A Foreign Exchange Primer

A Foreign Exchange Primer

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A FOREIGN EXCHANGE PRIMER Second Edition Shani Shamah A John Wiley and Sons, Ltd., Publication

Copyright C 2008 Shani Shamah Published by John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) 1243 779777 Email (for orders and customer service enquiries): cs-books@wiley.co.uk Visit our Home Page on www.wiley.com All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, Saffron House, 6-10 Kirby Street, London, EC1N 8TS, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or emailed to permreq@wiley.co.uk, or faxed to (+44) 1243 770620. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The Publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Other Wiley Editorial Offices John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA 94103-1741, USA Wiley-VCH Verlag GmbH, Boschstr. 12, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 6045 Freemont Blvd, Mississauga, ONT, L5R 4J3, Canada Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Shamah, Shani. A foreign exchange primer / Shani Shamah. 2nd ed. p. cm. Includes bibliographical references and index. ISBN 978-0-470-75437-5 1. Foreign exchange futures. 2. Foreign exchange market. I. Title. HG3853.S53 2008 332.4 5 dc22 2008040294 Typeset in 10/12pt Times by Aptara Inc., New Delhi, India Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

Contents Disclaimer ix 1 Introduction 1 PART I MARKET OVERVIEW 7 2 A Brief History of the Market 9 3 Market Overview 25 4 Major Participants 33 5 Roles Played 43 6 Purposes 45 PART II FOREIGN EXCHANGE PRODUCTS 49 7 Spot Foreign Exchange 51 8 Forward Contracts 59 9 Short- and Long-Dated Contracts 69 10 Broken-Dated Contracts 73 Glossary of Terms for Chapters 7 to 10 77

vi Contents 11 Non-Deliverable Forwards 81 12 Foreign Exchange Swaps 91 13 Currency Swaps 95 14 Foreign Exchange Options 99 15 Picturing Profit and Loss of Options 117 Glossary of Terms for Chapters 14 and 15 133 16 Foreign Exchange Futures 137 17 Exchange for Physical 145 PART III ESSENTIAL KNOWLEDGE 149 18 Foreign Exchange Dealing Rooms 151 19 Managing the Relationship with an Institution 155 20 Foreign Exchange Dealings 159 21 Foreign Exchange Market Orders 165 Glossary of Terms for Chapter 21 169 22 Electronic Foreign Exchange Trading 171 23 Margin Trading 179 PART IV FUNDAMENTALS AND TECHNICAL ANALYSIS 183 24 Fundamental versus Technical Approaches 185 25 Fundamental Analysis 191 26 Key Factors Impacting Currencies 197

Contents vii 27 Technical Analysis 207 Glossary of Terms for Chapters 24 to 27 221 28 Market Psychology 223 29 Final Remarks 231 Index 235

Disclaimer This publication is for information purposes only and contains advice, recommendations and/or opinions that may be used as the basis for trading. The publication should not be construed as solicitation or as offering advice for the purposes of the purchase or sale of any financial product. The information and opinions contained within this publication were considered to be valid when published. The charts, additional examples and pictures have been kindly supplied by MMS, 4castweb.com and GFT Global Markets. While MMS, 4CAST Limited and GFT Global Markets have attempted to be as accurate as possible with the information presented here, they do not guarantee its accuracy or completeness and make no warranties of merchantability or fitness for a particular purpose. In no event shall they be liable for direct, indirect or incidental, special or consequential damages resulting from the information herein regardless of whether such damages were foreseen or unforeseen. Any opinions expressed in this publication are given in good faith, but are subject to change without notice. Please note: All rates and figures used in the examples are for illustrative purposes only. The contents are copyright Shani Shamah 2008 and should not be used or distributed without the author s prior agreement.