economy increase
and unemployment falls, labour market shortages create wage pressures which are eventually
translated into higher prices and inflation in an economy. To combat this development, the
central bank will raise rates, and will keep it high until there are visible signs of cooling in the
economy, as demonstrated by rising unemployment and fewer capacity constraints. Similarly,
by following these values the trader can form an opinion on where the interest rates will go.
Compare the balance of payments of the currencies:
The balance of payments of a nation is like the balance sheet of a company. The healthier the
balance of payments, the stronger the nation’s currency will be in times of economic turmoil.
We will study the balance sheets of nations in terms of current and capital account situation.
Is the nation’s external position maintained by bank deposits and asset sales (which can be
revised easily), or by long term developments such as foreign direct investment or reserve
accumulation? We discussed these matters in previous texts, and the reader can examine them
for a better understanding of balance of payments dynamics.
Trade the third step: During the growth phase of the cycle, economic actors favour risk, thus
currencies with stronger fundamentals are prone to be sold in favour of those who choose to
attract capital through higher interest rates. Thus, during the boom phase or at the beginning of
it, we will sell currencies with strong fundamentals offering low interest rates, and buy the
currencies offering high interest rates to compensate for weaker fundamentals. During the bust
phase, we will buy currencies offering low interest rates with a strong balance of payments, and
sell currencies that offer high interest rates but are built on a weak balance of payments situation.
Thus, we will choose currency pairs which offer the greatest imbalances to the trader, and will
either enter long-term counter trend positions with low leverage, or we will await the market
to confirm our analysis with its actions.

CHAPTER – X

X. CONCLUSION-
Fundamental Analysis and Technical Analysis (FA and TA) go hand-in-hand in guiding the
forex trader to potential opportunities under ever changing market conditions. Both beginner
and veteran traders can benefit from the material that follows, but veterans have learned to
make one important distinction. They do not spend an inordinate amount of time on the FA
side of the equation, primarily because they do not have the resources, access to key
information, or the ability to read and assimilate the mountains of data that are made public on
a daily basis.
Large banks, hedge funds, and institutional investors have those resources, but even they have
a difficult time arriving at correct predictions on how market forces will evolve. The advice is
simply to use FA to determine a general feel for market directions, the interplay of key
variables, and existing monetary policy differences to suggest which currency pairs offer the
greatest opportunities at a point in time. The objective of every trader is to assess market
conditions daily, and then to modify his strategy accordingly. FA and TA are the tools for
achieving this goal each and every trading day.
So, the question which arises is what should we start with- Technical or the Fundamental. The
answer depends on the objective of the investor. Of course, if the investor wants to invest for
long term period, they should look at the Technical part of the market i.e. predict the movement
of the market by looking at different indicators focused mainly on the daily, weekly and
monthly candles. Whereas for short term even if technical are used, they are mainly focused on
the minutes, hours and daily candles. But for short term trading more focus is given on the
fundamentals. So, for instance if there is a recent news of unemployment rates increasing in the
U.S., it is a negative sign and the value of the US dollar will come down in the market. Again
for instance if the interest rate hikes, then it implies that the fed is trying to choke the cash
supply (maybe as a measure to control inflation) and again this will negatively impact the US
dollar in the market and the wise decision would be to sell the dollar.
Some fundamental factors may last for a day, some maybe for months. For instance, after
BREXIT in 2016, EUR came to hall down low though its technical were suggesting otherwise.
Huge bearish candles started to break their way in the market. They broke all resistance levels.
So, the technical did not come to much help as the markets came to all time low making it
obvious to draw and analyse the support and resistance from the scratch. So, this example proves
that sometimes fundamentals can be so strong as to break long term technical trends.

So, to conclude, Fundamentals are an integral part of trading and so cannot be underestimated.
Reaching to rational conclusion by combining the effect of these fundamentals with the proper
technical can-do wonders for the traders.
Step 1: Identify Type of Risk to Hedge

➢ Transactional Risk
➢ Translational Risk
➢ Economic Risk
Step 2: Identify What Needs to be hedged

➢ What currency pair e.g., EUR/GBP
➢ What Amount is at risk
➢ What Duration the risk is exposed
➢ Do you have a budget rate?
Step 3: Identify What Tools you can use to Hedge

➢ Spot
➢ Forward contract
➢ Option contract

CHAPTER – XI

XI. REFERENCES:
1) https://www.investopedia.com/university/forexmarket/forex1.asp
2) https://en.wikipedia.org/wiki/Foreign_exchange_market
3) https://www.intertrader.com/eu/forex/forex-for-beginners/
4) https://www.xe.com/currencytrading/
5) https://www.investopedia.com/university/meta-trader-guide-intro/
For analysis part we used:
➢ https://in.tradingview.com/
➢ https://www.marketwatch.com/
➢ https://www.fxleaders.com/forex-signals/
➢ https://in.investing.com/

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RISK MANAGEMENT IN FOREX MARKET

A Project Report for the partial fulfilment of the requirement for

Submitted by: Nabeel Tahir Siddiqui (Reg. No.: 1427698009)

Under the supervision of

REGIONAL COLLEGE OF MANAGEMENT

Nabeel Tahir Siddiqui

Nabeel Tahir Siddiqui

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II. INDUSTRY ANALYSIS

Forex Market Size Stats

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Significance of Forex Market

Table: On the basis of mostly traded currency

Name of the currency Position

Facts Based on Research

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searches around trading gold or oil, according to Google Trends.

Forex Technology Stats

Forex Trader Stats

Forex Broker Stats

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UK Spread Betting Stats

Pestle Analysis of Forex Industry

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III. OBJECTIVE OF THE PROJECT-

➢ To analysis and understand the forex market.

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IV. LIMITATION OF THE PROJECT-

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V. INTRODUCTION TO THE COMPANY-

Kalpataru Multiplier Ltd.

MCX Stock Exchange Ltd. (MCX-SX) Multi Commodity Exchange (MCX)

National Commodities Exchange of India (NCDEX) Depository Participant

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Our Valuable Team Members

Ramesh Manya Jain Aditya Manya Jain Amitabh Manya Jain

Sharda Manya Jain Savita Manya Jain Lalit Manya Jain

Our Field of Operations

• Derivative Futures & Options (F&O): Online through VSAT instrument.

• Commodity Derivatives: Commodity Derivatives, Futures & Options, Currency

• Depository Participant (DP): Service (DEMAT) through CDSL (Central Depository

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• Investment Advisory Services: We are prominent Financial and Investment advisor of

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VI. INTRODUCTION TO THE FOREX MARKET-

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➢ Amount of investment to be made by an investor is higher as compared to domestic

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➢ Gross Domestic Product (GDP) growth rate.

➢ Consumer Price Inflations (CPI).

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