The Foreign Exchange Market Not As Liquid As You May Think

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "The Foreign Exchange Market Not As Liquid As You May Think"

Transcription

1 Seite 1 / 5 The Foreign Exchange Market Not As Liquid As You May Think September AM GMT By Loriano Mancini Angelo Ranaldo and Jan Wrampelmeyer The foreign exchange market facilitates international trade and investment and is central to the global financial system Market participants both public and private commonly think of the foreign exchange market as highly liquid at all times This column challenges this view by documenting significant declines in liquidity during the recent financial crisis With an estimated average daily trading volume of 4 trillion the foreign exchange Forex market is by far the world s largest market Bank for International Settlements 2010 Due to this size market participants commonly regard foreign exchange as highly liquid at all times liquid in the sense that you can buy or sell very large sums quickly and without turning the price against yourself by much In a recent study we challenge this view by documenting significant declines in Forex liquidity during the financial crisis Moreover Forex liquidity risk impairs investors international diversification and affects the returns of popular Forex trading strategies such as carry trades Mancini et al 2012 Follow us Using a novel and comprehensive dataset of intraday data from Electronic Broking Services EBS the leading platform for spot Forex interdealer trading we estimate various liquidity measures capturing different dimensions of market liquidity An asset is considered liquid if it can be sold quickly at low cost without causing a significant price change We investigate price impact trading costs and price dispersion of exchange rates finding significant temporal and cross sectional variation in Forex liquidities Contrary to common perceptions all exchange rates experienced a significant decline in liquidity during the financial crisis especially after the bankruptcy of Lehman Brothers For the least liquid exchange rates the liquidity evaporation was ten times more severe than for the most liquid ones see the comparison of effective bid ask spreads between AUD USD and EUR USD in Figure 1 Figure 1 Average daily effective spread

2 Seite 2 / 5 Forex illiquidity is not isolated to certain exchange rates Market liquidities of individual currencies move together and are positively but to different degrees related to market wide Forex liquidity This commonality in liquidity implies that Forex liquidity is largely driven by shocks affecting the Forex market as whole rather than by idiosyncratic shocks to the liquidity of individual exchange rates Forex market liquidity is in turn tied to market wide liquidity of other asset classes such as equities and bonds highlighting that liquidity shocks are a cross market phenomenon What do these results mean for a foreign exchange investor in practice To quantify illiquidity costs we develop an example of a speculator who engages in the AUD JPY carry trade i e she borrows in low yielding Japanese yen and invests in high yielding Australian dollars She is forced to unwind her position when markets are illiquid for instance because she is not able to roll over short term positions In a realistic scenario of sudden exchange rate movements in conjunction with high bid ask spreads we show that the speculator loses 13 of her capital 25 more than in the benchmark case without Forex liquidity cost Thus losses due to Forex illiquidity can be substantial Forex illiquidity does not only affect speculators but every investor or company that owns assets denominated in foreign currencies Even worse commonality in Forex liquidity implies that the phenomenon of diminishing liquidity and the corresponding Forex illiquidity cost affect all exchange rates and thus Forex liquidity risks cannot be diversified away easily The commonality in market wide liquidity of foreign exchange equity and bond markets suggests that liquidity risk impairs the efficacy of international and cross asset class diversification Even a broadly diversified portfolio across asset classes is likely to suffer liquidity issues in crisis periods when market wide liquidities of different asset classes deteriorate contemporaneously Liquidity risk in the foreign exchange market also helps explaining the profitability of carry trades a long standing conundrum in the field of finance According to Uncovered Interest rate Parity UIP the expected carry trade return is zero because exchange rates move to compensate for the interest rate differential Historically however carry trades have yielded an annual return of more than 5 Burnside et al 2011 Previous studies have identified the volatility of global equity markets Lustig et al 2011 or the volatility of Forex markets Menkhoff et al 2012 as risk factors driving carry trade returns We find that carry trade returns can at least partially be explained by Forex liquidity risk We call the link between currency return and liquidity risk liquidity betas As shown in Figure 2 low interest rate

3 Seite 3 / 5 currencies exhibit negative liquidity betas thus funding currencies offer insurance against liquidity risk On the other hand liquidity betas for high interest rate currencies are positive hence investment currencies provide exposure to liquidity risk The opposite signs of liquidity betas of high and low interest rate currencies have important implications for carry trade returns When Forex liquidity improves high interest rate currencies appreciate further because of positive liquidity betas while low interest rate currencies depreciate further because of negative liquidity betas increasing the deviation from UIP During the unwinding of carry trades i e when investors sell high interest rate currencies and buy low interest rate currencies market wide Forex liquidity drops and liquidity betas lead to further selling pressure on investment currencies which exacerbates currency crashes This finding is consistent with a flight to liquidity and suggests that investors may demand a risk premium for bearing Forex liquidity risk Liquidity spirals may trigger our findings of declining Forex liquidity commonality in Forex liquidity and liquidity risk premiums in Forex returns see Brunnermeier and Pedersen 2009 The theory of liquidity spirals implies that traders are forced to liquidate positions when funding liquidity diminishes This selling pressure reduces market wide liquidity and triggers large price drops We provide evidence that when traders funding liquidity decreases market wide Forex liquidity drops which then affects exchange rates via their liquidity betas Figure 3 illustrates the time series evolution of our index of illiquidity in the Forex market the TED spread as well as the VIX volatility index highlighting the connection between investors uncertainty and fear proxied by the VIX funding strains proxied by the TED spread and Forex market liquidity Figure 3 Uncertainty in the market funding strains and Forex market illiquidity

