Foreign Exchange Trading Research Articles

Central European Free Trade Agreement (CEFTA) 2006 - Opportunities, Trade Relation and Evolution of Macedonian Economic Diplomacy

Main activity in the foreign trade policy of the Republic of Macedonia during the past 10 years was the integration of the country on the Central European Free Trade Agreement – (CEFTA). The reason for this is the expectation that the membership of the Republic of Macedonia in CEFTA will significantly contribute to the continual efforts for strengthening the regional trade cooperation, further liberalisation of foreign trade exchange, and continuation of activities for harmonisation of trade rules with international standards. Additionally, CEFTA 2006 provides a much more comprehensive framework for development of mutual relations and economic cooperation among the countries of South Easte Europe. We will explain the concept of development of economic diplomacy in the Republic of Macedonia as a tool for supporting Macedonian economy. The purpose of these activities is to present the Republic of Macedonia as an attractive destination for foreign investments through the promotion of business advantages, and giving incentive to Macedonian export, as well as through strengthening of the country’s position as a attractive touristic destination.

Technical analysis of foreign trade exchange of Bosnia and Herzegovina based on ARIMA model

Technical analysis of foreign trade exchange of Bosnia and Herzegovina based on ARIMA model

Trade Liberalization and Disaggregated Import Demand in Uganda

Studies investigating determinants of import demand for Uganda present aggregate findings yet there is a need to disaggregate the findings for specific sectors. This creates a research gap on disaggregated findings of import demand. This research attempts to fill this research gap by establishing determinants of import demand using disaggregated sector level data for consumer, intermediate and capital goods. The study estimates the long-run and short-run import demand elasticities for consumer, intermediate and capital goods over the period (1994 to 2012). The results show that there exists a cointegrating relationship between the disaggregated import demand and the following set of variables; relative import price, GDP per capita, real effective exchange rate, foreign exchange rate reserves and trade openness. The long run elasticity appears more responsive to import demand compared to the short-run elasticity. Importantly the effect of a change in trade openness on the volume of imports is positive, suggesting trade liberalization increases import demand.

Computational Visual Analysis of the Order Book Dynamics for Creating High-frequency Foreign Exchange Trading Strategies

Abstract This paper presents a Hierarchical Hidden Markov Model used to capture the USD/COP market sentiment dynamics choosing from uptrend or downtrend latent regimes based on observed feature vector realizations calculated from transaction prices and wavelet-transformed order book volume dynamics. The HHMM learned a natural switching buy/uptrend sell/downtrend trading strategy using a training-validation framework over one month of market data. The model was tested on the following two months, and its performance was reported and compared to results obtained from randomly classified market states and a feed-forward Neural Network. This paper also separately assessed the contribution to the model's performance of the order book information and the wavelet transformation.

Carry Trade e Risco Cambial: um Conto de Dois Fatores

Retornos da estrategia de carry trade tem sido explicados usando-se funcoes de utilidade inseparaveis no tempo que permitem premios de risco volateis. Tipicamente tais funcoes mimetizam as preferencias de economia fechada que dependem de bens duraveis e nao duraveis. Este trabalho retorna a uma classificacao mais tradicional, em macroeconomia internacional, de consumo entre bens domesticos e importados. O modelo e aplicado para paises que representam 98,2% do volume mundial do comercio bilateral de câmbio. Reporta-se uma melhora acentuada na significância dos betas de consumo.

A checklist-based weighted fuzzy severity approach for calculating operational risk exposure on foreign exchange trades under the Basel II regime

It is well-known that any risk management activity is a cost to the organization. However, optimized risk management practices satisfy regulatory capital requirements and gain the confidence of investors who take calculated risks. A bank's risk management division will generate a profit if it can develop methodologies to decrease the nonworking regulatory capital. This may be achieved only when the risks are measured using data from internal and external sources in conjunction with scenario analysis. One such method of measuring operational risk (OR) is the advanced measurement approach. This involves quantifying ORs across the various nodes within a bank following the loss distribution approach, in which the frequency and severity distributions of the loss-generating OR events are estimated from the data sources. These distributions are then used to generate the scenarios for frequency and its associated severity for estimating the OR capital. In our approach, the various levels of loss severity are mapped to a percentage of total trade exposure, and the occurrence frequency of an OR event is assumed to follow a binomial distribution.

