Archive for January, 2012

Foreign Exchange Rates

Foreign Exchange Rates

Foreign exchange rates are very important in the well being of the whole world’s economy as well as those of individuals, companies and central banks of many countries. They are defined as the value of one currency in terms of another. Even though foreign exchange rates are very important pieces of information that should be known by everyone, this is usually far from the case.

One thing that many people wonder about is the criteria used in deducting the foreign exchange rate of one currency against another. For example the euro currently has a higher foreign exchange rate than the dollar and this means that any quantity of dollar will be equivalent to a lesser quantity of the European currency.

There are two main methods used to deduct the foreign exchange rate of a currency namely fixed method and floating method.

The fixed method of foreign exchange rate deduction is the practice of a country’s central bank announcing a stable figure as the official foreign exchange rate of their currency. This method is very popular among countries such as India where its central bank sets an official figure for their currency and tries to maintain that figure by actively trading in its currency so its predetermined rate will not be at the mercy of the forces in the currency markets. The specific foreign exchange figure is arrived at after a critical comparison with major world currencies such as the Euro and US dollar.

The floating method of foreign exchange rate deduction is the most popular method in many countries around the world. There is usually limited governmental interference and the price of a currency is basically deducted from how popular a specific currency is and the amount of money people are willing to pay for it. This is usually created by the good old forces of marketing known as demand and supply. However this method can make the foreign exchange rate of a currency very volatile due to the high influence of rumors and speculation on the rates which could be created artificially by an unscrupulous group of people for their own benefits.

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Technical Analysis Indicator MACD part one

most technical analysis indicators are lagging. Let me show you how to use MACD properly and its Leading indicator values.

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Alcohol Intervention

Alcohol Intervention

Alcohol is both a fad and an addictive habit, which wrecks havoc in the lives of not just those who consume it, but also those directly or indirectly related to these people. Consuming alcohol often starts out either as a social habit or to get respite from problems and worries. But once started it is a habit that cannot be shaken off and consumption levels consistently increase. The end result is that alcohol begins to take its toll on health, efficiency, ability to work and concentrate, behavioral changes and even displays of violent temper. The sufferers with all this are innocent children and women who become victims of abuse. They might silently endure or try to use interventive methods of reducing the person’s intake of alcohol to permissible levels at least.

Alcohol intervention involves reaching out to the alcohol addict, and being able to convince him or her about the ill effects of their consumption habits.

Intervention is considered to be successful if the addict agrees to accept treatment and sincerely follows steps listed to help out of his addictive habit. Unfortunately, most alcohol addicts remain blissfully unaware of the damage their habit can lead to, and tend to justify the expense as well as the time wasted in the exercise. Intervention can be initiated by a family member, a friend or well-wisher, who could even turn to organizations that conduct regular intervention programs for alcoholics and drug addicts. Scores of websites also offer substantial amounts of information about successful drug intervention. Another source of help and support are help lines that are operational all 24 hours of the day, offering all types of assistance and advice.

Ideally, alcohol intervention must begin sooner rather than later, as old habits do die hard. It may also require considerable amount of time and energy from the partner initiating the intervention process. This would include positive conversations, creating a warm, positive environment, ensure lack of idle time by starting activities of interest, avoidance of nagging and also roping in other family members to create a suitable environment for the person to successfully shake off his bad habit. If it is found that the habit is linked to work-related stress then, even the office colleagues can be taken into confidence to provide assistance and support. The severity of the addiction eventually determines the extent and quality of intervention. New addicts can be weaned off alcohol with comparative ease, as opposed to those who have been in the habit for long. The bottom line is that whatever the time span of alcohol consumption beyond permissible limits, it can cause severe damages physically and emotionally on the person himself and just as much, if not more, on his family members.

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Why Hedge Foreign Currency Risk?

Why Hedge Foreign Currency Risk?

International commerce has rapidly increased as the internet has provided a new and more transparent marketplace for individuals and entities alike to conduct international business and trading activities. Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of foreign exchange rates. This uncertainty leads to volatility and the need for an effective vehicle to hedge foreign exchange rate risk and/or interest rate changes while, at the same time, effectively ensuring a future financial position. 