4 Seite 4 / 5 Several policy implications can be drawn from our study From a central bank perspective commonality in Forex liquidity implies that providing liquidity for a specific exchange rate may have positive spillover effects to other currencies Take the example of investment currencies during an unwinding of carry trades A central banks liquidity injection in its own currency could alleviate liquidity strains in other investment currencies and moderate the sudden appreciation depreciation of funding investment currencies Moreover our empirical evidence on liquidity spirals suggests that monetary policies aimed at relieving funding market constraints could also improve Forex market liquidity in all exchange rates But abundant liquidity may have adverse consequences Overwhelming liquidity in one currency tends to spread to other currencies in general and investment currencies in particular In risk taking environments with attractive carry trade opportunities ample liquidity could bolster speculative trading References Bank for International Settlements 2010 Foreign exchange and derivatives market activity in April 2010 Triennial Central Bank Survey Brunnermeier Markus and Lasse Pedersen 2009 Market liquidity and funding liquidity Review of Financial Studies Burnside Craig Martin Eichenbaum Isaac Kleshchelski and Sergio Rebelo 2011 Do peso problems explain the returns to the carry trade Review of Financial Studies Lustig Hanno Nikolai Roussanov and Adrien Verdelhan 2011 Common risk factors in currency markets Review of Financial Studies Mancini Loriano Angelo Ranaldo and Jan Wrampelmeyer 2012 Liquidity in the foreign exchange market measurement commonality and risk premiums Journal of Finance forthcoming Menkhoff Lukas Lucio Sarno Maik Schmeling and Andreas Schrimpf 2012 Carry trades and global foreign exchange volatility Journal of Finance Loriano Mancini is Assistant Professor of Finance at the Swiss Finance Institute at EPFL Angelo Ranaldo is Full Professor of Finance and Systematic Risk at the University of St Gallen and Jan Wrampelmeyer is Assistant Professor of

5 Seite 5 / 5 Finance at the University of St Gallen Copyright VoxEU org the above story was originally published on www VoxEU org readers reading this story through a third party channel may find that any graphs are not included our apologies for this technical anomaly here s a link to the original story on the VoxEU website click HERE Find out why FNArena subscribers like the service so much Your Feedback Thank You Warning this story contains unashamedly positive feedback on the service provided FN Arena is building the future of financial news reporting at www fnarena com Our daily news reports can be trialed at no cost and with no obligations Simply sign up and get a feel for what we are trying to achieve Subscribers and trialists should read our terms and conditions available on the website All material published by FN Arena is the copyright of the publisher unless otherwise stated Reproduction in whole or in part is not permitted without written permission of the publisher

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Loriano Mancini Swiss Finance Institute and EPFL Angelo Ranaldo University of St. Gallen Jan Wrampelmeyer University

More information

Online appendix to paper Downside Market Risk of Carry Trades

Online appendix to paper Downside Market Risk of Carry Trades Online appendix to paper Downside Market Risk of Carry Trades A1. SUB-SAMPLE OF DEVELOPED COUNTRIES I study a sub-sample of developed countries separately for two reasons. First, some of the emerging countries

More information

96 97 98 99 00 01 02 03 04 05 06 07 08* FDI Portfolio Investment Other investment

96 97 98 99 00 01 02 03 04 05 06 07 08* FDI Portfolio Investment Other investment Chartbook Contact: Sebastian Becker +49 69 91-3664 Global Risk Analysis The unwinding of Yen carry trades Some empirical evidence 3 2 1-1 -2-3 -4 October 31, 28 Many years before the sub-prime crisis hit

More information

Carry Trade Explained What Is the Carry Trade?