Financial intermediation and the role of price discrimination in the foreign exchange market

Foreign exchange trading is performed in opaque and decentralized markets. The two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information.

The Geography of Foreign Exchange Trading: Currencies and International Financial Centres

We use data on foreign exchange trading from the Bank for International Settlements for the period 1995-2013 to explore the relationship between the international currency system and the evolution of international financial centres. Drawing on existing literature, our conceptual framework suggests that both the system of currencies and that of financial centres have tendencies towards spatial concentration, but they have limits, and generate overlapping but different geographies. Our empirical analysis shows the forex market as globalised, networked and hierarchical, with a 40% share for the leading centre and currency, a 20% share of the runner-up, and the rest of the market divided among smaller financial centres and currencies. The US dollar, as the vehicle currency in foreign trade and cross-border financial transactions, and London, as the world’s most global financial centre, are both at the heart of the system. In the last 20 years the market has undergone spatial concentration, and seems on course for further concentration, driven by economies of scale, scope and agglomeration. The US subprime and Eurozone crises have done little to change the geography of forex trading. Turnover has boomed and Asia’s share in the market has remained stagnant. New regulation may indeed be contributing to the centripetal forces by adding fixed costs and increasing economies of scale. Nevertheless, geopolitics and geoeconomics may act as a centrifugal force, with the rising status of the Chinese currency in the lead.

Impact of Fluctuation on Major Foreign Currency Pairs to Indian Rupee Involved Currency Pairs

The study is a comprehensive analysis of the cause and effect of fluctuations in the major currency pairs and the effect on the Indian rupee. The study also depicts the variation in the rates of the currency pairs through correlation between them. The objectives of the study are met through the collective and comparative analysis of the data collected for the purpose of the study. Currency market (or Forex market) is a very volatile and liquid market among all the financial market. Currencies are priced in pairs and are traded in pairs. It is useful to know from an investment perspective, regarding the movement they share with each other i.e. whether they move in same direction or in opposite direction. Once the correlations between these pairs and their movement pattern are known, it can be used to control upon overall portfolio’s exposure. The study is useful for those willing to trade in foreign exchange. The inferences drawn from the study can be seen as useful information and can be used to test strategies on correlated pairs in order to avoid over-exposure; to double profitable positions; to diversify risks, and to hedge in the ever fluctuating market. This project is an overview of global forex market and the impact of movement pattern of major foreign currency pairs to Indian rupee currency pairs based on the date of fourteen years from 1/1/2000 to 31/12/2013. Investors can hedge their risks and diversify their portfolio by using the data of correlation between various currency pairs. Fluctuations in one currency pair may or may not impact to another currency pairs. Traders can build their strategies using the currency correlation between different currency pairs to make profit from the market.The study is undertaken in Wings World Finoconsult Pvt. Ltd., Bangalore which is a financial advisory company and is a Subsidiary of FW Markets Ltd. Located in Saint Vincent and the Grenadines under license number 20779 IBC 2013.From the analysis it is found that major foreign currency pairs EURUSD and USDJPY have direct and positive high correlation with EURINR and INRJPY respectively. Whereas, EURUSD and GBPUSD have low and insignificant impact to the exchange rate of USDINR and GBPINR.Investors can take an advantage of the finding of this study to construct the profitable portfolio, hedge the risk, confirm the breakouts and avoid fakeouts while trading in the forex market.

Evolution of India’s Foreign Exchange Market

India’s foreign exchange policy after Independence has evolved in tandem with international developments and domestic requirements. The post-reforms period has been marked by wide-ranging measures to widen and deepen the market, besides exchange rate liberalisation. The momentous developments over the past few years are reflected in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. The foreign exchange market has acquired depth. With the economy moving towards fuller capital account convertibility in a calibrated manner, focused regulation and monitoring of the foreign exchange market assumes added importance. In this context, there is a need to strengthen infrastructure, transparency and disclosure, and product range in the foreign exchange derivative markets.

