The Higher Institute of Management Administration and Computer Engineering EME Project in: Business English On the following subject: Exchange market Presented and sustained publicly by: Najoua Fermouche Soufiane Rouichi Cedric Belfort Oumou Touré In front of a jury composed of: Madam Najoua Souad Lagmiri Educational director of within the Higher Institute of Management, Administration and Computer Engineering Madam Zineb Bahji Professor of English within the Higher Institute of Management, Administration and Computer Engineering College year: 2019-2020 Table of contents: Acknowledgment ___________________________________________________________ 3 Introduction _______________________________________________________________ 4 Part I. Introduction to Exchange Market _______________________________________ 5 1. Definition of forex: __________________________________________________________ 5 2. Forex factors: ______________________________________________________________ 5 3. Benefits of Using the Forex Market _____________________________________________ 5 Part II. Functioning of foreign exchange market _______________________________ 7 1. functions of foreign exchange market ___________________________________________ 7 2. Influencing factors on forex___________________________________________________ 8 3. How the currency market works : ______________________________________________ 9 Part III. Risks and suggestions______________________________________________ 11 Conclusion ________________________________________________________________ 14 Bibliography ______________________________________________________________ 15 2 Acknowledgment We would like to express our gratitude to our director, Ms. Lagmiri Najoua Souad. We thank her for having supervised, guided, helped and advised us. We extend our sincere thanks to all the professors, contributors and all the people who by their words, their writings, their advice and their critics guided our reflections and agreed to meet us and to answer our questions during our research. To all of these stakeholders, we present our thanks, respect and gratitude. 3 Introduction As part of our training in 3rd year management and business administration at ISMAGI, an end of module project was requested by the administration of our institute, this project which is for us a test and a first experience in group work as well as in the development and implementation of a project report at the end of the module. Therewith, we are going to proceed with a general introduction to the project in question which will allow us to have a global idea on the subject tackled. The foreign exchange market has existed in its current form, known as the floating exchange rate regime, since March 1973 and the abandonment of the fixity of the exchange rates of the various currencies compared to the dollar standard resulting from the Bretton Woods agreements in 1944. There are several types of Forex orders: simple orders, namely market orders, limit orders and stop orders and finally combined orders, namely OCO or If Done orders . As Forex trading was not done on an organized market but on an interbank market, the only way for individuals before the 2000s to invest in exchange rates was to go through a banking institution. However, with minimum transaction amounts around one million euros, few investors had access to this market. Since the 2000s and the implementation of the MiFID directive , all investors, individuals and professionals, can then trade on the foreign exchange market for lower amounts through brokers. This market has grown strongly in recent years thanks to the Internet. Thus, our work will be divided into three chapters. First we will talk about the introduction to the foreign exchange market then we will talk how forex works and finally we will talk about the risks associated with forex 4 Part I. Introduction to Exchange Market 1. Definition of forex: The foreign exchange market (also known as forex, FX or the currency market) is an over-the-counter (OTC) global marketplace that determines the exchange rate for currencies around the world. Participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, forex dealers, commercial companies, central banks, investment management firms, hedge funds, retail forex dealers and investors. 2. Forex factors: In general, any individual carrying out a transaction directly or indirectly affecting the Forex market is considered to be a full player in this market, whether he is involved voluntarily or not. We will review here the main players present in the Forex market. • Central banks and governments. ... • Banking establishments. ... • Hedge Funds. ... • Import / export managers 3. Benefits of Using the Forex Market There are some key factors that differentiate the forex market from others, like the stock market. • There are fewer rules, which mean investors aren't held to the strict standards or regulations found in other markets. • There are no clearing houses and no central bodies that oversee the forex market. • Most investors won't have to pay the traditional fees or commissions that you would on another market. 5 • Because the market is open 24 hours a day, you can trade at any time of day, which means there's no cut-off time to be able to participate in the market. • Finally, if you're worried about risk and reward, you can get in and out whenever you want and you can buy as much currency as you can afford. 6 Part II. Functioning of foreign exchange market 1. functions of foreign exchange market Transfer Function: The basic and the most visible function of foreign exchange market is the transfer of funds (foreign currency) from one country to another for the settlement of payments. It basically includes the conversion of one currency to another, wherein the role of FOREX is to transfer the purchasing power from one country to another. For example, if the exporter of India import goods from the USA and the payment is to be made in dollars, then the conversion of the rupee to the dollar will be facilitated by FOREX. The transfer function is performed through a use of credit instruments, such as bank drafts, bills of foreign exchange, and telephone transfers. Credit Function: FOREX provides a short-term credit to the importers so as to facilitate the smooth flow of goods and services from country to country. An importer can use credit to finance the foreign purchases. Such as an Indian company wants to purchase the machinery from the USA, can pay for the purchase by issuing a bill of exchange in the foreign exchange market, essentially with a three-month maturity. Hedging Function: The third function of a foreign exchange market is to hedge foreign exchange risks. The parties to the foreign exchange are often afraid of the fluctuations in the exchange rates, i.e., the price of one currency in terms of another. The change in the exchange rate may result in a gain or loss to the party concerned. Thus, due to this reason the FOREX provides the services for hedging the anticipated or actual claims/liabilities in exchange for the forward contracts. A forward contract is usually a three month contract to buy or sell the foreign exchange for another currency at a fixed date in the future at a price agreed upon today. Thus, no money is exchanged at the time of the contract. 