Carry Trade Explained What Is the Carry Trade? I The Forex Trading Formula Carry Trade Triad Trading Formula - The Introduction Carry Trade Carry Trade Explained What Is the Carry Trade? The carry trade is a trading strategy in which you simultaneously

More information

Japanese Retail Investors and The

Japanese Retail Investors and The Japanese Retail Investors and The Carry Trade 1 Introduction The carry trade has been an important source of flows in foreign exchange markets in recent years. While a carry trade is difficult to define

More information

Carry Trades and Currency Crashes: A Comment

Carry Trades and Currency Crashes: A Comment Carry Trades and Currency Crashes: A Comment Craig Burnside y July 2008 Abstract The failure of uncovered interest parity and the pro tability of the carry trade in currencies are intimately related, and

More information

René Garcia Professor of finance

René Garcia Professor of finance Liquidity Risk: What is it? How to Measure it? René Garcia Professor of finance EDHEC Business School, CIRANO Cirano, Montreal, January 7, 2009 The financial and economic environment We are living through

More information

5 Carry Trades and Currency Crashes

5 Carry Trades and Currency Crashes 5 Carry Trades and Currency Crashes Markus K. Brunnermeier, Princeton University, NBER, and CEPR Stefan Nagel, Stanford University and NBER Lasse H. Pedersen, New York University, NBER, and CEPR I. Introduction

More information

The relationship between exchange rates, interest rates. In this lecture we will learn how exchange rates accommodate equilibrium in

The relationship between exchange rates, interest rates. In this lecture we will learn how exchange rates accommodate equilibrium in The relationship between exchange rates, interest rates In this lecture we will learn how exchange rates accommodate equilibrium in financial markets. For this purpose we examine the relationship between

More information

Fixed Income Training Seminar Asset Management Experience

Fixed Income Training Seminar Asset Management Experience Asset Management Fixed Income Training Seminar Asset Management Experience Philipp Büchler, Chris Koslowski, Markus Kramer, Manuel Walker Credit Suisse Asset Management Core Fixed Income Group Zurich August

More information

INTRODUCTION. This program should serve as just one element of your due diligence.

INTRODUCTION. This program should serve as just one element of your due diligence. FOREX ONLINE LEARNING PROGRAM INTRODUCTION Welcome to our Forex Online Learning Program. We ve always believed that one of the best ways to protect investors is to provide them with the materials they

More information

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Loriano Mancini Swiss Finance Institute EPFL University of Zurich Angelo Ranaldo Swiss National Bank Research Unit

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

More information

Carry Trades and Currency Crashes

Carry Trades and Currency Crashes Carry Trades and Currency Crashes Markus K. Brunnermeier, Stefan Nagel, Lasse Pedersen Princeton, Stanford, NYU AEA Meetings, January 2008 BNP (2008) Carry Trades & Currency Crashes AEA, Jan 2008 1 / 23

More information

INTRODUCTION TO FOREIGN EXCHANGE

INTRODUCTION TO FOREIGN EXCHANGE INTRODUCTION TO FOREIGN EXCHANGE Capademy Tutorial Series Option Banque Training Series Vol. 1 The foreign exchange market known as forex for short is the market in which currencies or sovereign money

More information

Average Variance, Average Correlation and Currency Returns

Average Variance, Average Correlation and Currency Returns Average Variance, Average Correlation and Currency Returns Gino Cenedese Bank of England Lucio Sarno Cass Business School and CEPR Ilias Tsiakas University of Guelph First version: August 2011 - Revised:

More information

FX strategies in periods of distress 1

FX strategies in periods of distress 1 Jacob Gyntelberg Andreas Schrimpf jacob.gyntelberg@bis.org andreas.schrimpf@bis.org FX strategies in periods of distress 1 This article presents an overview of widely practised short-term multicurrency

More information

Vanguard research July 2014

Vanguard research July 2014 The Understanding buck stops here: the hedge return : Vanguard The impact money of currency market hedging funds in foreign bonds Vanguard research July 214 Charles Thomas, CFA; Paul M. Bosse, CFA Hedging

More information

Swiss National Bank Working Papers

Swiss National Bank Working Papers 2010-3 Swiss National Bank Working Papers Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Loriano Mancini, Angelo Ranaldo and Jan Wrampelmeyer The views expressed

More information

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Loriano Mancini Swiss Finance Institute and EPFL Angelo Ranaldo Swiss National Bank Research Unit Jan Wrampelmeyer

More information

CM-Equity AG. General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure )

CM-Equity AG. General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure ) CM-Equity AG General Information and Risk Disclosure for Foreign Exchange (Forex) Transactions ( General Information and Risk Disclosure ) Contents I. General Informations regarding Foreign Exchange (Forex)...

More information

Reg. no 2014/1392 30 September 2014. Central government debt management

Reg. no 2014/1392 30 September 2014. Central government debt management Reg. no 2014/1392 30 September 2014 Central government debt management Proposed guidelines 2015 2018 1 Summary 1 Proposed guidelines 2015 2018 2 The objective for the management of central government debt

More information

Foreign Exchange Risk and the Predictability of Carry Trade Returns

Foreign Exchange Risk and the Predictability of Carry Trade Returns Foreign Exchange Risk and the Predictability of Carry Trade Returns Gino Cenedese Bank of England Lucio Sarno Cass Business School and CEPR February 2014 Ilias Tsiakas University of Guelph Abstract This

More information

Probability Weighting of Rare Events and Currency Returns

Probability Weighting of Rare Events and Currency Returns Probability Weighting of Rare Events and Currency Returns Fousseni Chabi-Yo and Zhaogang Song March 17, 2013 Currency Returns: Carry Trade Strategy Currency carry trade strategy: borrow in countries with

More information

Chapter 1.2. Currencies Come in Pairs

Chapter 1.2. Currencies Come in Pairs Chapter 1.2 Currencies Come in Pairs 0 GETTING STARTED You know the advantages of trading forex, and you are excited to start trading. Now you need to learn what this market is all about. How does it work?

