ISLAMABAD (PPI) - Federal Minister for Privatisation, Syed Naveed Qamar has said that Pakistan plans to sell stakes in at least three companies by the end of June, reviving an asset sale program stymied by political instability and a slowing economy.
This will be the start of our program with a new concept of modernizing companies with efficient management rather than a fund-raising target, Privatisation Minister Naveed Qamar said in an interview with foreign media.
Ministry officials will meet potential buyers for National Power Construction Co. (NPCC) on March 28 to set a bidding date as early as next month, he said. Stakes in Jamshoro Power Co. (JPC) and Heavy Electrical Complex (HEC) may be sold by June 30, Qamar said.
Funds raised from asset sales fell by a quarter last year as political wrangling and terrorist attacks in the nation biggest cities deterred overseas investors. Pakistan yesterday said it would seek $10 billion in funds over the next three years for development projects after securing a $7.6 billion bailout from the International Monetary Fund to avert default.
Since the start of this fiscal year on July 1, Qamar has completed only one transaction, raising 1.34 billion rupees ($16 million) by selling a stake in Hazara Phosphate Fertilizers Ltd., a urea maker. That compares with the previous govt of former President Pervez Musharraf raising 25.5 billion rupees in a year through stakes in HBL and UBL.
Last month, Naveed Qamar, announced changes to the asset sale policy, setting aside 12 percent of shares to workers in state- controlled companies such as Pakistan Railways and the Pakistan Post Office, the nation postal service.
The benchmark is 26 percent for the stake to be sold in almost every company, apart from offering shares to employees, he said. The new concept is to sell a minority stake and transfer the management, he said.
Tuesday, March 31, 2009
G20 to agree to avoid forex devaluations: draft
LONDON (Reuters) - The leaders of the Group of Twenty (G20) leading and emerging nations will agree at a summit on Thursday to refrain from currency moves that would hurt each other's economies, according to a draft statement.
"We commit to conduct our economic policies responsibly with regard to the impact on other countries and to refrain from competitive devaluation of our currencies," said the draft, obtained by Reuters.
The draft statement lists further G20 agreements to boost resources for the International Monetary Fund, multilateral development banks and for trade finance, while leaving as blanks the exact amounts of any increases.
On fiscal stimuli, it added: "We are committed to delivering the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability."
In the run-up to the meeting the United States has pressed for more stimulus action, but mainland Europe has said it has done enough for now and rejected suggestions that its overall effort lags well behind that of the United States.
The draft notes that G20 central banks have pledged to maintain expansionary policies as needed "using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability."
Describing such fiscal and monetary measures as the largest combined stimulus drive in modern times, it added:
"Our objective is that they will enable the global economy to expand ... by the end of 2010," with the exact amount of the expansion left blank.
"We commit to conduct our economic policies responsibly with regard to the impact on other countries and to refrain from competitive devaluation of our currencies," said the draft, obtained by Reuters.
The draft statement lists further G20 agreements to boost resources for the International Monetary Fund, multilateral development banks and for trade finance, while leaving as blanks the exact amounts of any increases.
On fiscal stimuli, it added: "We are committed to delivering the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability."
In the run-up to the meeting the United States has pressed for more stimulus action, but mainland Europe has said it has done enough for now and rejected suggestions that its overall effort lags well behind that of the United States.
The draft notes that G20 central banks have pledged to maintain expansionary policies as needed "using the full range of monetary policy instruments, including unconventional policy instruments, consistent with price stability."
Describing such fiscal and monetary measures as the largest combined stimulus drive in modern times, it added:
"Our objective is that they will enable the global economy to expand ... by the end of 2010," with the exact amount of the expansion left blank.
For Wall Street, March is best month since 2002
NEW YORK (Reuters) - Stocks climbed on Tuesday, driving the S&P 500 to its best month since October 2002, as investors snapped up top-performing bank and technology shares as the first quarter came to an end.
Upbeat news from Europe set the tone for financials, helping them recover much of Monday's losses and continue a recent robust rally after British bank Barclays (BARC.L) declined to take part in a government asset-protection plan.
Technology shares added to a strong three-week rally after brokerage Davenport recommended investors buy Microsoft Corp (MSFT.O), pointing to increased demand for personal computers in China and the United States, and potential restocking of inventories in Europe.
