Retail forex

In financial markets, the retail forex (retail off-exchange currency trading or retail FX) market is a subset of the larger foreign exchange market. This "market has long been plagued by swindlers preying on the gullible," according to The New York Times[1]. Whilst there may be a number of fully regulated, reputable international companies that provide a highly transparent and honest service, it's commonly thought that about 90% of all retail FX traders lose money. [2] [3]
It is now possible to trade cash FX, or forex (short for Foreign Exchange (FX)) or currencies around the clock with hundreds of foreign exchange brokers through trading platforms. The reason that the business is so profitable is because in many cases brokers are taking the opposite side of the trade, and therefore turning client capital directly into broker profit as the average account loses money. Some brokers provide a matching service, charging a commission instead of taking the opposite site of the trade and "netting the spread", as it is referred to within the forex "industry."
Recently forex brokers have become increasingly regulated. Minimum capital requirements of US$20m now apply in the US, as well as stringent requirements now in Germany and the United Kingdom. Switzerland now requires forex brokers to become a bank before conducting FX brokerage business from Switzerland.[citation needed]
Algorythmic or machine based formula trading has become increasingly popular in the FX market,with a number of popular packages allowing the customer to program his own studies.
The most traded of the "major" currencies is the pair known as the EUR/USD, due to its size, median volatility and relatively low "spread", referring to the difference between the bid and the ask price. This is usually measured in "pips", normally 1/100 of a full point.[citation needed]
According to the October 2008 issue of e-Forex Magazine, the retail FX market is seeing continued explosive growth despite, and perhaps because of, losses in other markets like global equities in 2008

Interpretation for the Financial Markets

While the overall number of jobs added or lost in the economy is obviously an important current indicator of what the economic situation is, the report also includes several other pieces of data that can move financial markets:
1. What the unemployment rate is in the economy as a percentage of the overall workforce. This is an important part of the report as the amount of people out of work is a good indication of the overall health of the economy, and this is a number that is watched by the Fed as when it becomes too low (generally anything below 5%) inflation is expected to start to creep up as businesses have to pay up to hire good workers and increase prices as a result.
2. What sectors the increase or decrease in jobs came from. This can give traders a heads up on which sectors of the economy may be primed for growth as companies in those sectors such as housing add jobs.
3. Average hourly earnings. This is an important component because if the same amount of people are employed but are earning more or less money for that work, this has basically the same effect as if people had been added or subtracted from the labor force.
4. Revisions of previous nonfarm payrolls releases. An important component of the report which can move markets as traders re-price growth expectations based on the revision to the previous number

Interpretation for the Economy

In general increases in employment means businesses are hiring which means they are growing and also that more people are employed so more people have money to spend on goods and services further fueling growth. The opposite of this is obviously true for decreases in employmentWhile the overall number of jobs added or lost in the economy is obviously an important current indicator of what the economic situation is, the report also includes several other pieces of data that can move financial markets

Nonfarm payrolls

Nonfarm payrolls is a U.S. economic employment report released monthly.
It is a compiled name for goods-producing, construction and manufacturing companies. The U.S. Department of Labor Bureau of Labor Statistics releases preliminary data covering the previous month's survey at 8:30 a.m. Eastern Time on the first Friday of every month, or according to the U.S. Department of Labor the report is released on the third Friday after the conclusion of the reference week, i.e, the week which includes the 12th of the month, and usually heavily affects the US dollar, the bond market and the stock market, if it is even slightly different from what is expected.
The figure released is the change in nonfarm payrolls (NFP), compared to the previous month, and is usually between +10,000 and +250,000 during non-recessional times. The NFP number is meant to represent the number of jobs added or lost in the economy over the last month, not including jobs relating to the farming industry. The farming industry is not included because of its seasonal hiring which would distort the number around harvest times (as farms add workers and then release them after the harvest is complete).

Interpretation

Traders often look to enter a position on the break of the neckline, interpreting the neckline as a support level. Upon a break of the neckline, traders will frequently set a target profit equal to the distance between the neckline and the head of the chart. A stop loss order is frequently set at where the right shoulder is. As a result, the head and shoulders pattern can be used by traders not only to identify entry points, but also to manage the risk of the trade as well.
The image below illustrates how a head and shoulders pattern can help traders identify entry points, stop-loss levels, and target profit levels.