More information

General Risk Disclosure

General Risk Disclosure General Risk Disclosure Colmex Pro Ltd (hereinafter called the Company ) is an Investment Firm regulated by the Cyprus Securities and Exchange Commission (license number 123/10). This notice is provided

More information

Introduction, Forwards and Futures

Introduction, Forwards and Futures Introduction, Forwards and Futures Liuren Wu Zicklin School of Business, Baruch College Fall, 2007 (Hull chapters: 1,2,3,5) Liuren Wu Introduction, Forwards & Futures Option Pricing, Fall, 2007 1 / 35

More information

Economic commentaries

Economic commentaries No. 3 211 Economic commentaries Liquidity in the foreign exchange market for EUR/NOK Kathrine Lund, Department for Market Operations and Analysis, Norges Bank* *The views expressed in this article are

More information

Currency Derivatives Guide

Currency Derivatives Guide Currency Derivatives Guide What are Futures? In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a specified asset of standardised quantity and quality

More information

AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET

AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET DUKASCOPY BANK SA AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET DUKASCOPY BANK EDUCATIONAL GUIDE AN INTRODUCTION TO THE FOREIGN EXCHANGE MARKET www.dukascopy.com CONTENTS INTRODUCTION TO FOREX CURRENCY

More information

Massachusetts Institute of Technology Department of Economics Working Paper Series

Massachusetts Institute of Technology Department of Economics Working Paper Series Massachusetts Institute of Technology Department of Economics Working Paper Series CARRY TRADE AND SYSTEM RISK: WHY ARE FX OPTIONS SO CHEAP? Ricardo J. Caballero Joseph B. Doyle Working Paper 12-28 December

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

More information

Currency Risk. A BigFuture Guide

Currency Risk. A BigFuture Guide $ Currency Risk A BigFuture Guide Many people would invest much more overseas if it weren t for the problem of currency risk. But what is currency risk and can we manage it? When we invest overseas we

More information

CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,

More information

FX Strategies. In the Low Yield Environment. Eddie Wang Head of FX Structuring, Asia. Hong Kong October 2010

FX Strategies. In the Low Yield Environment. Eddie Wang Head of FX Structuring, Asia. Hong Kong October 2010 FX Strategies In the Low Yield Environment Eddie Wang Head of FX Structuring, Asia Hong Kong October 2010 Contents 01 Key Trends 02 FX Hedging Strategies 03 FX Investment Strategies SECTION 01 Key Trends

More information

Understanding Currency

Understanding Currency Understanding Currency Overlay July 2010 PREPARED BY Gregory J. Leonberger, FSA Director of Research Abstract As portfolios have expanded to include international investments, investors must be aware of

More information

Global Currency Hedging

Global Currency Hedging Global Currency Hedging John Y. Campbell Harvard University Arrowstreet Capital, L.P. May 16, 2010 Global Currency Hedging Joint work with Karine Serfaty-de Medeiros of OC&C Strategy Consultants and Luis

More information

Futures Price d,f $ 0.65 = (1.05) (1.04)

Futures Price d,f $ 0.65 = (1.05) (1.04) 24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

More information

Chapter 1.2. Currencies Come in Pairs

Chapter 1.2. Currencies Come in Pairs Chapter 1.2 Currencies Come in Pairs 0 GETTING STARTED You know the advantages of trading forex, and you are excited to start trading. Now you need to learn what this market is all about. How does it work?

More information

Market Linked Certificates of Deposit

Market Linked Certificates of Deposit Market Linked Certificates of Deposit This material was prepared by Wells Fargo Securities, LLC, a registered brokerdealer and separate non-bank affiliate of Wells Fargo & Company. This material is not

More information

Product Disclosure Statement

Product Disclosure Statement Product Disclosure Statement Sumo Forex Limited Level 4, 228 Queen Street, Auckland, 1010, New Zealand Tel: +6498871044 Email: support@sumoforex.com 1. Important Information and Disclaimer 1.1 Financial

More information

Margin FX and CFDs Product Disclosure Statement 26 June 2015

Margin FX and CFDs Product Disclosure Statement 26 June 2015 Margin FX and CFDs 26 June 2015 Issuer: Forex Capital Trading Pty Ltd AFSL No. 306400 and ABN 69 119 086 270 1 P a g e 1. Important Information 1.1 About this PDS This PDS is issued by Forex Capital Trading

