The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2007. 54 central banks and monetary authorities participated in the survey, collecting information from approximately 1280 market participants.
Excerpt from the BIS:
"The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71% at current exchange rates and 65% at constant exchange rates...Against the background of low levels of financial market volatility and risk aversion, market participants point to a significant expansion in the activity of investor groups including hedge funds, which was partly facilitated by substantial growth in the use of prime brokerage, and retail investors...A marked increase in the levels of technical trading – most notably algorithmic trading – is also likely to have boosted turnover in the spot market...Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover." - BIS
Structure
Decentralised 'interbank' market
Main participants: Central Banks, commercial and investment banks, hedge funds, corporations & private speculators
The free-floating currency system arose from the collapse of the Bretton Woods agreement in 1971
Online trading began in the mid to late 1990's
Source: BIS Triennial Survey 2007
Trading Hours
24 hour market
Sunday 5pm EST through Friday 4pm EST.
Trading begins in the Asia-Pacific region followed by the Middle East, Europe, and America
Size
One of the largest financial markets in the world
$3.2 trillion average daily turnover, equivalent to:
More than 10 times the average daily turnover of global equity markets1
More than 35 times the average daily turnover of the NYSE2
Nearly $500 a day for every man, woman, and child on earth3
An annual turnover more than 10 times world GDP4
The spot market accounts for just under one-third of daily turnover
1. About $280 billion - World Federation of Exchanges aggregate 2006 2. About $87 billion - World Federation of Exchanges 2006 3. Based on world population of 6.6 billion - US Census Bureau 4. About $48 trillion - World Bank 2006.
Source: BIS Triennial Survey 2007
Wednesday, February 4, 2009
What are Your Options Regarding Forex Options Brokers?
Forex option brokers can generally be divided into two separate categories: forex brokers who offer online forex option trading platforms and forex brokers who only broker forex option trading via telephone trades placed through a dealing/brokerage desk. A few forex option brokers offer both online forex option trading as well a dealing/brokerage desk for investors who prefer to place orders through a live forex option broker.
The trading account minimums required by different forex option brokers vary from a few thousand dollars to over fifty thousand dollars. Also, forex option brokers may require investors to trade forex options contracts having minimum notional values (contract sizes) up to $500,000. Last, but not least, certain types of forex option contracts can be entered into and exited at any time while other types of forex option contracts lock you in until expiration or settlement. Depending on the type of forex option contract you enter into, you might get stuck the wrong way with an option contract that you can not trade out of. Before trading, investors should inquire with their forex option brokers about initial trading account minimums, required contract size minimums and contract liquidity.
There are a number of different forex option trading products offered to investors by forex option brokers. We believe it is extremely important for investors to understand the distinctly different risk characteristics of each of the forex option trading products mentioned below that are offered by firms that broker forex options.
Plain Vanilla Forex Options Broker - Plain vanilla options generally refer to standard put and call option contracts traded through an exchange (however, in the case of forex option trading, plain vanilla options would refer to the standard, generic option contracts that are traded through an over-the-counter (OTC) forex dealer or clearinghouse). In simplest terms, vanilla forex options would be defined as the buying or selling of a standard forex call option contract or forex put option contract.
There are only a few forex option broker/dealers who offer plain vanilla forex options online with real-time streaming quotes 24 hours a day. Most forex option brokers and banks only broker forex options via telephone. Vanilla forex options for major currencies have good liquidity and you can easily enter the market long or short, or exit the market any time day or night.
Vanilla forex option contracts can be used in combination with each other and/or with spot forex contracts to form a basic strategy such as writing a covered call, or much more complex forex trading strategies such as butterflies, strangles, ratio spreads, synthetics, etc. Also, plain vanilla options are often the basis of forex option trading strategies known as exotic options.
Exotic Forex Options Broker - First, it is important to note that there a couple of different forex definitions for "exotic" and we don’t want anyone getting confused. The first definition of a forex "exotic" refers to any individual currency that is less broadly traded than the major currencies. The second forex definition for "exotic" is the one we refer to on this website - a forex option contract (trading strategy) that is a derivative of a standard vanilla forex option contract.
To understand what makes an exotic forex option "exotic," you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all of the above features of a vanilla forex option. It is important to note that exotic options, since they are often tailored to a specific’s investor’s needs by an exotic forex options broker, are generally not very liquid, if at all.