Even as the broad S&P 500 rose 8.5 percent in March for its best one-month percentage gain since October 2002, uncertainty about the struggling economy left the benchmark U.S. stock index down 11.7 percent for the first quarter.
Upbeat news from Europe set the tone for financials, helping them recover much of Monday's losses and continue a recent robust rally after British bank Barclays (BARC.L) declined to take part in a government asset-protection plan.
Technology shares added to a strong three-week rally after brokerage Davenport recommended investors buy Microsoft Corp (MSFT.O), pointing to increased demand for personal computers in China and the United States, and potential restocking of inventories in Europe.
Even as the broad S&P 500 rose 8.5 percent in March for its best one-month percentage gain since October 2002, uncertainty about the struggling economy left the benchmark U.S. stock index down 11.7 percent for the first quarter.
TOKYO, April 1 (Reuters) - Japan's Nikkei average rose 0.8 percent on Wednesday as exporters such as Kyocera Corp (6971.T) gained on a weaker yen and
HONG KONG, March 31 (Reuters) - Hong Kong shares will open slightly higher on Tuesday as the market looks supported by firm regional sentiment, after the local bourse posted its biggest single-day drop in three weeks in the previous session.
Global lender HSBC (0005.HK) was down 2.2 percent in pre-opening trade, while Esprit (0330.HK) advanced 3.1 percent.
The benchmark Hang Seng Index .HSI was up 0.66 percent at 13,545.36.
The China Enterprises Index .HSCE of top mainland firms was up 1.2 percent at 7,994.26. (Reporting by Nerilyn Tenorio; editing by Jonathan Hopfner)
Global lender HSBC (0005.HK) was down 2.2 percent in pre-opening trade, while Esprit (0330.HK) advanced 3.1 percent.
The benchmark Hang Seng Index .HSI was up 0.66 percent at 13,545.36.
The China Enterprises Index .HSCE of top mainland firms was up 1.2 percent at 7,994.26. (Reporting by Nerilyn Tenorio; editing by Jonathan Hopfner)
Nikkei gains 0.8 pct as exporters rise on yen
TOKYO, April 1 (Reuters) - Japan's Nikkei average rose 0.8 percent on Wednesday as exporters such as Kyocera Corp (6971.T) gained on a weaker yen and a rally on Wall Street the previous day.
The benchmark Nikkei .N225 gained 63.83 points to 8,173.36, while the broader Topix rose 0.9 percent to 780.51. (Reporting by Rika Otsuka)
The benchmark Nikkei .N225 gained 63.83 points to 8,173.36, while the broader Topix rose 0.9 percent to 780.51. (Reporting by Rika Otsuka)
Dollar, euro reverse gains on yen
TOKYO, April 1 (Reuters) - The dollar and the euro abruptly reversed gains on the yen on Wednesday, having climbed in the wake of a Bank of Japan survey that showed business confidence falling at its fastest pace on record.
Traders said there was talk President Barack Obama was prepared to let carmaker Chrysler go bankrupt or be sold off, which had increased risk aversion in the market.
The dollar fell 0.4 percent on the day to 98.52 yen and the euro slipped 0.6 percent on the day to 130.35 . (Reporting by Charlotte Cooper)
Traders said there was talk President Barack Obama was prepared to let carmaker Chrysler go bankrupt or be sold off, which had increased risk aversion in the market.
The dollar fell 0.4 percent on the day to 98.52 yen
$1bn to be sought from FoP to raise special force
ISLAMABAD: Pakistan will ask Friends of Pakistan (FoP) to provide $500 million to $1 billion assistance for establishing 80,000-men special force equipped with the latest arms to combat militants in various parts of the country especially in volatile tribal areas, it is learnt.
Pakistan will table a ten year strategic development framework before the FoP forum for seeking $26 billion for twenty crucial projects. It will also ask the donors to provide additional $4 to $6 billion for the budgetary support and to overcome balance of payments difficulties for the next two years.
Pakistan will seek $500 to $1 billion assistance for establishing a special force, which will be given full training only to control the insurgency, a high-level official of Gilani government confided to The News in a background interview on Monday.
The major projects included in the list are construction of the Diamer-Basha dam, skill development, establishing of a special force for fighting against militants and many other projects related to the social sector. The Basha dam will be unbundled into civil works and installation of power plants.