7 There are several dealers in the foreign exchange markets, the most important amongst them are the banks. The banks have their branches in different countries through which the foreign exchange is facilitated, such service of a bank are called as Exchange Banks 2. Influencing factors on forex Inflation: It is the widespread and sustained rise over time in the prices of goods and services in a country. The rise in the price of goods and services within an economy means that the economy's exports are considerably reduced and that imports from foreign countries are reduced. The effect of high inflation on the exchange rate of a currency will be a gradual decrease in its value. Interbank interest rates: Central banks, such as the ECB (European Union) or the FED (United States) are responsible for setting the interest rates of their respective economies and therefore they can directly influence both the inflation only on the exchange rate of their currencies. High interest rates greatly facilitate the arrival of capital from foreign investors in the country, since they are looking for high profitability, this will therefore cause an increasing demand for the local currency and push to the increase in its value. Conversely, a low interest rate will cause the value of the currency of the country concerned to fall. The real income of citizens: It is also a factor that affects the exchange rate of currencies in the Forex market. When the citizens of a country see their purchasing power increase imports will tend to be increasing more than exports and consequently this will cause a greater demand for foreign currency which will lower the value of the local currency. Political and geopolitical stability: The countries which show a certain political stability also have greater capacities in order to attract the capital of foreign investors in their own economy while increasing the value of the local currency. If the country is otherwise fairly unstable from a political and geopolitical point of view, then foreign investment will tend to decrease because the holders of foreign capital will seek to invest in other, more stable "refuge" economies, which therefore will drop the value of the local currency here. Psychological and speculative biases: The feelings of traders on the Forex market are also very important and considerably influence the exchange rate of currencies. Every day, 8 certain streams of opinions are produced by traders, they concern currencies in particular and lead to intensive speculation. A large demand on the price of a currency pair will for example increase its value in the short term. A rumor, a market noise relating to the intervention of a central bank on interest rates will also push speculative traders to buy or sell very specific currencies. 3. How the currency market works : Unlike stock and commodity trading, forex trading does not take place on a stock exchange, but directly between two parties in what is called an over-the-counter market, or OTC for over-the-counter . The forex market is managed by a global network of banks spread across four major trading centers that cover different time zones: London, New York, Sydney and Tokyo. Thanks to the absence of a centralized exchange, it is possible to trade forex 24 hours a day. There are three types of foreign exchange markets: The spot exchange market: it allows the physical exchange of a currency pair, which takes place at the exact moment when the transaction is settled, or shortly after. The forward exchange market: the two parties conclude a purchase or sale contract, the price and quantity of currencies of which are defined in advance, which will take place on a date or during a certain period situated in the future. The future foreign exchange market: the two parties conclude a purchase or sale contract, the price and quantity of currencies of which are defined in advance, which will take place on a specific date in the future. Unlike forwards, a future contract is legally binding. Most traders who trade in forex do not want to receive physical currency. Instead, they make predictions about the evolution of the exchange rate in order to take advantage of price movements. 9 What influences the forex market? Currencies from around the world make up the forex market, which is why it is difficult to make predictions of exchange rates as there are factors at play. However, like most financial markets, it is the supply and demand that most influence prices. It is therefore essential to understand how these two forces work. Central banks: The supply of foreign currency is controlled by central banks. Their different measures can therefore have a considerable impact on the price of forex. For example, quantitative easing, which involves injecting more money into the economy, can depress the currency of the country concerned. Economic data: Commercial banks and investors tend to favor healthy economies. So if good news hits a certain region of the globe, investment can be expected to rise, driving up demand for the currency in question. Unless its supply increases simultaneously, the disparity between supply and demand will cause its price to rise. Conversely, if the news is bad, investments could fall and the price of the currency could fall. Currencies therefore generally reflect the economic health of their region. Market sentiment: Market sentiment is often a reaction to the news and can play a major role in the exchange rate. If investors believe that a currency will move in a certain direction, they will position themselves accordingly, which could encourage others to do the same. 10 Part III. Risks and suggestions Risks related to forex : Exchange rate risks: Exchange rate risk is the risk caused by changes in the value of currency. It is based on the effect of continuous and usually volatile shifts in the worldwide supply and demand balance. For the period the trader’s position is outstanding, the position is subject to all price changes. This risk can be quite substantial and is based on the market's perception of which way the currencies will move based on all possible factors that happen (or could happen) at any given time, anywhere in the world. Additionally, because the offexchange trading of Forex is largely