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Future in capital management
New investment opportunities
Innovative investment solutions in the management of the financial resources

Futures

A futures contract is a contract to buy or sell a certain quantity of commodity or financial instrument that will be supplied on a specified day in the future. A leverage is applied in trading with such financial instrument and a short sale is possible, which means that your position can increase in value when the rates fall.
 
There are futures on:
  • energy (oil, natural gas ...);
  • agricultural products (corn, wheat ...);
  • metals (copper, gold ...);
  • stock indices (DAX, S&P500 ...);
  • interest rates (Euribor, Libor ...);
  • currencies (EUR/USD, EUR/CHF ...).

 

Options

An option is a financial derivative that represents a contractual relationship between a buyer and a seller. It gives the owner the right, but not the obligation, to buy or sell a certain quantity of the underlying asset at a pre-agreed contract price.

CFDs

CFDs or contracts for difference are financial derivatives. CFDs are traded on shares and stock indices. CFDs allow investors to trade with leverage, which means that the investors are not required to provide the total value of the investment.

Foreign exchange market – Forex

MEANING OF FOREIGN EXCHANGE MARKET - FOREX 

The foreign exchange market (Forex) is a financial market in which participants exchange (trade) one currency for another. With over 5,000 billion dollars of daily turnover, it is the largest, most dynamic and most liquid capital market in the world. Foreign exchange differences between currency pairs are monitored and traded. Based on information we choose to buy or sell a currency in currency pair. The values on the foreign exchange market are independent of the stock prices on the stock exchange. The exchange rates of currency pairs are constantly changing, from second to second. The right decision to buy or sell brings profit irrespective of whether the value of currency is rising or falling. The Forex market trades 24 hours a day 5 days a week from opening on Sundays at 22h to closing on Fridays at 23h.

Millions of well-informed individuals, companies and investment funds actively trade on the foreign exchange market. The foreign exchange market is "over the counter" (OTC) business, which means that there is no specific location where buyers and sellers could actually meet and trade. Instead, transactions are carried out "on-line" via internet. A development of computer technology and of financial markets, where foreign exchange transactions are not subject to the national authorities, allowed a big boom of currency markets in the last two decades. E-trading, research available on the internet, analysis and cost competitiveness have recently made this market more accessible to individual investors.  

How does currency trading work?

The currencies are always traded in pairs (base currency/quote currency), which means that the customer is always simultaneously buying one currency and selling the other. Talking about currency pairs, we simultaneously meet two concepts: long and short position. The investors take a long position, when they expect base currency to rise in value or quote currency to fall in value. The investors take short position, when they expect base currency to fall in value or quote currency to rise in value. This means that they can potentially create gains irrespective of whether an exchange rate of a certain currency pair rises or falls. Currency fluctuations are all they need to achieve returns.

 

Advantages of currency trading

  • The foreign exchange market is the most liquid financial market in the world.
  • The possibility of making a profit in either direction when exchange rates rise or fall.
  • Due to a large number of investors all around the world and a high value of the market, it is not possible to manipulate on the foreign exchange market.
  • Relatively low cost of trading.
  • Loss and profit can be limited – using a Stop Loss order and Take Profit order.
  • The foreign exchange market is not limited in time – trading is executed 24 hours a day 5 days a week.
  • It is possible to use leverage – to carry out large transactions with a small deposit.
  • You can invest in several markets at the same time – trading with a variety of currency pairs.

History of currency trading

Ancient history
The first money appeared in the time of ancient Egypt in about 2000 BC.
The first coins appeared in Asia Minor in about 600 BC. They quickly spread to ancient Greece, where the coins were called drachmas.
The first stock exchange in 1406 in the Netherlands (Bruges), founder Mr. Van de Bourse. 
The first bank in 1408 in Italy (Genoa).
The first international exchange in 1560 in the Netherlands (Amsterdam).
The London Stock Exchange in 1566, the Frankfurt Stock Exchange in 1585.
The first central bank “Bank of England” in 1694, King William III. (London).
The formation of the American Stock Exchange on Wall Street (New York, 1792).
Until 1918, the “gold standard”, followed by the abandonment, the final step: US in 1933 definitely abolished the gold currency.
 
INTERNATIONAL MONETARY SYSTEM
The international monetary system has passed different periods throughout history, what also changed the configuration of the foreign exchange market. The foreign exchange market, as we know it today, began to develop in the seventies of the last century.
 
In the beginning there was gold
The first comprehensive international monetary system evolved after 1870, since at that time, due to political and economic reasons, all major countries adopted the system of the gold standard. There are two basic rules of such a system. First rule is that a country determines the value of its currency in terms of gold ensuring the exchange of currency for gold at this rate and second rule is that free import and export of gold is possible. The exchange rates between the currencies were thus fixed. The system worked relatively successfully until the beginning of World War 1, when the international trade was paralysed for some years.
 