The experts level meeting of the FoP forum, which will be held tomorrow (Wednesday) in Dubai, will fine tune the proposed strategy for taking decisions that would be tabled during the ministerial level meeting going to be held in Tokyo on April 17.
The official said that there would be two sessions held in Tokyo, during the FoP forum, one would be related to establish strategic development partnership with donor countries and that session would not be meant for making pledges.
The second session will be meant for seeking budgetary as well as balance of payment support to the tune of $4 to $6 billion for the next two years, said the official and added that these were the main reasons for co-sponsoring of the event jointly by Japan and World Bank.
Pakistan will table a ten year strategic development framework before the FoP forum for seeking $26 billion for twenty crucial projects. It will also ask the donors to provide additional $4 to $6 billion for the budgetary support and to overcome balance of payments difficulties for the next two years.
Pakistan will seek $500 to $1 billion assistance for establishing a special force, which will be given full training only to control the insurgency, a high-level official of Gilani government confided to The News in a background interview on Monday.
The major projects included in the list are construction of the Diamer-Basha dam, skill development, establishing of a special force for fighting against militants and many other projects related to the social sector. The Basha dam will be unbundled into civil works and installation of power plants.
The experts level meeting of the FoP forum, which will be held tomorrow (Wednesday) in Dubai, will fine tune the proposed strategy for taking decisions that would be tabled during the ministerial level meeting going to be held in Tokyo on April 17.
The official said that there would be two sessions held in Tokyo, during the FoP forum, one would be related to establish strategic development partnership with donor countries and that session would not be meant for making pledges.
The second session will be meant for seeking budgetary as well as balance of payment support to the tune of $4 to $6 billion for the next two years, said the official and added that these were the main reasons for co-sponsoring of the event jointly by Japan and World Bank.
KSE crosses 7,000 points on institutional support
KARACHI: Ignoring the fast deteriorating law & order situation in the country again on Monday, the Karachi bourse easily breached through 7,000 points psychological level on Monday on aggressive institutional buying.
The KSE 100-share Index rose by another 3.11 per cent or 211.35 points and closed at 7,017.81 points.
This morning, market opened above 7,000 points level and managed to maintain above this psychological level successfully, it was observed.
Analysts said that the massive institutional buying amid strong stocks fundamentals managed to minimize the intensity of fast worsening law & order situation in the country.
The terrorist attack on police training centre in Lahore about 7:30 in the morning, which remained lasted till late noon hours, could have derailed market, but immense institutional buying on corrective measure in the local economy inflated stocks values to notable levels.
The trading was very much similar to the weekend session, as market moved aggressively up while operation against anti-terrorist activities in Lahore was in progress, which took over two-dozen lives and injured another 100 people too.
On last Friday also, marked had exhibited excellent performance despite of a powerful suicide blast in a mosque in Khyber Agency, which had taken more than 50 lives and injured another 150 peopled.
Ahsan Mehanti at Shahzad Chamdia Securities said that the news of arrangement of Rs80 billion Term Finance Certificates (TFCs) for Independent Power Projects (IPPs) and oil companies to address the threatening circular debt issue to the local economy; and President Obama announcement of giving $1.5 billion per annum assistance to Pakistan for the next five years together helped market recovering on fast pace.
The KSE 100-share Index rose by another 3.11 per cent or 211.35 points and closed at 7,017.81 points.
This morning, market opened above 7,000 points level and managed to maintain above this psychological level successfully, it was observed.
Analysts said that the massive institutional buying amid strong stocks fundamentals managed to minimize the intensity of fast worsening law & order situation in the country.
The terrorist attack on police training centre in Lahore about 7:30 in the morning, which remained lasted till late noon hours, could have derailed market, but immense institutional buying on corrective measure in the local economy inflated stocks values to notable levels.
The trading was very much similar to the weekend session, as market moved aggressively up while operation against anti-terrorist activities in Lahore was in progress, which took over two-dozen lives and injured another 100 people too.
On last Friday also, marked had exhibited excellent performance despite of a powerful suicide blast in a mosque in Khyber Agency, which had taken more than 50 lives and injured another 150 peopled.
Ahsan Mehanti at Shahzad Chamdia Securities said that the news of arrangement of Rs80 billion Term Finance Certificates (TFCs) for Independent Power Projects (IPPs) and oil companies to address the threatening circular debt issue to the local economy; and President Obama announcement of giving $1.5 billion per annum assistance to Pakistan for the next five years together helped market recovering on fast pace.