unregulated, no daily price limits are imposed as exist for regulated futures exchanges. The market moves based on fundamental and technical factors more about this later. Credit risk: Credit risk refers to the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by counterparty. Credit risk is usually something that is a concern of corporations and banks. Country and Liquidity Risk: Although the liquidity of OTC Forex is in general much greater than that of exchange traded currency futures, periods of illiquidity nonetheless have been seen, especially outside of US and European trading hours. Additionally, several nations or groups of nations have in the past imposed trading limits or restrictions on the amount by which the price of certain Foreign Exchange rates may vary during a given time period, the volume which may be traded, or have imposed restrictions or penalties for carrying positions in certain foreign currencies over time. Leverage risk: Low margin deposits or trade collateral are normally required in Foreign Exchange, (just as with regulated commodity futures). These margin policies permit a high degree of leverage. Accordingly, a relatively small price movement in a contract may result in immediate and substantial losses in excess of the amount invested. Transactional Risk: Errors in the communication, handling and confirmation of a trader's orders (sometimes referred to as "out trades") may result in unforeseen losses. Often, even where an out trade is substantially the fault of the dealing counter-party institution, the 11 trader/customer's recourse may be limited in seeking compensation for resulting losses in the account. Risk of Ruin: Even where a trader/customer's medium to longer term view of the market may be ultimately correct, the trader may not be able to financially bear short-term unrealized losses, and may close out a position at a loss simply because he or she is unable to meet a margin call or otherwise sustain such positions. Thus, even where a trader's view of the market is correct, and a currency position may ultimately turn around and become profitable had it been held, traders with insufficient capital may experience losses. Suggestions to avoid forex risks : Thinking through Market Hype: It is common practice for Forex traders to subscribe to several market information sources. While it is a good thing, the daily bombardment of “buy” and “sell” messages can impel a trader to make a trade decision without thinking properly about it. Even when it seems like everyone else out there is making money, don’t just take action because the charts are screaming at you. Remember that the money at risk is yours, not your broker’s or your news provider’s. Thinking objectively amid the hype is a big challenge for many traders and probably the major factor differentiating successful and frustrated traders. Learning to resist the pressure of trading emotionally helps to avoid unnecessary trading risk. Trade longer time-frames/avoid high frequency trading: Shorter time-frames are generally more volatile than longer time-frames. The higher level of unpredictability of shorter time frames makes trading them more stressful. Trading short time frames is also less profitable due to trading fees. Longer frames like the hourly, 4-hourly or daily chart provide more certainty and are less stressful. You have relatively more time to plan trades. Trading longer time frames is also more profitable since fees and slippage are lower. Trade markets that have low correlation: Trading uncorrelated markets or those with low correlation follows the idea of diversification. In all kinds of investment, diversification entails holding investments whose returns and risks don’t follow the same direction. It is a way of reducing the overall risk of the investment portfolio. You don’t want your holdings in 12 a Forex trading account to move in the same direction because you will have no protection in case the market turns in an unexpected way. Many currency pairs have high correlations, meaning that when one currency trends in a certain direction its counterpart moves in the same direction. Holding highly correlated currencies concentrates risk rather than lowering it. It is a good practice to diversify your account with currency pairs that have low correlation. Study money management: Managing risk in Forex means managing money on a daily basis. Understanding how to manage trading capital effectively is the most essential tool of minimizing losses and maximizing profits in online trading. Successful Forex trading is not just about pumping in big money to earn big profits. Without proper money management skills even a million dollar trading account can run dry in a matter of days. Commit to mastering money management principles such as: Start with a small capital and grow your account as you learn Use a demo account before trading with real money Use correct stop losses to minimize trading risk and thus protect your profits Keep your leverage low Accept your losses and move on swiftly These are just a few money management tips for Forex trading. Trade using a regulated Forex broker: Fraud is not a stranger to financial markets. Forex trading, therefore, has an element of risk due to the possibility of being involved in a fraudulent scheme. The last thing you want is to lose your hard-earned capital to a fraud dealer. Do thorough research on your desired broker before opening an account with them. Ensure that they are registered and regulated by relevant authorities. Forex broker reviews can be of great help when you are doing your due diligence. 13 Conclusion The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. As the currency market keeps changing, so do the Forex risks that a trader faces. Managing trading risk effectively requires one to have a clear understanding of the risks and a strong plan of how to reduce them when making trading decisions. The above tips should help you put up a risk management strategy that will support your success in Forex trading. Indeed, despite the different risks that forex presents, Forex trading has become widely available in recent decades, it is essential to understand the advantages offered by Forex compared to the stock market because the latter is still the one of the best ways to make money these days. 14 Bibliography https://www.slideshare.net/pujachaudhary/forex-ppt https://www.ig.com/fr/forex/quest-ce-que-le-trading-sur-forexquelle-est-sa-fonction#information-banner-dismiss https://www.tradingacademy.com/financial-educationcenter/forex-risks.aspx https://www.tutorialspoint.com/forex_trading/forex_trading_forei gn_exchange_risks.htm https://www.noobpreneur.com/2019/03/26/how-to-reduce-forextrading-risks/ https://www.investopedia.com/articles/forex/11/why-tradeforex.asp 15
