Trading in the Global Currency Markets brings the universe of foreign exchange within the reach of every trader.
Including complete coverage of the euro and the latest historical and economic changes in the market, this essential resource gives traders an indispensable overview of the market's workings and new technologies, then links this information to developments and case studies drawn from the real world, illustrating them with plenty of graphics, charts, and visuals. Traders will find:
- Analysis of the mechanics of the market, the major players and markets, corporate trading, methods of trading execution, and pertinent risks
- A thorough overview of foreign exchange instruments and major option strategies, with clear explanations of why currencies are traded and how to forecast currency behavior
- An in-depth look at the two types of analysis-fundamental and technical
- Forex scenarios from the multiple perspectives of trader, broker, and corporate trader
- Vital information about the new generation of extremely aggressive "hedge funds"
- A survey of technical analysis, including an in-depth comparison of the major chart types, chart formations, and oscillators
Trading in the Global Currency Markets also provides valuable historical context, explaining the basis of foreign exchange and the factors that contributed to growth of the industry. It asks the basic questions, and then provides comprehensive answers that will benefit both beginning traders and seasoned market experts.
About the Author
Cornelius Luca is a foreign currency market expert with more than twenty years of experience in international finance. He is the author of Technical Analysis Applications in the Global Currency Markets (Prentice Hall Press, NYIF), and teaches classes and seminars at the New York Institute of Finance and New York University.
Table of Contents
Preface xiii Acknowledgments xvii
1 What is Foreign Exchange? 1
Why Foreign Exchange Occurs 1
Factors That Have Contributed to Foreign
Exchange Volume Growth 2
2 Historical Development of Foreign Exchange 9
A Historical Perspective 9
The Bretton Woods Accord 11
Why the Bretton Woods Accord Failed 16
After Bretton Woods 17
The Free-Floating Foreign Exchange Markets 18
An Overview of the Emerging Market Crisis in the 1990s 21
3 The European Monetary Union 23
Historical Background 23
The European Monetary System 26
Emergence of the Euro 33
The European Central Bank (ECB) 38
Conclusion 44
4 Currency Characteristics 46
The ISO Codes 46
The U.S. Dollar 47
The Euro 48
The Japanese Yen 52
The British Pound 53
The Swiss Franc 54
The Major Foreign Exchange Markets 56
The Major Players 56
Conclusion 60
5 Foreign Exchange Risks 62
Exchange Rate Risk 62
Interest Rate Risk 85
Credit Risk 86
Country Risk 89
Conclusion 90
6 Central Banks 91
The Federal Reserve 91
The Federal Reserve's Role in Foreign
Exchange 93
An Overview of the Central Banks of the Other G 7 Countries 100
7 Price Structure and Foreign Exchange Terminology 104
Spot Market 104
Forward Market 105
Futures Market 105
Foreign Exchange Terms 106
Currency Fixings 111
8 Corporate Trading 113
The Role of Foreign Exchange for Corporations 113
Types of Corporations 114
Types of Exposure 114
Hedging 119
How Foreign Exchange Is Executed 123
Different Points of View 126
9 Foreign Exchange Settlement 128
The Role of the Back Office 128
SWIFT 132
Advisory Bilateral Foreign Exchange Netting
Service 134
ACCORD 135
CHIPS 137
Conclusion 139
Appendix 140
10 Conducting Foreign Exchange Trading 149
The Brokers' Market 149
Direct Dealing 156
Dealing Systems 159
Matching Systems 162
11. The Spot Market 164
The Foreign Currency Spot Marketplace 165
Profit and Loss 169
Characteristics of a Spot Trader 176
Conclusion 177
12 The Forward Currency Market 179
The Forward Foreign Currency Marketplace 179
General Characteristics of the Forward Market 180
The Forward Price 181
Introduction to the Types of Forward Spreads 183
Methods of Calculating the Forward Outright Prices 187
The Interest Rate Differential 188
The Maturity Dates 192
Currency Forward Outright Deals 196
Currency Swaps 198
Trading Currency Swaps 199
The Rollover or Toni/Next Swap 202
Covered Interest Rate Arbitrage 206
13 Currency Crosses 208
The Cross Foreign Currency Marketplace 208
Price Calculation 211
Relative Strength of a Currency 215
Trading Components 215
Position Calculation 215
Calculation of the Cross Profit and Loss 216
14 Currency Futures 219
The Currency Futures Marketplace 220
The International Monetary Market 220