SC sets up body to inquire into petrol prices
ISLAMABAD: A three-member bench of the Supreme Court Monday appointed a one-man commission under Justice (R) Rana Bhagwandas to determine wrong doings in the fixation of petroleum prices and submit a detailed report within a month after the start of its work.
The bench, comprising Chief Justice Iftikhar Muhammad Chaudhry, Justice Mian Shakirullah Jan and Justice Raja Fayyaz Ahmed, appointed the commission with the consent of all the concerned parties.
Regarding the fixation of fee and expenses to be paid to the Commission, the bench directed the Attorney General to approach the Federal Government for payment of all expenditures of the commission. However, one million rupees will be paid by the oil companies to the commission in accordance with the direction of the bench.
The bench also directed the Attorney General to talk to Federal Government about providing possible relief to people by reducing petroleum prices.
Attorney General Sardar Muhammad Latif Khosa assured the court he would take up the matter with the government.
According to the direction of the bench, a charted accountant firm namely Ferguson will be appointed as auditor firm to prepare a comprehensive report about the issue of oil prices from the record to be provided by the Oil & Gas Regulatory Authority (OGRA) and Oil Companies Advisory Committee (OCAC) and Oil Companies.
The fee and relevant expenditure will be paid to the auditor firm by the Oil Companies, the bench said. Sardar Latif Khan Khosa appeared before the court on notice.
Muhammad Ikram Chaudhry appeared as counsel of Zafar Iqbal Jhagra. He apprised the court of the recommendations made by the National Accountability Bureau (NAB).
Muhammad Ikram Chaudhry raised a number of issues regarding the fixation of petroleum prices especially after the fall of prices in the international market.
The bench, comprising Chief Justice Iftikhar Muhammad Chaudhry, Justice Mian Shakirullah Jan and Justice Raja Fayyaz Ahmed, appointed the commission with the consent of all the concerned parties.
Regarding the fixation of fee and expenses to be paid to the Commission, the bench directed the Attorney General to approach the Federal Government for payment of all expenditures of the commission. However, one million rupees will be paid by the oil companies to the commission in accordance with the direction of the bench.
The bench also directed the Attorney General to talk to Federal Government about providing possible relief to people by reducing petroleum prices.
Attorney General Sardar Muhammad Latif Khosa assured the court he would take up the matter with the government.
According to the direction of the bench, a charted accountant firm namely Ferguson will be appointed as auditor firm to prepare a comprehensive report about the issue of oil prices from the record to be provided by the Oil & Gas Regulatory Authority (OGRA) and Oil Companies Advisory Committee (OCAC) and Oil Companies.
The fee and relevant expenditure will be paid to the auditor firm by the Oil Companies, the bench said. Sardar Latif Khan Khosa appeared before the court on notice.
Muhammad Ikram Chaudhry appeared as counsel of Zafar Iqbal Jhagra. He apprised the court of the recommendations made by the National Accountability Bureau (NAB).
Muhammad Ikram Chaudhry raised a number of issues regarding the fixation of petroleum prices especially after the fall of prices in the international market.
Pakistan seeks US budgetary support
ISLAMABAD: Pakistan has asked the Obama Administration to bifurcate $1.5 billion assistance per annum for Islamabad into the budgetary support as well as for the social sector projects, in order to extend its help both for the government and people of Pakistan, it is reliably learnt.
Pakistan has proposed to the US for providing $800 million as budgetary support while remaining $700 million for the projects, which will be executed through USAID, mainly for social sector out of total $1.5 billion per annum assistance package announced by the President Obama.
The last Bush administration had abandoned budgetary support for Islamabad in the last two years by restricting its annual assistance for the development projects through USAID. In the first three years, the Bush regime had extended its annual $600 million in shape of $300 million as budgetary support and remaining $300 million as Foreign Military Grants (FMG).
Now we are pursuing Washington to bifurcate its upcoming annual $1.5 billion assistance both for the budgetary support as well as for projects through USAID, a high-level official of Pakistan embassy in Washington told The News on Sunday.
The official said that the Foreign Relation Committee would start hearing about its upcoming assistance for Pakistan from Monday and procedural requirements would take one and half month to get through the legislation process. Pakistan assistance is expected to be received from the next financial year, starting from July 2009, added the official.