Exotic forex options are generally traded by commercial and institutional investors rather than retail forex traders, so we won’t spend too much time covering exotic forex options brokers. Examples of exotic forex options would include Asian options (average price options or "APO’s"), barrier options (payout depends on whether or not the underlying reaches a certain price level or not), baskets (payout depends on more than one currency or a "basket" of currencies), binary options (the payout is cash-or-nothing if underlying does not reach strike price), lookback options (payout is based on maximum or minimum price reached during life of the contract), compound options (options on options with multiple strikes and exercise dates), spread options, chooser options, packages and so on. Exotic options can be tailored to a specific trader’s needs, therefore, exotic options contract types change and evolve over time to suit those ever-changing needs.
Since exotic forex options contracts are usually specifically tailored to an individual investor, most of the exotic options business in transacted over the telephone through forex option brokers. There are, however, a handful of forex option brokers who offer "if touched" forex options or "single payment" forex options contracts online whereby an investor can specify an amount he or she is willing to risk in exchange for a specified payout amount if the underlying price reaches a certain strike price (price level). These transactions offered by legitimate online forex brokers can be considered a type of "exotic" option. However, we have noticed that the premiums charged for these types of contracts can be higher than plain vanilla option contracts with similar strike prices and you can not sell out of the option position once you have purchased this type of option - you can only attempt to offset the position with a separate risk management strategy. As a trade-off for getting to choose the dollar amount you want to risk and the payout you wish to receive, you pay a premium and sacrifice liquidity. We would encourage investors to compare premiums before investing in these kinds of options and also make sure the brokerage firm is reputable.
Again, it is fairly easy and liquid to enter into an exotic forex option contract but it is important to note that depending on the type of exotic option contract, there may be little to no liquidity at all if you wanted to exit the position.
Firms Offering Forex Option "Betting" - A number of new firms have popped up over the last year offering forex "betting." Though some may be legitimate, a number of these firms are either off-shore entities or located in some other remote location. We generally do not consider these to be forex brokerage firms. Many do not appear to be regulated by any government agency and we strongly suggest investors perform due diligence before investing with any forex betting firms. Invest at your own risk with these firms.
The trading account minimums required by different forex option brokers vary from a few thousand dollars to over fifty thousand dollars. Also, forex option brokers may require investors to trade forex options contracts having minimum notional values (contract sizes) up to $500,000. Last, but not least, certain types of forex option contracts can be entered into and exited at any time while other types of forex option contracts lock you in until expiration or settlement. Depending on the type of forex option contract you enter into, you might get stuck the wrong way with an option contract that you can not trade out of. Before trading, investors should inquire with their forex option brokers about initial trading account minimums, required contract size minimums and contract liquidity.
There are a number of different forex option trading products offered to investors by forex option brokers. We believe it is extremely important for investors to understand the distinctly different risk characteristics of each of the forex option trading products mentioned below that are offered by firms that broker forex options.
Plain Vanilla Forex Options Broker - Plain vanilla options generally refer to standard put and call option contracts traded through an exchange (however, in the case of forex option trading, plain vanilla options would refer to the standard, generic option contracts that are traded through an over-the-counter (OTC) forex dealer or clearinghouse). In simplest terms, vanilla forex options would be defined as the buying or selling of a standard forex call option contract or forex put option contract.
There are only a few forex option broker/dealers who offer plain vanilla forex options online with real-time streaming quotes 24 hours a day. Most forex option brokers and banks only broker forex options via telephone. Vanilla forex options for major currencies have good liquidity and you can easily enter the market long or short, or exit the market any time day or night.
Vanilla forex option contracts can be used in combination with each other and/or with spot forex contracts to form a basic strategy such as writing a covered call, or much more complex forex trading strategies such as butterflies, strangles, ratio spreads, synthetics, etc. Also, plain vanilla options are often the basis of forex option trading strategies known as exotic options.
Exotic Forex Options Broker - First, it is important to note that there a couple of different forex definitions for "exotic" and we don’t want anyone getting confused. The first definition of a forex "exotic" refers to any individual currency that is less broadly traded than the major currencies. The second forex definition for "exotic" is the one we refer to on this website - a forex option contract (trading strategy) that is a derivative of a standard vanilla forex option contract.
To understand what makes an exotic forex option "exotic," you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options have a definitive expiration structure, payout structure and payout amount. Exotic forex option contracts may have a change in one or all of the above features of a vanilla forex option. It is important to note that exotic options, since they are often tailored to a specific’s investor’s needs by an exotic forex options broker, are generally not very liquid, if at all.