Structure of Head and Shoulders Pattern

Head and shoulders patterns have four elements: a left shoulder, which is essentially a relative peak; a head, which is a peak above both shoulders; a right shoulder, which is a peak that is approximately parallel to the left shoulder; and a neckline, which serves as a support, or bottom, of price activity within the range of the head and shoulders pattern. The chart below illustrates.

Head and shoulders (chart pattern)

The head and shoulders pattern is a commonly found pattern in the price charts of financially traded assets (stocks, bonds, futures, etc). The pattern derives its name from the fact that its structure is visually similar to that of a head with two shoulders

Contents[hide]
1 Structure of Head and Shoulders Pattern
2 Interpretation
3 See also
4 External links

Pricing

The relationship between spot and forward is as follows:

where:
F = forward rate
S = spot rate
r1 = simple interest rate of the term currency
r2 = simple interest rate of the base currency
T = tenor (calculated according to the appropriate day count convention)
The forward points or swap points are quoted as the difference between forward and spot, F - S, and is expressed as the following:

where r1 and r2 are small. Thus, the absolute value of the swap points increases when the interest rate differential gets larger, and vice versa

Uses

By far and away the most common use of FX swaps is for institutions to fund their foreign exchange balances.
Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. To do this they typically use tom-next swaps, buying (selling) a foreign amount settling tomorrow, and selling (buying) it back settling the day after.
The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades

Forex swap

In finance, a forex swap (or FX swap) is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward
A forex swap consists of two legs:
a spot foreign exchange transaction, and
a forward foreign exchange transaction.
These two legs are executed simultaneously for the same quantity, and therefore offset each other.
It is also common to trade forward-forward, where both transactions are for (different) forward dates

The use of high leverage

By offering high leverage, the market maker encourages traders to trade extremely large positions. This increases the trading volume cleared by the market maker and increases his profits, but increases the risk that the trader will receive a margin call. While professional currency dealers (banks, hedge funds) never use more than 10:1 leverage, retail clients are generally offered leverage between 50:1 and 200:1[2].
A self-regulating body for the foreign exchange market, the National Futures Association, warns traders in a forex training presentation of the risk in trading currency. “As stated at the beginning of this program, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital; in other words, funds you can afford to lose without affecting your financial situation.“ [

Not beating the market

The foreign exchange market is a zero sum game[7] in which there are many experienced well-capitalized professional traders (e.g. working for banks) who can devote their attention full time to trading. An inexperienced retail trader will have a significant information disadvantage compared to these traders.
Although it is possible for a few experts to successfully arbitrage the market for an unusually large return, this does not mean that a larger number could earn the same returns even given the same tools, techniques and data sources. This is because the arbitrages are essentially drawn from a pool of finite size; although information about how to capture arbitrages is a nonrival good, the arbritrages themselves are a rival good. (To draw an analogy, the total amount of buried treasure on an island is the same, regardless of how many treasure hunters have bought copies of the treasure map.)
Retail traders are - almost by definition - undercapitalized. Thus they are subject to the problem of gambler's ruin. In a fair game (one with no information advantages) between two players that continues until one trader goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt.
The retail trader always pays the bid/ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be "resettled" each day, each time costing the full bid/ask spread.
According to the Wall Street Journal (Currency Markets Draw Speculation, Fraud July 26, 2005) "Even people running the trading shops warn clients against trying to time the market. 'If 15% of day traders are profitable,' says Drew Niv, chief executive of FXCM, 'I'd be surprised.' "[15]
Paul Belogour, the Managing Director of a Boston based retail forex trader, was quoted by the Financial Times as saying, "Trading foreign exchange is an excellent way for investors to find out how tough the markets really are. But I say to customers: if this is money you have worked hard for – that you cannot afford to lose – never, never invest in foreign exchange