The official said that it was not yet known in which shape the US is going to extend its support for Pakistan. However, it is the desire of Islamabad to provide it the budgetary support of $800 million per annum from the next fiscal year, added the official.
Pakistan embassy in the US, the official said, is hardly pursuing Islamabad case before the Obama administration in order to convince them for providing support in accordance with the objectives outlined by the incumbent regime.
Pakistan has proposed to the US for providing $800 million as budgetary support while remaining $700 million for the projects, which will be executed through USAID, mainly for social sector out of total $1.5 billion per annum assistance package announced by the President Obama.
The last Bush administration had abandoned budgetary support for Islamabad in the last two years by restricting its annual assistance for the development projects through USAID. In the first three years, the Bush regime had extended its annual $600 million in shape of $300 million as budgetary support and remaining $300 million as Foreign Military Grants (FMG).
Now we are pursuing Washington to bifurcate its upcoming annual $1.5 billion assistance both for the budgetary support as well as for projects through USAID, a high-level official of Pakistan embassy in Washington told The News on Sunday.
The official said that the Foreign Relation Committee would start hearing about its upcoming assistance for Pakistan from Monday and procedural requirements would take one and half month to get through the legislation process. Pakistan assistance is expected to be received from the next financial year, starting from July 2009, added the official.
The official said that it was not yet known in which shape the US is going to extend its support for Pakistan. However, it is the desire of Islamabad to provide it the budgetary support of $800 million per annum from the next fiscal year, added the official.
Pakistan embassy in the US, the official said, is hardly pursuing Islamabad case before the Obama administration in order to convince them for providing support in accordance with the objectives outlined by the incumbent regime.
Govt intends to increase remittances target to $15b
KARACHI - The Federal government is intending to increase the remittances target to $15 billion dollars for next financial year 2009-10 which is almost double than the $7.5 billion dollars of current financial year 2008-09.
Dr. Farooq Sattar, Federal Minister for Overseas Pakistanis disclosed this while talking to the media at launching ceremony of a book Marhaba Musafar released by Western Union at local hotel on Monday. The book contains the basic information about the various countries where Western Union operations are in progress.
A large number of representatives of diplomatic missions, industrialists and traders attended the event.
Though, the $15b target of remittances for next FY2009-10 is seemed ambitious and difficult but not impossible, he said by quoting a quotation that where there is a will, there is a way!
Sattar said that the Overseas Pakistanis Ministry is planning to introduce a new mechanism for faster delivery of remittances to prescribed destination while in this regard, a meeting is scheduled to be held at State Bank of Pakistan on 6th April 2009. The State Bank Governor, representatives from telecommunication, NADRA and other relevant institutions would also participate in the meeting, he said. He said that Pakistan was legging behind the countries whose export was much below the exports of Pakistan in the decade of 90s.
Overseas Pakistanis Minister also offered his ministry cooperation to Western Union for expansion of branches and transferring of remittances by overseas Pakistanis.
Courtesy: The Nation
Dr. Farooq Sattar, Federal Minister for Overseas Pakistanis disclosed this while talking to the media at launching ceremony of a book Marhaba Musafar released by Western Union at local hotel on Monday. The book contains the basic information about the various countries where Western Union operations are in progress.
A large number of representatives of diplomatic missions, industrialists and traders attended the event.
Though, the $15b target of remittances for next FY2009-10 is seemed ambitious and difficult but not impossible, he said by quoting a quotation that where there is a will, there is a way!
Sattar said that the Overseas Pakistanis Ministry is planning to introduce a new mechanism for faster delivery of remittances to prescribed destination while in this regard, a meeting is scheduled to be held at State Bank of Pakistan on 6th April 2009. The State Bank Governor, representatives from telecommunication, NADRA and other relevant institutions would also participate in the meeting, he said. He said that Pakistan was legging behind the countries whose export was much below the exports of Pakistan in the decade of 90s.
Overseas Pakistanis Minister also offered his ministry cooperation to Western Union for expansion of branches and transferring of remittances by overseas Pakistanis.
Courtesy: The Nation
Hedging with FX options
Corporations primarily use FX options to hedge uncertain future cash flows in a foreign currency. The general rule is to hedge certain foreign currency cash flows with forwards, and uncertain foreign cash flows with options.