More information

Seeking Alternatives. Senior loans an innovative asset class

Seeking Alternatives. Senior loans an innovative asset class Trends 09 10.11 Seeking Alternatives Senior loans an innovative asset class Dirk Wieringa, Alternative Investments Advisory Senior loans are an innovative asset class that provide a hedge against rising

More information

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums

Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums Liquidity in the Foreign Exchange Market: Measurement, Commonality, and Risk Premiums LORIANO MANCINI, ANGELO RANALDO, and JAN WRAMPELMEYER First draft: August 2009; This version: June 8, 2012 Journal

More information

FIN 683 Financial Institutions Management Foreign-Currency Risk

FIN 683 Financial Institutions Management Foreign-Currency Risk FIN 683 Financial Institutions Management Foreign-Currency Risk Professor Robert B.H. Hauswald Kogod School of Business, AU Global Banks Globalization of financial markets has increased foreign exposure

More information

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and

The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and The purpose of this ebook is to introduce newcomers to the forex marketplace and CMTRADING. Remember that trading in forex is inherently risky, and you can lose money as well as make money. Manage your

More information

General Forex Glossary

General Forex Glossary General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without

More information

Philadelphia Stock Exchange World Currency Options Trading

Philadelphia Stock Exchange World Currency Options Trading Philadelphia Stock Exchange World Currency Options Trading Currency Option Fundamentals Currency Market Analysis Currency Option Trading Al Brinkman, Director, Derivatives Marketing, Philadelphia Stock

More information

Instructions and Guide for Carry Trade and Interest Rate Parity Lab

Instructions and Guide for Carry Trade and Interest Rate Parity Lab Instructions and Guide for Carry Trade and Interest Rate Parity Lab FINC413 Lab c 2014 Paul Laux and Huiming Zhang 1 Introduction 1.1 Overview In the lab, you will use Bloomberg to explore issues concerning

More information

CFD & FOREX TRADING RULES

CFD & FOREX TRADING RULES CFD & FOREX TRADING RULES WHS TRADING RULES Version: JAN. 2016 WH SELFINVEST Est. 1998 Luxembourg, France, Belgium, Switzerland, Germany, Netherlands Copyright 2007-2016 all rights attached to this guide

More information

Effective downside risk management

Effective downside risk management Effective downside risk management Aymeric Forest, Fund Manager, Multi-Asset Investments November 2012 Since 2008, the desire to avoid significant portfolio losses has, more than ever, been at the front

More information

Carry Strategies Don t get Carried away! Krishna Kumar Contact: kriskumar@earthlink.net

Carry Strategies Don t get Carried away! Krishna Kumar Contact: kriskumar@earthlink.net Carry Strategies Don t get Carried away! Krishna Kumar Contact: kriskumar@earthlink.net Summary Buying high yielding currency and shorting low-yielding currency has been a profitable strategy and has been

More information

Electronic Trading and the Australian Foreign Exchange Market

Electronic Trading and the Australian Foreign Exchange Market Electronic Trading and the Australian Foreign Exchange Market Alexandra Heath and James Whitelaw* The introduction of electronic broking to the foreign exchange market in the early 199s signalled the start

More information

Sources of return for hedged global bond funds

Sources of return for hedged global bond funds Research commentary Sources of return for hedged global bond funds August 2012 Author Roger McIntosh Executive summary. The recent results in key bond market indices demonstrate the importance of a strategic,

More information

A guide to managing foreign exchange risk

A guide to managing foreign exchange risk A guide to managing foreign exchange risk CPA Australia Ltd ( CPA Australia ) is one of the world s largest accounting bodies with more than 122,000 members of the financial, accounting and business profession

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board September 30, 2015 Condensed Interim Consolidated Balance Sheet As at September 30, 2015 As at September 30,

More information

Credit Suisse Asset Management Headline Ideas 2015 Dividends An Important Source of Income When Interest Rates Are Low. For qualified investors only

Credit Suisse Asset Management Headline Ideas 2015 Dividends An Important Source of Income When Interest Rates Are Low. For qualified investors only Credit Suisse Asset Headline Ideas 2015 Dividends An Important Source of Income When Interest Rates Are Low For qualified investors only Dividends An Important Source of Income When Interest Rates Are

More information

6. Foreign Currency Options

6. Foreign Currency Options 6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are

More information

FxPro Education. Introduction to FX markets

FxPro Education. Introduction to FX markets FxPro Education Within any economy, consumers and businesses use currency as a medium of exchange. In the UK, pound sterling is the national currency, while in the United States it is the US dollar. Modern

More information

RISK DISCLOSURE STATEMENT

RISK DISCLOSURE STATEMENT RISK DISCLOSURE STATEMENT You should note that there are significant risks inherent in investing in certain financial instruments and in certain markets. Investment in derivatives, futures, options and

