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COSMIC: There are two methods for trading currency:
Currency Futures and ForeX. There is raging
competition between Futures and ForeX brokers for your
account. Right now, it is our opinion that it's
not as cost effective to trade ForeX with multiple pip
spreads entry fees as it is to trade Futures with very
low [$5] commissions. ForeX brokers advertise:
"No Commission Trades." Why would they
need to charge you a commission when they can scalp you
for $60 to $100 on the spread for each ForeX contract
entered?
This is what we do:
We concentrate on what we believe to be the
most straight forward, least confusing, markets. Our
mentor concentrates on trading what
he considers to be the best trending
currency or index future... Generally, at the present,
the Euro Future contract appears
to offer the best volatility.
With
the U.S. Dollar taken off the Gold Standard in 1971 by
President Nixon and continuing development of a global
economy, there has been a significant increase in
foreign exchange activity and risk.
Foreign exchange risk is the chance of loss due
to changes in the relative value of world currencies.
For example, if a
U.S.
investor buys a foreign security for a company based in
a BRIC Country [
Brazil
,
Russia
,
India
or
China
], he in essence buys the exchange rate between the two
countries.
Remember, the exchange rate
fluctuates daily. A small fluctuation in the
exchange rate can have a major impact on portfolios. For
example, a portfolio holding a million units of foreign
exchange will fluctuate by $12,500 for every one cent [1
digit to right of decimal point] fluctuation in the
cross rate. We trade on the 4th digit
to right of decimal. The Euro Future point value =
$12.50, so 10 points equal $125.00, 100 points = $1,250
and 1000 points = $12,500.
A Portfolio manager’s major concern is foreign
exchange economic exposure.
This concern has led to the increase in spot and
futures currency volume.
The spot rate is the current price of the foreign
currency. The
future rate is the contractual rate between a commercial
bank and a client for future delivery of foreign
exchange. Future
rates or forward exchange rates are traded on the basis
of one, two, three, six, and twelve months, with the
major currencies extending out as much as 5 years.
The
current value of the futures contract is an unbiased
prediction of the future value of the spot rate.
When trading foreign currencies, it is important
to pay close attention to the policy makers for each
country. For
example if a trader wants to trade the Euro Currency,
then he or she would need to recognize key fundamental
data being released within the European Union Central
Bank [ECB] and, in particular, what Jean-Claude Trichet
[Europe’s equivalent of Mr. Bernake, Chairman of the
FOMC] says or does.
As with any product, when the supply increases,
the price of that product decreases and if supply
decreases, the price of that product increases.
The price of money is the interest rate that
lenders charge borrowers.
Therefore, if the U. S. Federal Reserve Board,
led by Ben Bernake, changes key interest rates, the
price of money must change also.
Key Terms:
Interest Rate Parity – the difference in national
interest rates will be reflected in the currency futures
market. If
there are no transaction cost differentials, two
securities with similar risk and expirations will
portray a difference in their interest rates equal to
the forward premium or discount, but with the opposite
sign, Interest
Rate Parity
Purchasing Power Parity
– In a world of perfect markets, the same good should
sell for the same price in different countries.
If there are no barriers to trade, no taxes, or
other costs, for example the one troy ounce of gold
should be worth the same in the
U.S.
as it is in
Germany
. Purchasing
Power Parity
Big Mac Index - The Big Mac PPP is the exchange rate that
would mean hamburgers cost the same in
America
as abroad. Comparing actual exchange rates with PPPs
indicates whether a currency is under- or overvalued.
Big
Mac Index.
Fisher Effect – Fisher
Hypothesis
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Federal
Reserve Board Activities
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Effects
on Credit & Money Supply
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Movement
of Interest Rates
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Raise
bank Reserve Requirements
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Decrease
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Raise
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Raise
Margin Requirements
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Decrease
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Raise
|
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Raise
the Discount Rate
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Decrease
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Raise
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Sell
Government Securities
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Decrease
|
Raise
|
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Lower
Bank Reserve Requirements
|
Increase
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Lower
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Lower
Margin Requirements
|
Increase
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Lower
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Lower
the Discount Rate
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Increase
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Lower
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Buy
Government Securities
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Increase
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Lower
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Become familiar with the world’s
currencies.
There are too many to name; however, we need only watch
6 dollar based currencies:
Aussie, Canadian,
Euro, Pound, Swiss Franc and Yen.
The Euro is the “in”
currency future to trade!
At this writing, late June 2008, the U.S.
Dollar Future is
approaching 74.0 coming off 3 months of strong support.
With the Euro down from its April 1.60 highs, this is a
major inflection.
From here on, the Dollar may take on strength.
Richard V Rueb
DISCLOSURE:
The
High Degree of Leverage Often Obtainable in Commodity
Trading Can Work against You As well As for You. Use of
Leverage Can Lead To Large Losses As Well As Gains.
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