Characteristics of Currency Futures 221
The Look of Currency Futures 222
Futures Market and Cash Market: Comparisons 224
Margins 226
Contract Size 227
Floor Trading 227
Trading Hours 228
Mark-to-Market 231
Arbitrage 231
Exchange for Physical (EFP) 232
Current Directions in the Futures Markets 233
Regulation in the United States 234
Conclusion 235
15 Currency Options 236
The Currency Options Marketplace 236
Benefits of Trading Options 237
Where Currency Options Are Traded 239
Premium 248
Theoretical Models: Factors Determining Option Price 249
Option Pricing 267
16 Major option Strategies on Currencies 271
Basic Strategies 271
Compound Strategies 278
Ratio Spreads 289
Spreads with Both Options and Currency 294
Exotic Options 296
Average Options 304
Conclusion 305
17 Economic Fundamentals 307
Economic Fundamentals 307
Theories of Exchange Rate Determination 310
Economic Indicators 316
Industrial Sector Indicators 322
Construction Data 326
Inflation Indicators 327
Balance of Payments 332
Employment Indicators 335
Consumer Spending Indicators 337
Leading Indicators 339
Conclusion 341
18 Financial and Sociopolitical Factors 343
The Role of Financial Factors 343
Political Events 347
Political Crises 349
Conclusion 350
19 Technical Analysis 351
The Evolution of Technical Analysis 351
Types of Charts: A Comparison 356
Volume and Open Interest 364
The Importance of the Long-Term Charts 378
Percentage Retracements 381
20 Trend Reversal Patterns 384
Head-and-Shoulders 384
Inverse Head-and-Shoulders 388
Double Top 389
Double Bottom 393
Triple Top and Triple Bottom 393
V-Formations (Spikes) 395
Other Patterns 398
21 Trend Continuation Patterns 401
Flag Formation 401
Pennant Formation 403
Triangle Formation 405
Wedge Formation 411
Rectangle Formation 413
22 Formations Unique to Bar Charts for Futures 416
Gaps 416
Island Reversals 421
Key Reversal Days 421
23 Point-and-Figure Charting 423
Triple Tops and Bottoms 425
Support and Resistance Lines 429
Consolidation Formations 430
The Horizontal Count 432
24 Candlestick Charting 434
Daily White Candlesticks 435
Daily Black Candlesticks 436
Daily Reversal Patterns 438
Two-Day Candlestick Combinations 441
25 Quantitative Trading Methods 458
Moving Averages 458
Trading Signals 461
26 Oscillators and Studies 465
Stochastics 465
Moving Average Convergence-Divergence 467
Momentum 469
The Relative Strength Index (RSI) 470
Other Oscillators 471
Oscillators Wrap-Up 474 Studies 474
27 W.D. Gann Analysis 479
The Cardinal Square 479
The Squaring of Price and Time 481
Geometric Angles 481
28 The Mott Wave 483
Basics of Wave Analysis 483
Impulse Waves-Variations 486
Diagonal Triangles 487
Failures (Truncated Fifths) 490
Fibonacci Analysis 498
Further Study 500
Conclusion 500
Glossary 502
Appendix A 529
Appendix B 536
Bibliography 541 Index 543
Including complete coverage of the euro and the latest historical and economic changes in the market, this essential resource gives traders an indispensable overview of the market's workings and new technologies, then links this information to developments and case studies drawn from the real world, illustrating them with plenty of graphics, charts, and visuals. Traders will find:
- Analysis of the mechanics of the market, the major players and markets, corporate trading, methods of trading execution, and pertinent risks
- A thorough overview of foreign exchange instruments and major option strategies, with clear explanations of why currencies are traded and how to forecast currency behavior
- An in-depth look at the two types of analysis-fundamental and technical
- Forex scenarios from the multiple perspectives of trader, broker, and corporate trader
- Vital information about the new generation of extremely aggressive "hedge funds"
- A survey of technical analysis, including an in-depth comparison of the major chart types, chart formations, and oscillators
Trading in the Global Currency Markets also provides valuable historical context, explaining the basis of foreign exchange and the factors that contributed to growth of the industry. It asks the basic questions, and then provides comprehensive answers that will benefit both beginning traders and seasoned market experts.
About the Author
Cornelius Luca is a foreign currency market expert with more than twenty years of experience in international finance. He is the author of Technical Analysis Applications in the Global Currency Markets (Prentice Hall Press, NYIF), and teaches classes and seminars at the New York Institute of Finance and New York University.