More information

Risk Warning Notice. Introduction

Risk Warning Notice. Introduction First Equity Limited Salisbury House London Wall London EC2M 5QQ Tel 020 7374 2212 Fax 020 7374 2336 www.firstequity.ltd.uk Risk Warning Notice Introduction You should not invest in any investment product

More information

THE US DOLLAR, THE EURO, THE JAPANESE YEN AND THE CHINESE YUAN IN THE FOREIGN EXCHANGE MARKET A COMPARATIVE ANALYSIS

THE US DOLLAR, THE EURO, THE JAPANESE YEN AND THE CHINESE YUAN IN THE FOREIGN EXCHANGE MARKET A COMPARATIVE ANALYSIS THE US DOLLAR, THE EURO, THE JAPANESE YEN AND THE CHINESE YUAN IN THE FOREIGN EXCHANGE MARKET A COMPARATIVE ANALYSIS ORASTEAN Ramona Lucian Blaga University of Sibiu, Romania Abstract: This paper exposes

More information

rtfx asset ManageMent ServiceS INFORMATION BROCHURE

rtfx asset ManageMent ServiceS INFORMATION BROCHURE rtfx asset ManageMent ServiceS INFORMATION BROCHURE Our History RTFX Ltd is a pioneer in the online Foreign Exchange market with a history dating back to 1995 when the first of the group of strategic partnering

More information

Section 1 Important Information... 2. Section 2 Regulatory Guide 227... 2. Section 3 Features... 3. Section 4 How to Trade... 8

Section 1 Important Information... 2. Section 2 Regulatory Guide 227... 2. Section 3 Features... 3. Section 4 How to Trade... 8 CONTENTS Section 1 Important Information... 2 Section 2 Regulatory Guide 227... 2 Section 3 Features... 3 Section 4 How to Trade... 8 Section 5 Significant Risks... 32 Section 6 Costs, Fees & Charges...

More information

Margin FX and CFDs Product Disclosure Statement 26 April 2016

Margin FX and CFDs Product Disclosure Statement 26 April 2016 Margin FX and CFDs 26 April 2016 Issuer: Forex Capital Trading Pty Ltd AFSL No. 306400 and ABN 69 119 086 270 1 P a g e 1. Important Information 1.1 About this PDS This PDS is issued by Forex Capital Trading

More information

What is Forex Trading?

What is Forex Trading? What is Forex Trading? Foreign exchange, commonly known as Forex or FX, is the exchange of one currency for another at an agreed exchange price on the over-the-counter (OTC) market. Forex is the world

More information

CommSeC CFDS: IntroDuCtIon to FX

CommSeC CFDS: IntroDuCtIon to FX CommSec CFDs: Introduction to FX Important Information This brochure has been prepared without taking account of the objectives, financial and taxation situation or needs of any particular individual.

More information

Alphabeta FX. Asset Management Services. Information Brochure

Alphabeta FX. Asset Management Services. Information Brochure Alphabeta FX Asset Management Services Our History UNPREDECENTED LIQUIDITY ABFX Inc., is a pioneer in the online Foreign Exchange market with a history dating back to 2009 when the first of the group of

More information

NPH Fixed Income Research Update. Bob Downing, CFA. NPH Senior Investment & Due Diligence Analyst

NPH Fixed Income Research Update. Bob Downing, CFA. NPH Senior Investment & Due Diligence Analyst White Paper: NPH Fixed Income Research Update Authored By: Bob Downing, CFA NPH Senior Investment & Due Diligence Analyst National Planning Holdings, Inc. Due Diligence Department National Planning Holdings,

More information

Chapter 9. The Case for International Diversification. Copyright 2009 Pearson Prentice Hall. All rights reserved.

Chapter 9. The Case for International Diversification. Copyright 2009 Pearson Prentice Hall. All rights reserved. Chapter 9 The Case for International Diversification Introduction In this chapter we cover: The advantages and disadvantages of international investing. Present the traditional case for international diversification.

More information

Carry Trade DISCUSSION NOTE

Carry Trade DISCUSSION NOTE 03 2014 DISCUSSION NOTE The carry trade in currency markets means that an investor buys a high-yielding currency and finances this by borrowing money in a currency with a low interest rate. The empirical

More information

Seeking a More Efficient Fixed Income Portfolio with Asia Bonds

Seeking a More Efficient Fixed Income Portfolio with Asia Bonds Seeking a More Efficient Fixed Income Portfolio with Asia s Seeking a More Efficient Fixed Income Portfolio with Asia s Drawing upon different drivers for performance, Asia fixed income may improve risk-return

More information

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS

CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS INSTRUCTOR S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT, 9 TH ED. CHAPTER 8 SUGGESTED ANSWERS TO CHAPTER 8 QUESTIONS. On April, the spot price of the British pound was $.86 and the price of the June futures