Each entity and/or individual that has exposure to foreign exchange rate risk will have specific foreign exchange hedging needs and this website can not possibly cover every existing foreign exchange hedging situation. Therefore, we will cover the more common reasons that a foreign exchange hedge is placed and show you how to properly hedge foreign exchange rate risk.

Foreign Exchange Rate Risk Exposure – Foreign exchange rate risk exposure is common to virtually all who conduct international business and/or trading.

Buying and/or selling of goods or services denominated in foreign currencies can immediately expose you to foreign exchange rate risk. If a firm price is quoted ahead of time for a contract using a foreign exchange rate that is deemed appropriate at the time the quote is given, the foreign exchange rate quote may not necessarily be appropriate at the time of the actual agreement or performance of the contract. Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.

Interest Rate Risk Exposure – Interest rate exposure refers to the interest rate differential between the two countries’ currencies in a foreign exchange contract. The interest rate differential is also roughly equal to the “carry” cost paid to hedge a forward or futures contract. As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low. In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold. Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought. Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials.

Foreign Investment / Stock Exposure – Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. Investing in foreign stocks automatically exposes the investor to foreign exchange rate risk and speculative risk. For example, an investor buys a particular amount of foreign currency (in exchange for domestic currency) in order to purchase shares of a foreign stock. The investor is now automatically exposed to two separate risks. First, the stock price may go either up or down and the investor is exposed to the speculative stock price risk. Second, the investor is exposed to foreign exchange rate risk because the foreign exchange rate may either appreciate or depreciate from the time the investor first purchased the foreign stock and the time the investor decides to exit the position and repatriates the currency (exchanges the foreign currency back to domestic currency). Therefore, even if a speculative profit is achieved because the foreign stock price rose, the investor could actually net lose money if devaluation of the foreign currency occurred while the investor was holding the foreign stock (and the devaluation amount was greater than the speculative profit). Placing a foreign exchange hedge can help to manage this foreign exchange rate risk.

Hedging Speculative Positions – Foreign currency traders utilize foreign exchange hedging to protect open positions against adverse moves in foreign exchange rates, and placing a foreign exchange hedge can help to manage foreign exchange rate risk. Speculative positions can be hedged via a number of foreign exchange hedging vehicles that can be used either alone or in combination to create entirely new foreign exchange hedging strategies. 

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All You Need to Know About Forex Currency Hedging

All You Need to Know About Forex Currency Hedging

Forex hedge denotes a transaction done by a forex trader to safeguard an existing or anticipated position from an unwanted move in exchange rates. Forex market is one of the most liquid and volatile financial market in the world.

By making correct use of hedging, a forex trader who is long a currency pair can be protected from downside risk. Similarly a forex trader who is short a currency pair can be protected against upside risk.

There are various methods of forex hedging which a trader can use. The primary ones popularly used in retail forex trade are through

1. Spot contracts and

2. Foreign currency options.

Spot contracts are the ordinary trade transactions made by retail traders.

Spot contracts have a very short delivery period of two days. Hence this method is not very effective in forex hedging. In fact hedge is basically required because of the regular spot contracts.

Foreign currency options are one of the most popular methods of forex hedging. Similar to option trading in other types of securities, foreign currency options also give the purchase the right but not the obligation, to buy or sell the currency pair at a particular exchange rate at some time in future. Here too option strategies like long straddles, long strangles and bull or bear spreads can be adopted to limit the loss potential of a given transaction.

To quote an example of hedging, the forex trader will sell CHF/JPY and at the same time buy GBP/JPY. The aim here is to make profits from both price movements and interest rate differentials. Presently a long GBP/JPY may earn significant swap interest because of large difference between rates. The forex trader will have to pay interest on the short CHF/JPY. However this interest is significantly less than the interest on the long GBP/JPY position.

Like all forex deals there is considerable amount of risk involved in hedging. Continuing with our example the CHF/JPY currency pair is normally not guaranteed to go in opposite direction to GBP/JPY. Therefore there is always an underlying risk involved in currency hedging. 

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