Exotic forex options are generally traded by commercial and institutional investors rather than retail forex traders, so we won’t spend too much time covering exotic forex options brokers. Examples of exotic forex options would include Asian options (average price options or "APO’s"), barrier options (payout depends on whether or not the underlying reaches a certain price level or not), baskets (payout depends on more than one currency or a "basket" of currencies), binary options (the payout is cash-or-nothing if underlying does not reach strike price), lookback options (payout is based on maximum or minimum price reached during life of the contract), compound options (options on options with multiple strikes and exercise dates), spread options, chooser options, packages and so on. Exotic options can be tailored to a specific trader’s needs, therefore, exotic options contract types change and evolve over time to suit those ever-changing needs.
Since exotic forex options contracts are usually specifically tailored to an individual investor, most of the exotic options business in transacted over the telephone through forex option brokers. There are, however, a handful of forex option brokers who offer "if touched" forex options or "single payment" forex options contracts online whereby an investor can specify an amount he or she is willing to risk in exchange for a specified payout amount if the underlying price reaches a certain strike price (price level). These transactions offered by legitimate online forex brokers can be considered a type of "exotic" option. However, we have noticed that the premiums charged for these types of contracts can be higher than plain vanilla option contracts with similar strike prices and you can not sell out of the option position once you have purchased this type of option - you can only attempt to offset the position with a separate risk management strategy. As a trade-off for getting to choose the dollar amount you want to risk and the payout you wish to receive, you pay a premium and sacrifice liquidity. We would encourage investors to compare premiums before investing in these kinds of options and also make sure the brokerage firm is reputable.
Again, it is fairly easy and liquid to enter into an exotic forex option contract but it is important to note that depending on the type of exotic option contract, there may be little to no liquidity at all if you wanted to exit the position.
Firms Offering Forex Option "Betting" - A number of new firms have popped up over the last year offering forex "betting." Though some may be legitimate, a number of these firms are either off-shore entities or located in some other remote location. We generally do not consider these to be forex brokerage firms. Many do not appear to be regulated by any government agency and we strongly suggest investors perform due diligence before investing with any forex betting firms. Invest at your own risk with these firms.
What is forex Trading
Foreign Exchange Market, or Forex as it is commonly called, is an international exchange market to buy and sell different currencies from around the world. An investor has the ability to buy and sell these currencies in order to create gains from small movements in the value of one currency over another. The forex market is open from Monday at 0:00 GMT until Friday at 10:00 GMT. For this reason Forex traders are not limited to the general time constraints of the New York Stock Exchange or NASDAQ.
This versatility attracts many investors to become Forex traders. The liquidity of the Foreign Exchange Market is also very attractive for the Forex investor as trades range from 1 to 1.5 trillion dollars on a daily basis. These massive amounts of trades make it extremely difficult for any one trader to affect the market.
Foreign Exchange Trading is simply the purchase and sales of currency based on the strength of the currency and the fluctuation in the value of that currency. For example, if one were to invest $1,000 against the British pound at 1.7999 with a 1% margin and anticipate the exchange rate to climb. If that occurs and you close the exchange rate at 1.8050 you would earn roughly $400. Forex is giving you a 40% return on your investment.
Forex offers the possibility of huge profits in relatively short periods of time. The stock exchange is very different in that positions are generally maintained over a longer period of time. Although there are day traders, Forex traders have much shorter hold times on positions. Similar to the stock market marginal accounts can be obtained in the Foreign Exchange Market as well.
Forex marginal accounts are very engaging as they allow Forex traders to take large positions without having to make a large deposit. In many circumstances one can fund a marginal account with .05% the necessary funds. In other words, $500 would allow a $100,000 position. In order to trade Forex effectively and profitably, one must have some type of method to follow. There are two methods used in determining what Foreign Exchange trades one should make. There are two methods, fundamental Forex analysis, and technical Forex analysis.
Technical analysis is the most commonly used practice and uses the assumption that the changes that occur in the Foreign Exchange Market happened for a reason and are accurate. The belief is that if a currency has been trading towards a high then that currency will mostly continue towards that high with the adverse being true as well. The technical Forex view does not try to make long term predictions about the market but instead simply tries to take advantage of what has already been seen in the past.