Regional economic and development problems and perspectives: Case study of Slavonia and Baranja (Croatia)

Slavonia and Baranja or Eastern Croatia is a physical-geo?graphical part of the Pannonian Basin and it is divided administratively into 5 counties: Virovitica-Podravina, Pozega-Slavonia, Slavonski Brod-Posavina, Osijek-Baranja and Vukovar-Sirmium (which make nearly 20% of the state). Regarding functional organization, Slavonia and Baranja is a part of Osijek nodal region but with interrelated influences of other regional centres like Slavonski Brod, Vinkovci, Vukovar, Djakovo and Pozega. Analysis of this region consisting of 22 cities and 104 municipalities with 805,998 people (according to Census 2011) will be conducted according to several economic-geographic indicators: foreign trade exchange, number of employed people per 100 inhabitants, number of unemployed people per 100 inhabitants, economic structure of population as well as the share of people employed in agriculture and industry as the most important sectors in the regional economy. Demographic problems will also be analysed, because the population is one of the most important factors of economic and social development. The main problems of the analysed region are depopulation, aging and rural exodus as well as the fact that every city or municipality, except one, had the decline of population comparing to previous Census of 2001. These processes are accompanied by spatial population polarization which has also resulted in economic decline.

“Professional trading”, exchange rate risk and the growth of international banking: a note

The movement from fixed to floating exchange rates led to predictions that foreign exchange markets might become more volatile. In particular, the issue whether speculation in the market was stabilising or destabilising was widely debated. Concern was also expressed whether sufficient speculative funds would be available to ensure capital mobility. The author argues that the development of international banking has allowed banks to undertake more speculative foreign exchange trading without incurring greater risk, thus alleviating the problem of capital mobility.

An empirical study on technical analysis: GARCH (1, 1) model

One of the deficits of the common Bollinger band is that it fails to consider the fat tails/leptokurtosis often exists in financial time series. An adjusted Bollinger band generated by rolling GARCH regression method is proposed in this study. The performance of the adjusted Bollinger band strategy on EUR, GBP, JPY, and AUD vs. USD foreign exchange trading is evaluated. Results show that in general, the adjusted Bollinger band performs better than the traditional one in terms of success ratios, net successes, and profit. In addition, no matter there is transaction cost or not, only adjusted Bollinger strategies are recommended for investors. Adjusted Bollinger band strategies with MA 5 or 10 are recommended for EUR, GBP, and JPY. Adjusted Bollinger strategy with MA 20 is the recommended strategies for AUD.

The Foreign Exchange Trader Who Exceeded His Targets

The Foreign Exchange Trader Who Exceeded His Targets

Strategy diversification: Combining momentum and carry strategies within a foreign exchange portfolio

Hedge funds, such as managed futures, typically use two different types of trading strategies: technical and macro/fundamental. In this article, we evaluate the impact of combining the two strategies, and focus on, in particular, two common foreign exchange trading strategies: momentum and carry. We find evidence that combining the strategies offers a significant improvement in risk-adjusted returns. Our analysis, which uses data spanning 20 years, highlights the potential benefits of achieving strategy-level diversification.

Customer foreign exchange orders: When timing really does matter

This paper investigates customer foreign exchange (FX) transactions to learn if there are any groups of customers whose transactions are related to subsequent FX rate changes. We use a unique data set from an Australian commercial bank with every customer FX trade in the spot Australian Dollar/US Dollar market between 2005 and 2010. We use Monte Carlo simulation to generate benchmark expected cash flows for each individual customer. This enables us to determine whether that customer’s transaction history is well-timed and therefore potentially relevant for FX determination. We find very few customers whose transactions appear well-timed, given subsequent FX rate changes.

