PT Quantum Futures - Foreign Exchange

Foreign Exchange

Foreign exchange Products:

1.	US$	=	United States Dollar
2.	EUR	=	Euro Uni Eropa
3.	GBP	=	Great Britain Poundsterling
4.	JPY	=	Japanese Yen
5.	CHF	=	Confederatio Helvetica Franc (Swiss Frank)
6.	AUD	=	Australian Dollar

Foreign exchange understanding

Foreign exchange is the currency trading market, which is the biggest derivative market in the world. This trading began in 1971, based on the Bretton Woods Agreement. The agreement states that changes in a country’s currency value from rate still becomes developing rate, of which the value is determined by the market).

Plaza Accord Agreement, which was signed by the G5 nations on September 22, 1985, was the beginning of the International Foreign Exchange era.

The simple definition of foreign exchange is value changes of one currency to another. The size of the foreign exchange market, based on a survey done by Bank of International Settlement (BIS), is US$ 80 million a day in 1980. Today, the number rises to US$ 2 billion a day, where more than 38% of such value is done in the London market.

Foreign exchange market player:

1.	Central Bank of each country
2.	Commercial banks
3.	Devisa banks
4.	Investment Institution
5.	Non-banking financial institution
6.	Exporter & Importer

Time of Trades

Country	Summer		Winter
Country	Open	Close	Open	Close
Australia	05.30	12.30	05.30	12.30
Chicago	21.30	05.30	20.30	04.30
Frankfurt	14.00	22.00	14.00	22.00
Hong Kong	07.45	15.30	07.45	15.30
London	14.30	23.30	14.30	23.30
New York	20.30	04.00	19.30	03.00
New Zealand	04.30	12.00	04.30	12.00
Tokyo	07.00	14.25	07.00	14.25

Foreign Exchange's Mover Factor

The main factor which influences the exchange value of a country’s currency is their balance sheet, economic condition, political factor and the result of the market’s graphic and psychological research. The movement on availability and level of funding resources between countries, or what is also known as Purchasing Power Parity (PPP), is the main factor that decides a market’s momentum. The power of fundamental economy such as inflation rate and interest rate are two examples that affect a currency value. This can be done in two ways: control and intervention.

Control, limits the citizens to do something that has a negative effect towards the currency exchange value (such as borrowing money from another country). Changing the interest rate level to make it less appealing for foreigners, or buying/selling its currency to increase/decrease the market value is intervention.

The main factor that influences the monetary exchange rate of a country is balance sheet. If the stated condition changes, it will cause a dramatic change against the country’s currency value. This shows that the basic concept of the currency movement is to anticipate an economical condition.

The movement of currency value is also influenced by technical/ graphic analytical result that has been done by the financial managers/ investment managers. In this case the market behaviors will seem more technical and the reaction of the managers is often alike and predictable.

Condition & Requirement for Foreign Exchange Transaction

1.	Trading Hours	: Monday 06.30 – Saturday (AM) 04.30 (winter) and 03.30 (summer)
2.	Month of Contract	: SPOT
3.	Final Trading day	: No Limit
4.	Contract Retail	: US$ 100,000
5.	Warranty Fund/ Lot	: US$ 1,000
6.	Commission/ Lot	: US$ 50
7.	Minimum Spread	: 8 point
8.	Maximum Lot/ DQ	: 30 Lot
9.	Rate IDR	: IDR 6000, 8000, 10.000 and floating rate

FOREIGN EXCHANGE’S PROFIT / LOSS CALCULATION

(Selling Price – Buying Price) x ∑ Lot x Value – (commission x ∑ Lot)

Note:

•	Lot	: size of transaction volume
•	Value	: size of value per points that is different from each other currency
		• EURO	= $10/ Lot
		• GBP	= $10/ Lot
		• AUD	= $10/ Lot
		• JPY	= $9.5/ Lot (Indirect Currency)
		• CHF	= $8.5/ Lot (Indirect Currency)

Profit Illustration

Example of EURO currency trading transaction.

On January 3, 2005 FOMC (Federal Open Market Committee) announced that the interest rate in the United States will be increased from 2.25% to 3.5% in 2005. This was done in order to lower the inflation rate caused by fast economic growth (much faster than anticipated).
On January 3, 2005, EURO was at 1.3580 against US$. That meant, to buy EUR 1 we need US$ 1.3580.

After FOMC announced that it will increase the interest rate to 3.5%, the market gave a positive response towards the news, hence the US$ was stronger against Euro. This news have caused the Euro value to decrease from 1.3580 towards 1.3380 (Euro weakens 200 points).

How do we do transactions based on the above stated information?

Based on the above information and supported by technical analysis, it was decided to go in the market by taking an open sell position on Euro for 1 lot at 1.3530 price point at 2PM (West Indonesian Time). On the very same day Euro was continuously weakening, down to 1.3450 at 5PM (Western Indonesian Time). It was because of this, it was decided to liquidate/ close the position (get out of the market) by taking a buy liquid for 1 lot at the 1.3480 price point.
How much was the profit?

The profit/loss calculation formula

(Sell-Buy) x Value/ points x Lot no – (Commision x Lot no)

= (1.3530-1.3480) x $10 x 1 lot – ( $50 x 1 lot)
= 50 poin x $10 x 1 lot - $50
= $450

Rupiah rate against US$ (IDR) = Rp. 9.300,-
Transaction profit on January 3, 2005 adalah $450 or equivalent with Rp. 4.185.000,-

LOSS ILLUSTRATION

How to calculate LOSS?

When mistakes happen in doing analysis (as example above), where it was decided by investor and trader to enter the market with an OPEN BUY position on Euro, as much as 1 lot at 1.3530 price point at 14.00 WIB; the plan was to target profit at 1.3580 price point and target loss at 1.3500 price point.

On the day itself it was seemed that Euro was getting weaker to the level of 1.3480. As per the transaction plan, we go out of the market and end transactions, by taking the SELL LIQUID position as much as 1 lot at the 1.3500 price point.

How much was the loss?

The Profit/Loss evaluation formula

(Sell-Buy) x Value/points x Lot no – (Commision x Lot no)

= (1.3530-1.3530) x $10 x 1 lot – ( $50 x 1 lot)
= -30 poin x $10 x 1 lot - $50
= -$350

Rupiah rate against US$ (IDR) = Rp. 9.300,-
Transaction loss on January 2, 2005 adalah $350 or equivalent with Rp. 3.255.000,-

Product

Newsflash

NEW YORK, Dec 18 (Reuters) - Rates banks charge each other for U.S. dollar-denominated funds slid to fresh 4-1/2 year lows on Thursday in the wake of the U.S. Federal Reserve's move this week to keep interest rates at rockbottom levels for a sustained period.

The Fed's dramatic measure that sent its target rate to a record low range of zero to 0.25 percent has helped to unlock credits for cash-strapped borrowers, but it has not been the immediate jolt that some traders had hoped.