The fundamental Forex method takes into account all aspects of the country in which the currency is traded. Things such as the economy, the countries prime interest rates, war, poverty level, and other factors are taken into account. If there is a sharp rise in the prime interest rate a Forex trader may take a position based on that information.
Online Forex trading has the potential of being extremely lucrative. One can learn to trade by creating an online Forex Account and begin by using a learning account without real funds. This will help you to understand the Forex trading process and how currencies are affected by different things that are happening on a global scale.
This versatility attracts many investors to become Forex traders. The liquidity of the Foreign Exchange Market is also very attractive for the Forex investor as trades range from 1 to 1.5 trillion dollars on a daily basis. These massive amounts of trades make it extremely difficult for any one trader to affect the market.
Foreign Exchange Trading is simply the purchase and sales of currency based on the strength of the currency and the fluctuation in the value of that currency. For example, if one were to invest $1,000 against the British pound at 1.7999 with a 1% margin and anticipate the exchange rate to climb. If that occurs and you close the exchange rate at 1.8050 you would earn roughly $400. Forex is giving you a 40% return on your investment.
Forex offers the possibility of huge profits in relatively short periods of time. The stock exchange is very different in that positions are generally maintained over a longer period of time. Although there are day traders, Forex traders have much shorter hold times on positions. Similar to the stock market marginal accounts can be obtained in the Foreign Exchange Market as well.
Forex marginal accounts are very engaging as they allow Forex traders to take large positions without having to make a large deposit. In many circumstances one can fund a marginal account with .05% the necessary funds. In other words, $500 would allow a $100,000 position. In order to trade Forex effectively and profitably, one must have some type of method to follow. There are two methods used in determining what Foreign Exchange trades one should make. There are two methods, fundamental Forex analysis, and technical Forex analysis.
Technical analysis is the most commonly used practice and uses the assumption that the changes that occur in the Foreign Exchange Market happened for a reason and are accurate. The belief is that if a currency has been trading towards a high then that currency will mostly continue towards that high with the adverse being true as well. The technical Forex view does not try to make long term predictions about the market but instead simply tries to take advantage of what has already been seen in the past.
The fundamental Forex method takes into account all aspects of the country in which the currency is traded. Things such as the economy, the countries prime interest rates, war, poverty level, and other factors are taken into account. If there is a sharp rise in the prime interest rate a Forex trader may take a position based on that information.
Online Forex trading has the potential of being extremely lucrative. One can learn to trade by creating an online Forex Account and begin by using a learning account without real funds. This will help you to understand the Forex trading process and how currencies are affected by different things that are happening on a global scale.
The Forex Market and Understanding Foreign Exchange Rates
Unlike the stock exchange, the Forex Market (foreign exchange market) is a relatively new player to the investment world. Today's current Forex market model started in the early 1970's, and today it represents the biggest financial market around, even surpassing the stock market. With trading surpassing $2 trillion dollars per day, the Forex market attracts more and more investors all the time. Before an investor starts trading on the Forex market, he should grasp the fundamentals of how exchange rates work.Exchange ratesBasically, the exchange rate represents the rate of exchange between two currencies. Most currencies are traded, or paired up against the dollar. The five most common currencies traded on the market are the dollar (USD), euro (EUR), the yen (JPY), the British pound (GBP), and the Swiss franc (CHF). Some other currencies that are traded are the Australian dollar, the Canadian dollar, and the Hong Kong dollar.In the exchange rate or ratio, the numerator represents the quote currency and the denominator the base currency, which always equals one.Let's say that an investor wants to exchange euros for dollars. In this case, the euro currency is the quote currency, or how much currency you have to exchange. The base currency is the dollar. The investor researches the current exchange rate (euros converted into dollars) either on the Internet, through the bank, broker, etc., and then multiplies that amount by the number of euros to exchange. Let's say that the exchange rate is 1.57959. That means that 1.57959 euros must be paid to receive one dollar. If he has 1000 euros to exchange, then he can receive $1,579.59 (1000 x 1.57959).On the flip side, the exchange rate can also tell the investor how much he'll receive if he converts dollars back into euros. If he has $1000, he can either divide that amount by the same euro to dollar exchange rate ($1000/1.57959 = 633.07 euros), or look up the conversation rate for dollars to euros on the Internet, etc. (i.e. .633072) and multiply it by the amount of dollars to exchange ($1000 x .633072 = 633.07 euros).Once the exchange rate concept is understood, the investor can feel more confident in investing in the Forex market.
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