Table of Contents
Preface xiii Acknowledgments xvii
1 What is Foreign Exchange? 1
Why Foreign Exchange Occurs 1
Factors That Have Contributed to Foreign
Exchange Volume Growth 2
2 Historical Development of Foreign Exchange 9
A Historical Perspective 9
The Bretton Woods Accord 11
Why the Bretton Woods Accord Failed 16
After Bretton Woods 17
The Free-Floating Foreign Exchange Markets 18
An Overview of the Emerging Market Crisis in the 1990s 21
3 The European Monetary Union 23
Historical Background 23
The European Monetary System 26
Emergence of the Euro 33
The European Central Bank (ECB) 38
Conclusion 44
4 Currency Characteristics 46
The ISO Codes 46
The U.S. Dollar 47
The Euro 48
The Japanese Yen 52
The British Pound 53
The Swiss Franc 54
The Major Foreign Exchange Markets 56
The Major Players 56
Conclusion 60
5 Foreign Exchange Risks 62
Exchange Rate Risk 62
Interest Rate Risk 85
Credit Risk 86
Country Risk 89
Conclusion 90
6 Central Banks 91
The Federal Reserve 91
The Federal Reserve's Role in Foreign
Exchange 93
An Overview of the Central Banks of the Other G 7 Countries 100
7 Price Structure and Foreign Exchange Terminology 104
Spot Market 104
Forward Market 105
Futures Market 105
Foreign Exchange Terms 106
Currency Fixings 111
8 Corporate Trading 113
The Role of Foreign Exchange for Corporations 113
Types of Corporations 114
Types of Exposure 114
Hedging 119
How Foreign Exchange Is Executed 123
Different Points of View 126
9 Foreign Exchange Settlement 128
The Role of the Back Office 128
SWIFT 132
Advisory Bilateral Foreign Exchange Netting
Service 134
ACCORD 135
CHIPS 137
Conclusion 139
Appendix 140
10 Conducting Foreign Exchange Trading 149
The Brokers' Market 149
Direct Dealing 156
Dealing Systems 159
Matching Systems 162
11. The Spot Market 164
The Foreign Currency Spot Marketplace 165
Profit and Loss 169
Characteristics of a Spot Trader 176
Conclusion 177
12 The Forward Currency Market 179
The Forward Foreign Currency Marketplace 179
General Characteristics of the Forward Market 180
The Forward Price 181
Introduction to the Types of Forward Spreads 183
Methods of Calculating the Forward Outright Prices 187
The Interest Rate Differential 188
The Maturity Dates 192
Currency Forward Outright Deals 196
Currency Swaps 198
Trading Currency Swaps 199
The Rollover or Toni/Next Swap 202
Covered Interest Rate Arbitrage 206
13 Currency Crosses 208
The Cross Foreign Currency Marketplace 208
Price Calculation 211
Relative Strength of a Currency 215
Trading Components 215
Position Calculation 215
Calculation of the Cross Profit and Loss 216
14 Currency Futures 219
The Currency Futures Marketplace 220
The International Monetary Market 220
Characteristics of Currency Futures 221
The Look of Currency Futures 222
Futures Market and Cash Market: Comparisons 224
Margins 226
Contract Size 227
Floor Trading 227
Trading Hours 228
Mark-to-Market 231
Arbitrage 231
Exchange for Physical (EFP) 232
Current Directions in the Futures Markets 233
Regulation in the United States 234
Conclusion 235
15 Currency Options 236
The Currency Options Marketplace 236
Benefits of Trading Options 237
Where Currency Options Are Traded 239
Premium 248
Theoretical Models: Factors Determining Option Price 249
Option Pricing 267
16 Major option Strategies on Currencies 271
Basic Strategies 271
Compound Strategies 278
Ratio Spreads 289
Spreads with Both Options and Currency 294
Exotic Options 296
Average Options 304
Conclusion 305
17 Economic Fundamentals 307
Economic Fundamentals 307
Theories of Exchange Rate Determination 310
Economic Indicators 316
Industrial Sector Indicators 322
Construction Data 326
Inflation Indicators 327
Balance of Payments 332
Employment Indicators 335
Consumer Spending Indicators 337
Leading Indicators 339
Conclusion 341
18 Financial and Sociopolitical Factors 343
The Role of Financial Factors 343
Political Events 347
Political Crises 349
Conclusion 350
19 Technical Analysis 351
The Evolution of Technical Analysis 351
Types of Charts: A Comparison 356
Volume and Open Interest 364
The Importance of the Long-Term Charts 378
Percentage Retracements 381
20 Trend Reversal Patterns 384
Head-and-Shoulders 384
Inverse Head-and-Shoulders 388
Double Top 389
Double Bottom 393
Triple Top and Triple Bottom 393
V-Formations (Spikes) 395
Other Patterns 398
21 Trend Continuation Patterns 401
Flag Formation 401
Pennant Formation 403
Triangle Formation 405
Wedge Formation 411
Rectangle Formation 413
22 Formations Unique to Bar Charts for Futures 416
Gaps 416
Island Reversals 421
Key Reversal Days 421
23 Point-and-Figure Charting 423
Triple Tops and Bottoms 425
Support and Resistance Lines 429
Consolidation Formations 430
The Horizontal Count 432
24 Candlestick Charting 434
Daily White Candlesticks 435
Daily Black Candlesticks 436
Daily Reversal Patterns 438
Two-Day Candlestick Combinations 441
25 Quantitative Trading Methods 458
Moving Averages 458
Trading Signals 461
26 Oscillators and Studies 465
Stochastics 465
Moving Average Convergence-Divergence 467
Momentum 469
The Relative Strength Index (RSI) 470
Other Oscillators 471
Oscillators Wrap-Up 474 Studies 474
27 W.D. Gann Analysis 479
The Cardinal Square 479
The Squaring of Price and Time 481
Geometric Angles 481
28 The Mott Wave 483
Basics of Wave Analysis 483
Impulse Waves-Variations 486
Diagonal Triangles 487
Failures (Truncated Fifths) 490
Fibonacci Analysis 498
Further Study 500
Conclusion 500
Glossary 502
Appendix A 529
Appendix B 536
Bibliography 541 Index 543