Between the two wars the countries, despite several attempts, failed to re-establish the functional version of the gold standard, therefore, this period was characterised by instability. At the end of the World War 2, the international community did not want to re-establish the system, so they began to seek an agreement on the future status of the international monetary system. At that time, the US had a great economic and political value and they held 70 % of all global gold reserves. The countries reached an agreement about the dollar standard system during the conference in the US town of Bretton – Woods. The US were committed to exchange dollars for gold and the other countries expressed their currencies in dollars, which means that the exchange rates practically were fixed. The system worked fairly well until the beginning of the sixties, when it increasingly began to show its defects, such as lack of the international liquidity and unsuitability of the balance sheet adjustment mechanism. The US deficit, which had grown excessively, with the economic development of other countries, especially Germany and Japan, was particularly problematic.
 
Floating exchange rates 
In 1973, a period of the dollar standard finally ended. It was replaced by a period of more or less regulated floating exchange rates. The basic characteristics of the modern international monetary system are floating exchange rates of the biggest currency pairs. However, on the political level the countries are regularly meeting and coordinating with regard to the values of exchange rates.
Nevertheless, the exchange rates can be rather volatile, especially compared with the stock market and this is a prerequisite for a development of speculative trading. This concept characterizes currency trading, whose main purpose is to generate profits and not to trade in foreign currencies.
 
What influences the exchange rates?
The foreign exchange market is the largest financial market in the world with on average 300 times higher turnover than the US stock market.
 
Since the central banks only rarely intervene in financial markets in order to influence the exchange rates, these are mainly determined by supply and demand of traders. When such interventions still occur, they have a strong impact on the movement of exchange rates despite their small trading volume. Other traders watch closely every central bank intervention, because it can indicate the movement of exchange rates in the future. 
 
In addition to the central banks, the main players in the global foreign exchange market are commercial banks, corporations that trade across national borders, non-bank financial institutions such as investment firms and insurance companies. One of the biggest players in this market with the greatest share of turnover (17 %) is the German Deutsche Bank.
 
Technology development brings trade growth
A great technological development had a decisive impact on a big growth in trade over the last decade. Thus, for example, many professional brokers, who previously facilitated the exchange of currencies on the interbank market, lost their jobs, because nowadays, computer systems take care for mediation between supply and demand. The information revolution also led to an increase of personal electronic trading platforms, where exactly the foreign exchange market has the leading role. Such platforms offer usually over one hundred currency crosses and trading with high leverage, which means that even small movements of the exchange rates cause to investors big gain or loss.
Due to its extreme liquidity and high volatility, the foreign exchange market offers attractive opportunities for speculative trading. Of course, it is certainly true that this type of investment requires great attention and careful risk management, because the profit potential is also inevitably associated with the loss potential.

 

"I am still learning.”
- Michelangelo -

Terminology

Currency pair 
Relationship between the base currency and the quote currency. The most common or the most widely traded currency pair is EUR/USD.

Arbitrage
A phenomenon that occurs when the exchange rates of the same security are different in different markets. This exchange rate difference results in buying the same security where the price is lower and selling it where the price is higher.
 
Short position
Selling of the base currency and buying of the quote currency. We therefore bet on the fall of the base currency or on the growth of the quote currency.
 
Long position 
Buying of goods/currency in expectation that the price of the base currency will rise.
 
Stop loss
Stop loss order is an electronic tool that enables automatic closing of positions at a pre-set price in order to limit the loss of an individual transaction.
 
Leverage
It enables trading using credit (leverage). It is expressed as a percentage of an amount of money that can be borrowed from a broker to open a position.
 
Margin
It represents the required amount of money that must be paid by the buyers from their own funds on the trading account to open a position. 
 
Exchange rate
The expression of value of one currency in terms of another currency.
 
Base currency
The first currency listed in a currency pair. Based on the exchange ratio a buyer knows how many units of the quote currency he needs, in order to buy one unit of the base currency. Based on the exchange ratio a seller knows how many units of the quote currency he gets by selling one unit of the base currency.
 
Buy limit
The highest price that a buyer is willing to pay for a currency pair.
 
Sell limit
The lowest price at which a seller is willing to sell a currency pair.
 
Interbank rates
A rate of interest charged on loans made between banks.

 

Floating exchange rate
An exchange rate reflecting supply and demand on the market.
 
Fixed exchange rate
An exchange rate determined by the national central bank.
 
Forward
A non-standardised contract, the object of which is the purchase or sale of a financial transaction at a specific pre-agreed price at a fixed pre-agreed date in the future.
 
Pip
Base unit of the exchange rate expressed to four decimal places, for example 1.4001.
 
Bid
Price at which a dealer is ready to sell goods or currency.

Ask
Price at which a dealer is ready to buy goods or currency.
 
Maturity
Date on which the liability becomes due..

Broker
An individual or firm, acting as an intermediary in the transactions between a buyer and a seller, who receives the agreed commission for the service delivered.
 
Position
General state of the investment. A position is taken by placing a buy order (long position) or a sell order (short position).

Spread
Difference between bid price and ask price.
 
Quote currency
The second currency listed in a currency pair on which the value of the base currency is based. Example: EUR/USD; 1 EUR = 1.2559 USD.
 
Technical analysis
Analysis based on statistical analysis of previous price movements and repeating visual chart patterns.
 
Fundamental analysis
General analysis of a financial instrument, based on global economic, commercial, and political indicators.

Dealer
An individual or firm acting, on the one hand, as the buyer/seller of financial instruments for their own account and, on the other hand, as a broker connecting buyers and sellers for an agreed commission.

 

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