The valuation of equity warrants under the fractional Vasicek process of the short-term interest rate

Motivated by the empirical evidence of long range dependence in short-term interest rates and considering the long maturities of equity warrants, we propose the fractional Vasicek model to describe the dynamics of the short rate in the pricing environment of equity warrants. Using the partial differential equation approach, we present a valuation model for equity warrants under the assumption that the short rate follows the fractional Vasicek process. After identifying the pricing model for equity warrants, we provide the parameter estimation procedure for the proposed pricing model. Since obtaining the values of equity warrants from the proposed model needs to solve a nonlinear equation, we employ a hybrid intelligent algorithm to get around this optimization problem. Furthermore, to illustrate the practicality of our proposed model, we conduct an empirical study to ascertain the performance of our proposed model using the data from China’s warrant market and the China Foreign Exchange Trade System. The comparison of traditional models (such as the Black–Scholes model, the Noreen–Wolfson model, the Lauterbach–Schultz model, and the Ukhov model) with our proposed model is also presented. The empirical results show that the mean absolute percentage error of our pricing model is 10.30%. By contrast, the Black–Scholes model, the Noreen–Wolfson model, the Lauterbach–Schultz model, and the Ukhov model applied to the same warrant produce mean absolute errors of 35.26%, 37.67%, 33.40%, 32.81%, respectively. Thus the long memory property in stochastic interest rates cannot be ignored in determining the valuation of equity warrants.

The choice of direct dealing or electronic brokerage in foreign exchange trading

Central bank surveys indicate that the use of electronic brokerage systems account for the great majority of inter-dealer spot foreign exchange market trade execution. This share has grown from zero in the early 1990s and is up sharply from that reported in the surveys taken in 1998. While the surveys point out the rapid growth of electronic brokers as an important FX institution, there has been no research on the microstructure issues that lead traders to choose electronic brokerage (EB) over the historically dominant, and still quite relevant, institution of direct dealing where bilateral conversations (either telephone or electronic) occur between two FX traders and a deal is struck. We provide analysis to further our understanding of the choice of trading venue in foreign exchange.Theory suggests that the choice of trading venue will differ for “large” and “small” traders. This is due to the importance of asymmetric information, transaction costs, and speed of execution. The most likely outcome has direct dealing used for large trades while the EB is used for small trades.The empirical analysis utilizes data on orders submitted to the Reuters EB system. We focus on the duration of time between order submission and finding a match for trade execution. An autoregressive conditional duration (ACD) model is specified using the Burr distribution. Given the price competitiveness of an order, duration is increasing in order size. Because of this longer duration for large orders on the EB, large traders will prefer the direct dealing market to the brokerage. We also find that the greater the depth of the market, the shorter the duration of orders of all sizes. This result is consistent with traders clustering in time to submit orders so as to increase the probability of finding a match.

Lessons from the evolution of foreign exchange trading strategies

The adaptive markets hypothesis posits that trading strategies evolve as traders adapt their behavior to changing circumstances. This paper studies the evolution of trading strategies for a hypothetical trader who chooses portfolios from foreign exchange (forex) technical rules in major and emerging markets, the carry trade, and US equities. The results show that a backtesting procedure to choose optimal portfolios improves upon the performance of nonadaptive rules. We also find that forex trading alone dramatically outperforms the S&P 500, with much larger Sharpe ratios over the whole sample, but there is little gain to coordinating forex and equity strategies, which explains why practitioners consider these tools separately. Forex trading returns dip significantly in the 1990s but recover by the end of the decade and have been markedly superior to an equity position since 1998. Overall, trading rule returns still exist in forex markets—with substantial stability in the types of rules—though they have migrated to emerging markets to a considerable degree.

Exchange rate predictability and a monetary model with time-varying cointegration coefficients

Many studies have pointed out that the underlying relations and functions for the monetary model (e.g. the PPP relation, the money-demand function, monetary policy rule, etc.) have undergone parameter instabilities and that the relation between exchange rates and macro fundamentals is unstable due to the shift in the economic models in foreign exchange traders' views or the scapegoat effect in Bacchetta and van Wincoop (2009). Facing this, we consider a monetary model with time-varying cointegration coefficients in order to understand exchange rate movements. We provide statistical evidence against the standard monetary model with constant cointegration coefficients but find favorable evidence for the time-varying cointegration relationship between exchange rates and monetary fundamentals. Furthermore, we demonstrate that deviations between the exchange rate and fundamentals from the time-varying cointegration relation have strong predictive power for future changes in exchange rates through in-sample analysis, out-of-sample analysis, and directional accuracy tests.