Forex scam

A forex (or foreign exchange) scam is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading "has become the fraud du jour" as of early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission. [1] But "the market has long been plagued by swindlers preying on the gullible," according to the New York Times [2]. "The average individual foreign-exchange-trading victim loses about $15,000, according to CFTC records" according to The Wall Street Journal. [3] The North American Securities Administrators Association says that "off-exchange forex trading by retail investors is at best extremely risky, and at worst, outright fraud." [4]
“In a typical case, investors may be promised tens of thousands of dollars in profits in just a few weeks or months, with an initial investment of only $5,000. Often, the investor’s money is never actually placed in the market through a legitimate dealer, but simply diverted – stolen – for the personal benefit of the con artists.”[5]
In August, 2008 the CFTC set up a special task force to deal with growing foreign exchange fraud.”[6]
The forex market is a zero-sum game[7] , meaning that whatever one trader gains, another loses, except that brokerage commissions and other transaction costs are subtracted from the results of all traders, technically making forex a "negative-sum" game.
These scams might include churning of customer accounts for the purpose of generating commissions, selling software that is supposed to guide the customer to large profits, [8] improperly managed "managed accounts", [9] false advertising, [10] Ponzi schemes and outright fraud. [4] [11] It also refers to any retail forex broker who indicates that trading foreign exchange is a low risk, high profit investment. [12]
The U.S. Commodity Futures Trading Commission (CFTC), which loosely regulates the foreign exchange market in the United States, has noted an increase in the amount of unscrupulous activity in the non-bank foreign exchange industry.[13]
An official of the National Futures Association was quoted [14] as saying, "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically..." Between 2001 and 2006 the U.S. Commodity Futures Trading Commission has prosecuted more than 80 cases involving the defrauding of more than 23,000 customers who lost $350 million. From 2001 to 2007, about 26,000 people lost $460 million in forex frauds. [1] CNN quoted Godfried De Vidts, President of the Financial Markets Association, a European body, as saying, "Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?"

Levels

United States dollars and 26.5% in euros [1].
Monetary Authorities with the largest foreign reserves in 2008.
Rank
Country/Monetary Authority
billion USD (end of month)
change in year 2007
1
People's Republic of China
$ 1953 (Mar 2009) 1[1]
+32.9%
2
Japan
$ 1019 (Mar 2009)
+8.7%
-
Eurozone
$ 531 (Feb 2009)
+16.6%
3
Russia
$ 413 (June 2009) 2 [2]
▲
4
Taiwan
$ 305 (Apr 2009) [3]
+2.7%
5
India
$ 262 (June 2009) 2 [4]
+64.4%
6
South Korea
$ 232 (Jun 2009)
▲
7
Brazil
$ 206 (Jun 2009) 3
+105.9%
8
Hong Kong
$ 186 (Mar 2009)
+14.6%
9
Singapore
$ 166 (Mar 2009)
+19.1%
10
Germany
$ 144 (Feb 2009)
-

Excess reserves

Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds. If those were included, Norway and Persian Gulf States would rank higher on these lists, and UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its foreign exchange reserves

Costs, benefits, and criticisms

Large reserves of foreign currency allow a government to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment. In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case.
There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but the U.S. dollar has been weakening on the exchange markets, resulting in a relative loss of wealth. In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets

Changes in reserves

The quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized[clarification needed]) to maintain the targeted exchange rate within the prescribed limits (China has been repeatedly accused of doing this by the USA).
Foreign exchange operations that are unsterilized will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect monetary policy and inflation: An exchange rate target cannot be independent of an inflation target. Countries that do not target a specific exchange rate are said to have a floating exchange rate, and allow the market to set the exchange rate; for countries with floating exchange rates, other instruments of monetary policy are generally preferred and they may limit the type and amount of foreign exchange interventions. Even those central banks that strictly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements.
To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, although eventually the increased domestic money supply will result in inflation and reduce the demand for the domestic currency (as its value relative to goods and services falls). In practice, some central banks, through open market operations aimed at preventing their currency from appreciating, can at the same time build substantial reserves.
In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors (domestic demand, production and productivity, imports and exports, relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts (such as inflation) can take many months or even years to become evident, changes in foreign reserves and currency values in the short term may be quite large as different markets react to imperfect data

Purpose

In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money itself as IOUs). This action can stabilise the value of the domestic currency.
Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.