More information

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board

Condensed Interim Consolidated Financial Statements of. Canada Pension Plan Investment Board Condensed Interim Consolidated Financial Statements of Canada Pension Plan Investment Board December 31, 2015 Condensed Interim Consolidated Balance Sheet As at December 31, 2015 (CAD millions) As at December

More information

Foreign Exchange Investments Discover the World of Currencies. Private Banking USA

Foreign Exchange Investments Discover the World of Currencies. Private Banking USA Foreign Exchange Investments Discover the World of Currencies Credit Suisse Securities (USA) llc Private Banking USA 2 Foreign exchange: There s no ignoring the largest market in the world. Introduction

More information

Mechanics of Currency Hedged Indices

Mechanics of Currency Hedged Indices EQUITY 101 Global Mechanics of Currency Hedged Indices CONTRIBUTORS Sabrina Salemi Manager, Strategy and Global Equity Indices sabrina.salemi@spdji.com Philip Murphy, CFA Vice President, North American

More information

SPECIAL COMMENTARY. Yen Carry Trade: Fact or Fiction? January 25, 2007. Jay H. Bryson, Global Economist jay.bryson@wachovia.

SPECIAL COMMENTARY. Yen Carry Trade: Fact or Fiction? January 25, 2007. Jay H. Bryson, Global Economist jay.bryson@wachovia. Yen Carry Trade: Fact or Fiction? Jay H. Bryson, Global Economist jay.bryson@wachovia.com 1-704-383-3518 Executive Summary Many commentators point to the so-called yen carry trade, in which investors borrow

More information

RISK WARNING. Retail transactions conducted with NatureForex are not insured by any deposit insurance of any kind.

RISK WARNING. Retail transactions conducted with NatureForex are not insured by any deposit insurance of any kind. RISK WARNING High Risk Investment Margined retail foreign exchange or currency ( forex ), commodities and financial derivatives transactions are extremely risky. Trading with Nature Forex Ltd. ( NatureForex

More information

Combined Product Disclosure Statement Financial Services Guide for MahiFX Margin FX Trading

Combined Product Disclosure Statement Financial Services Guide for MahiFX Margin FX Trading Combined Product Disclosure Statement Financial Services Guide for MahiFX Margin FX Trading MahiFX Limited ARBN: 152 535 085 AFSL: 414198 Date: 28 August 2013 Version: 3.1 1. About this combined Product

More information

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK

4. ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK Annexure 3 (PRR) - Part 3, Clause 18 - Foreign Exchange Position Risk Amount 4 ANNEXURE 3 : PART 3 - FOREIGN EXCHANGE POSITION RISK (a) CLAUSE 18 - FOREIGN EXCHANGE POSITION RISK AMOUNT (i) Rule PART 3

More information

The European Central Bank s Minimum Bid Rate and Its Effect on Major Currency Pairs

The European Central Bank s Minimum Bid Rate and Its Effect on Major Currency Pairs The European Central Bank s Minimum Bid Rate and Its Effect on Major Currency Pairs Ikhlaas Gurrib Abstract The paper looks at the effects of Minimum Bid Rate on three major currency pairs namely the Australian

More information

Risk Management and Financial Instruments. Cases and Practices

Risk Management and Financial Instruments. Cases and Practices Risk Management and Financial Instruments Cases and Practices Content 1. Decision Case: Zapa Chemical and Buba 2. Delphi s Currency Swap 3. Ikea s Yen Exposure International Financial Management 2 1. Decision

More information

Defensive equity. A defensive strategy to Canadian equity investing

Defensive equity. A defensive strategy to Canadian equity investing Defensive equity A defensive strategy to Canadian equity investing Adam Hornung, MBA, CFA, Institutional Investment Strategist EXECUTIVE SUMMARY: Over the last several years, academic studies have shown

More information

Carry Trades, Order Flow and the Forward. Bias Puzzle

Carry Trades, Order Flow and the Forward. Bias Puzzle Carry Trades, Order Flow and the Forward Bias Puzzle Francis Breedon Queen Mary, University of London Dagfinn Rime Norges Bank Paolo Vitale University Gabriele d Annunzio October 2013 Vitale is grateful

More information

Evolution of Forex the Active Trader s Market

Evolution of Forex the Active Trader s Market Evolution of Forex the Active Trader s Market The practice of trading currencies online has increased threefold from 2002 to 2005, and the growth curve is expected to continue. Forex, an abbreviation for

More information

International fixed income: The investment case FOR EXISTING VANGUARD ADVICE CLIENT USE ONLY. NOT FOR DISTRIBUTION

International fixed income: The investment case FOR EXISTING VANGUARD ADVICE CLIENT USE ONLY. NOT FOR DISTRIBUTION International fixed income: The investment case Why international fixed income? International bonds currently make up the largest segment of the securities market Ever-increasing globalization and access

More information

Practice Problems on Exchange Rates

Practice Problems on Exchange Rates Practice Problems on Exchange Rates 1- Define nominal exchange rate and real exchange rate. How are changes in the real exchange rate and the nominal exchange rate related? The nominal exchange rate is

