Forex Markets - Trade Life Cycle

Trading Position
1.When you buy / sell a currency , you are said to hold a Position
2.Position denotes your size of holding in that currency
3.When you buy – “going long or overbought”
4.When you sell – “going short or oversold”
5.If you have no position – “ being square”
FORWARD CONTRACT :
A contractual commitment to buy or sell a specified amount of
foreign exchange for a specified price (forward exchange rate )
at a specified future date (maturity of contract ).
Premium/ Discount :
.Forward exchange rates can be higher or lower than the applicable spot rate.
.The difference between spot rate and forward rate is called ‘swap premium or discount’
.If the base currency interest rate is higher – discount – forward rate is lower
.If the base currency interest rate is lower – premium – forward rate is higher
What is a Swap?
1 Exchange of two currencies and their re-exchange later
2 A swap is a lending and borrowing transaction achieved through the foreign exchange market.
3 Instead of lending(borrowing) and borrowing(lending), we just sell(buy) and buy(sell) in the forex market.
Different Financial Markets
Listed Market –
. Exchanges where an Auction method is used at a physical location. (e.g.) The New York Stock Exchange (NYSE)
. Exchanges where trade execution is automated using Order Matching Systems
. All the exchanges are registered with the SEC / SEBI.
. e.g. stock markets
Over-the-Counter Market (OTC, Unlisted) –
. A negotiated market without a physical location where transactions are done via telecommunications.
. e.g. Currency markets
OTC Markets
. Currency Markets are traded entirely OTC
. OTC price information is either published periodically in paper form, disseminated over telephone lines, or displayed real-time electronically