History

Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves

Foreign exchange reserves

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions

Under US GAAP

The US Generally Accepted Accounting Principles also include instruction on accounting for derivatives. For the most part, the rules are similar to those given under IFRS. The standards that include these guidelines are SFAS 133 and 138. SFAS 133, written in 1998, stated that a “recognized asset or liability that may give rise to a foreign currency transaction gain or loss under Statement 52 (such as a foreign-currency-denominated receivable or payable) not be the hedged item in a foreign currency fair value or cash flow hedge” [4]. Based on the language used in the statement, this was done because the FASB felt that the assets and liabilities listed on a company’s books should reflect their historic cost value, rather than being adjusted for fair value. The use of a hedge would cause them to be revalued as such. Remember that the value of the hedge is derived from the value of the underlying asset. The amount recorded at payment or reception would differ from the value of the derivative recorded under SFAS 133. As illustrated above in the example, this difference between the hedge value and the asset or liability value can be effectively accounted for by using either a cash flow or a fair value hedge. Thus, two years later FASB issued SFAS 138 which amended SFAS 133 and allowed both cash flow and fair value hedges for foreign exchanges. Citing the reasons given previously, SFAS 138 required the recording of derivative assets at fair value based on the prevailing spot rate [5].

[edit] Fair Value Hedge Example

12/1/Y1
Inventory
$20,000.00
to record purchase and A/P of 20000C
A/P
$20,000.00
12/31/Y1
Foreign Exchange Loss
$1,000.00
to adjust value for S.R of $1.05
A/P
$1,000.00
Forward Contract
$1,176.36
to record forward contract at fair value
Gain on Forward Contract
$1,176.36
3/1/Y2
Foreign Exchange Loss
$1,400.00
to adjust value for S.R. of $1.12
A/P
$1,400.00
Forward Contract
$423.64
to adjust the fwd. contract to its FV
Gain on Forward Contract
$423.64
Foreign Currency
$22,400.00
to record the settlement of the fwd. cont.
Forward Contract
$1,600.00
Cash
$20,800.00
A/P
$22,400.00
to record the payment of the A/P
Foreign Currency
$22,400.00
Again, notice that the amounts paid are the same as in the cash flow hedge. The big difference here is that the adjustments are made directly to the assets and not to the other comprehensive income holding account. This is because this type of hedge is more concerned with the fair value of the asset or liability (in this case the account payable) than it is with the profit and loss position of the entity

Cash Flow Hedge Example

12/1/Y1
Inventory
$20,000.00
To record purchase and A/P of 20000C
A/P
$20,000.00
12/31/Y1
Foreign Exchange Loss
$1,000.00
To adjust value for spot of $1.05
A/P
$1,000.00
AOCI
$1,000.00
To record a gain on the forward contract
Gain on Forward Contract
$1,000.00
Forward Contract
$1,176.36
To record the forward contract as an asset
AOCI
$1,176.36
Premium Expense
$266.67
Allocate the fwd contract discount
AOCI
$266.67
3/1/Y2
Foreign Exchange Loss
$1,400.00
To adjust value for spot of $1.12
A/P
$1,400.00
AOCI
$1,400.00
To record a gain on the forward cont.
Gain on Forward Contract
$1,400.00
Forward Contract
$423.64
To adjust the fwd. cont. to its FV of $1600
AOCI
$423.64
Premium Expense
$533.33
To allocate the remaining fwd. cont. discount
AOCI
$533.33
Foreign Currency
$22,400.00
To record the settlement of the fwd. cont.
Forward Contract
$1,600.00
Cash
$20,800.00
A/P
$22,400.00
To record the payment of the A/P
Foreign Currency
$22,400.00
Notice how in year 2 when the payable is paid off, the amount of cash paid is equal to the forward rate of exchange back in year 1. Any change in the forward rate, however, changes the value of the forward contract. In this example, the exchange rate climbed in both years, increasing the value of the forward contract. Since the derivative instruments are required to be recorded at fair value, these adjustments must be made to the forward contract listed on the books. The offsetting account is other comprehensive income. This process allows the gain and loss on the position to be shown in Net income.
The second is a fair value hedge. Again, according to IAS 39 this is “a hedge of the exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect profit or loss” [3]. More simply, this type of hedge would eliminate the fair value risk of assets and liabilities reported on the Balance sheet. Since Accounts receivable and payable are recorded here, a fair value hedge may be used for these items. The following are the journal entries that would be made if the previous example were a fair value hedge