More information

Rethinking Fixed Income

Rethinking Fixed Income Rethinking Fixed Income Challenging Conventional Wisdom May 2013 Risk. Reinsurance. Human Resources. Rethinking Fixed Income: Challenging Conventional Wisdom With US Treasury interest rates at, or near,

More information

TRANSAMERICA SERIES TRUST Transamerica Vanguard ETF Portfolio Conservative VP. Supplement to the Currently Effective Prospectus and Summary Prospectus

TRANSAMERICA SERIES TRUST Transamerica Vanguard ETF Portfolio Conservative VP. Supplement to the Currently Effective Prospectus and Summary Prospectus TRANSAMERICA SERIES TRUST Transamerica Vanguard ETF Portfolio Conservative VP Supplement to the Currently Effective Prospectus and Summary Prospectus * * * The following replaces in their entirety the

More information

SSgA CAPITAL INSIGHTS

SSgA CAPITAL INSIGHTS SSgA CAPITAL INSIGHTS viewpoints Part of State Street s Vision thought leadership series A Stratified Sampling Approach to Generating Fixed Income Beta PHOTO by Mathias Marta Senior Investment Manager,

More information

FOREIGN EXCHANGE PRODUCT DISCLOSURE STATEMENT INTERACTIVE BROKERS LLC ARBN 091 191 141 AFSL 245 574

FOREIGN EXCHANGE PRODUCT DISCLOSURE STATEMENT INTERACTIVE BROKERS LLC ARBN 091 191 141 AFSL 245 574 FOREIGN EXCHANGE PRODUCT DISCLOSURE STATEMENT INTERACTIVE BROKERS LLC ARBN 091 191 141 AFSL 245 574 Date of Issue: 19 February 2014 INDEX 1. GENERAL INTRODUCTION 4 1.1 Important Information 4 1.2 Purpose

More information

Monetary and Financial Aspects of Issuing Public Debt Instruments in Kuwait (1)

Monetary and Financial Aspects of Issuing Public Debt Instruments in Kuwait (1) Monetary and Financial Aspects of Issuing Public Debt Instruments in Kuwait (1) I would like to thank the Faculty of Commerce for arranging this meeting, which I hope will lead to the clarification of

More information

Market Implied Ratings FAQ Updated: June 2010

Market Implied Ratings FAQ Updated: June 2010 Market Implied Ratings FAQ Updated: June 2010 1. What are MIR (Market Implied Ratings)? Moody s Analytics Market Implied Ratings translate prices from the CDS, bond and equity markets into standard Moody

More information

Aide-Mémoire. Impact of Currency Exchange Fluctuations on UNHCR s Operations

Aide-Mémoire. Impact of Currency Exchange Fluctuations on UNHCR s Operations Aide-Mémoire Impact of Currency Exchange Fluctuations on UNHCR s Operations 1. Following a request at the thirty-second meeting of the Standing Committee in March 2005, under the agenda item Update on

More information

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets

Chapter 5. The Foreign Exchange Market. Foreign Exchange Markets: Learning Objectives. Foreign Exchange Markets. Foreign Exchange Markets Chapter 5 The Foreign Exchange Market Foreign Exchange Markets: Learning Objectives Examine the functions performed by the foreign exchange (FOREX) market, its participants, size, geographic and currency

More information

ANZ ETFS PHYSICAL RENMINBI ETF. (ASX Code: ZCNH)

ANZ ETFS PHYSICAL RENMINBI ETF. (ASX Code: ZCNH) ANZ ETFS PHYSICAL RENMINBI ETF (ASX Code: ZCNH) INVESTMENT BUILDING BLOCKS FOR A CHANGING WORLD Introducing a suite of innovative exchange traded funds (ETFs) designed for Australian investors by ANZ

More information

Good for business: get your forex transactions on track

Good for business: get your forex transactions on track Companies Foreign currencies Good for business: get your forex transactions on track Do you want to hedge foreign currency risks or invest in forex? A bank that takes your needs into account and provides

More information

ishares MINIMUM VOLATILITY SUITE SEEKING TO WEATHER THE MARKET S UP AND DOWNS

ishares MINIMUM VOLATILITY SUITE SEEKING TO WEATHER THE MARKET S UP AND DOWNS ishares MINIMUM VOLATILITY SUITE SEEKING TO WEATHER THE MARKET S UP AND DOWNS Table of Contents 1 Introducing the ishares Minimum Volatility Suite... 02 2 Why Consider the ishares Minimum Volatility Suite?...

More information

The Carry Trade in Industrialized and Emerging Markets

The Carry Trade in Industrialized and Emerging Markets The Carry Trade in Industrialized and Emerging Markets Craig Burnside January 2014 Abstract I revisit the evidence on the profits associated with currency carry trades, explore its relationship to the

More information