Accounting for Derivatives

[edit] Under IFRS
Guidelines for accounting for financial derivatives are given under IFRS 7. Under this standard, “an entity shall group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the balance sheet” [1]. Derivatives should be grouped together on the balance sheet and valuation information should be disclosed in the footnotes. This seems fairly straightforward, but IASB has issued two standards to help further explain this procedure. The International Accounting Standards IAS 32 and 39 help to give further direction for the proper accounting of derivative financial instruments. IAS 32 defines a “financial instrument” as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity” [2]. Therefore, a forward contract or option would create a financial asset for one entity and a financial liability for another. The entity required to pay the contract holds a liability, while the entity receiving the contract payment holds an asset. These would be recorded under the appropriate headings on the balance sheet of the respective companies. IAS 39 gives further instruction, stating that the financial derivatives be recorded at fair value on the balance sheet. IAS 39 defines two major types of hedges. The first is a cash flow hedge, defined as: “a hedge of the exposure to variability in cash flows that (i) is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction, and (ii) could affect profit or loss” [3]. In other words, a cash flow hedge is designed to eliminate the risk associated with cash transactions that can affect the amounts recorded in net income. Below is an example of a cash flow hedge for a company purchasing Inventory items in year 1 and making the payment for them in year 2, after the exchange rate has changed.
Date
Spot Rate
US $ value
Change
Fwd. Rate
US $ value
FV of contract
Change
12/1/Y1
$1.00
$20,000.00
$0.00
$1.04
$20,800.00
$0.00
$0.00
12/31/Y1
$1.05
$21,000.00
$1,000.00
$1.10
$22,000.00
($1,176.36)
($1,176.36)
3/2/Y2
$1.12
$22,400.00
$1,400.00
$1.12
$22,400.00
($1,600.00)
($423.64)

Hedge

A hedge is a type of derivative, or a Financial instrument, that derives its value from an underlying asset. This concept is important and will be discussed later. Hedging is a way for a company to minimize or eliminate foreign exchange risk. Two common hedges are forwards and options. A Forward contract will lock in an exchange rate at which the transaction will occur in the future. An option sets a rate at which the company may choose to exchange currencies. If the current exchange rate is more favorable, then the company will not exercise this option

Foreign Exchange Risk

When companies conduct business across borders, they must deal in foreign currencies . Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavorably before the currency is exchanged

Foreign exchange hedge

A way for companies to eliminate foreign exchange (FOREX) risk when dealing in foreign currencies. This can be done using either the cash flow or the fair value method. The accounting rules for this are addressed by both the International Financial Reporting Standards (IFRS) and by the US Generally Accepted Accounting Principles (US GAAP

Foreign currency mortgage

A foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident. Foreign currency mortgages can be used to finance both personal mortgages and corporate mortgages.
The interest rate charged on a Foreign currency mortgage is based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower's own domestic currency. Therefore, a Foreign currency mortgage should only be considered when the interest rate on the foreign currency is significantly lower than the borrower can obtain on a mortgage taken out in his or her domestic currency.
Borrowers should bear in mind that ultimately they have a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower's domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. Therefore, in effect, the borrower makes a capital saving.
Conversely, if the exchange rate of borrowers domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. Therefore, the borrower makes a capital loss.
When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging (see below).
Managed currency mortgages can help to reduce risk exposure. A borrower can allow a specialist currency manager to manage their loan on their behalf (through a limited power of attorney), where the currency manager will switch the borrower's debt in and out of foreign currencies as they change in value against the base currency. A successful currency manager will move the borrower's debt into a currency which subsequently falls in value against the base currency. The manager can then switch the loan back into the base currency (or another weakening currency) at a better exchange rate, thereby reducing the value of the loan. A further benefit of this product is that the currency manager will try to select currencies with a lower interest rate than the base currency, and the borrower therefore can make substantial interest savings.
There are risks associated with these types of mortgages and the borrower must be prepared to accept an (often limited) increase in the value of their debt if there are adverse movements in the currency markets.
A successful currency manager may be able to use the currency markets to pay off a borrower's loan (through a combination of debt reduction and interest rate savings) within the normal lifetime of the loan, while the borrower pays on an interest only basis

Double top

A double top is a reversal chart pattern which is defined by a chart where a financial instrument makes a run up to a particular level, then drops back from that level, then makes a second run at that level, and then finally drops back off again.

[edit] Significance for traders
The double top pattern shows demand outpacing supply (buyers predominate) up to the first top, causing prices to rise. The supply/demand situation then reverses; supply outpaces demand (sellers predominate), causing prices to fall. After a price "valley", buyers again predominate and prices rise. If traders see that prices are not pushing past their level at the first top, sellers may again prevail, lowering prices and causing a double top to form. It is generally regarded as a bearish sign if prices drop below their level at the earlier valley between the two tops

Currency correlation

Currency correlation is a statistical measure of the strength and direction of a linear relationship between two currency pairs. Currency correlation is computed as a correlation coefficient. In the broader sense, currency correlation can refer to the correlation between any currency pairs and the commodities, stocks and bonds markets

Spread

The usually quoted rate is a "spot price". For a real transaction there are two prices: the lower price (bid) is the price at which a market maker or a brokerage in general is willing to buy the first currency of a pair; the higher price (ask) is the price at which a brokerage is willing to sell the first currency of a pair. See bid/ask spread for more. For example if the quotation of EUR/USD is 1.3607/1.3609, then the spread is USD 0.0002 (or 2 pips). In general, the more popular the pair is, the smaller the differences or spreads. Different brokerage firms have different spreads. Of course a bureau de change may have totally ridiculous spreads but this is usually for small amounts

Cross Rates

Cross rate is a currency pair that does not include USD, such as GBP/JPY. Pairs that involve the EUR are called euro crosses, such as EUR/GBP. All other currency pairs (those that don't involve USD or EUR) are generally referred to as cross rates

Majors

Majors are the most liquid and widely traded currency pairs in the world. Trades involving majors make up about 90% of total Forex trading.
The Majors are: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD.[citation needed]
GBP/USD is the only currency pair with its own name. It is known as "Cable", which has its origins from the days when a cable under the Atlantic synchronized the GBP/USD rate between the London and New York markets.[citation needed]

Currency pair

A currency pair depicts a quotation of two different currencies. The first currency in the pair is the base currency (or transaction currency). The second currency in the pair is labelled quote currency (payment currency, counter currency). Such a quotation depicts how many units of the counter currency are needed to buy one unit of the base currency.
For example the quotation EUR/USD 1.2500 means that one euro is exchanged for 1.25 US dollar. If the quote moves from EUR/USD 1.2500 to EUR/USD 1.2510, the euro is getting stronger and the dollar weaker. On the other hand if the EUR/USD quote moves from 1.2500 to 1.2490 the euro is getting weaker while the dollar is getting stronger.

Market participants

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the "line" (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs

Market size and liquidity

The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.
FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Top 10 currency traders [5]% of overall volume, May 2008
Rank
Name
Volume
1
Deutsche Bank
21.70%
2
UBS AG
15.80%
3
Barclays Capital
9.12%
4
Citi
7.49%
5
Royal Bank of Scotland
7.30%
6
JPMorgan
4.19%
7
HSBC
4.10%
8
Lehman Brothers
3.58%
9
Goldman Sachs
3.47%
10
Morgan Stanley
2.86%
Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).[6] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.[3] These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".
These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to

foreign exchange market (currency, forex, or FX)

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system until 1971.
Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollars, Euros, Japanese yen, Pounds Sterling, etc., and the need for trading in such currencies