Suppose a United Kingdom manufacturing firm is expecting to be paid US$100,000 for a piece of engineering equipment to be delivered in 90 days. If the GBP strengthens against the US$ over the next 90 days the UK firm will lose money, as it will receive less GBP when the US$100,000 is converted into GBP. However, if the GBP weaken against the US$, then the UK firm will gain additional money: the firm is exposed to FX risk. Assuming that the cash flow is certain, the firm can enter into a forward contract to deliver the US$100,000 in 90 days time, in exchange for GBP at the current forward rate. This forward contract is free, and, presuming the expected cash arrives, exactly matches the firm's exposure, perfectly hedging their FX risk.
If the cash flow is uncertain, the firm will likely want to use options: if the firm enters a forward FX contract and the expected USD cash is not received, then the forward, instead of hedging, exposes the firm to FX risk in the opposite direction.
Using options, the UK firm can purchase a GBP call/USD put option (the right to sell part or all of their expected income for pounds sterling at a predetermined rate), which will:
protect the GBP value that the firm will receive in 90 day's time (presuming the cash is received)
cost at most the option premium (unlike a forward, which can have unlimited losses)
yield a profit if the expected cash is not received but FX rates move in its favor
Suppose a United Kingdom manufacturing firm is expecting to be paid US$100,000 for a piece of engineering equipment to be delivered in 90 days. If the GBP strengthens against the US$ over the next 90 days the UK firm will lose money, as it will receive less GBP when the US$100,000 is converted into GBP. However, if the GBP weaken against the US$, then the UK firm will gain additional money: the firm is exposed to FX risk. Assuming that the cash flow is certain, the firm can enter into a forward contract to deliver the US$100,000 in 90 days time, in exchange for GBP at the current forward rate. This forward contract is free, and, presuming the expected cash arrives, exactly matches the firm's exposure, perfectly hedging their FX risk.
If the cash flow is uncertain, the firm will likely want to use options: if the firm enters a forward FX contract and the expected USD cash is not received, then the forward, instead of hedging, exposes the firm to FX risk in the opposite direction.
Using options, the UK firm can purchase a GBP call/USD put option (the right to sell part or all of their expected income for pounds sterling at a predetermined rate), which will:
protect the GBP value that the firm will receive in 90 day's time (presuming the cash is received)
cost at most the option premium (unlike a forward, which can have unlimited losses)
yield a profit if the expected cash is not received but FX rates move in its favor
Terms
Generally in thinking about options, one assumes that one is buying an asset: for instance, you can have a call option on oil, which allows you to buy oil at a given price. One can consider this situation more symmetrically in FX, where one exchanges: a put on USD/GBP allows one to exchange GBP for USD: it is at once a put on GBP and a call on USD.
As a vivid example: people usually consider that in a fast food restaurant, one buys hamburgers and pays in dollars, but one can instead say that the restaurant buys dollars and pays in hamburgers.
There are a number of subtleties that follow from this symmetry.
Ratio of notionals
The ratio of the notionals in an FX option is the strike, not the current spot or forward. Notably, when constructing an option strategy from FX options, one must be careful to match the foreign currency notionals, not the local currency notionals, else the foreign currencies received and delivered don't offset and one is left with residual risk.
Non-linear payoff
The payoff for a vanilla option is linear in the underlying, when one denominates the payout in a given numéraire. In the case of an FX option on a rate, one must be careful of which currency is the underlying and which is the numéraire: in the above example, an option on USD/GBP gives a USD value that is linear in USD/GBP (a move from 2.0000 to 1.9000 yields a .10 * $2,000,000 / 2.0000 = $100,000 profit), but has a non-linear GBP value in USD/GBP. Conversely, the GBP value is linear in the GBP/USD rate, while the USD value is non-linear in the GBP/USD rate. This is because inverting a rate has the effect of , which is non-linear.
Change of numéraire
The implied volatility of an FX option depends on the numéraire of the purchaser, again because of the non-linearity of .
As a vivid example: people usually consider that in a fast food restaurant, one buys hamburgers and pays in dollars, but one can instead say that the restaurant buys dollars and pays in hamburgers.
There are a number of subtleties that follow from this symmetry.
Ratio of notionals
The ratio of the notionals in an FX option is the strike, not the current spot or forward. Notably, when constructing an option strategy from FX options, one must be careful to match the foreign currency notionals, not the local currency notionals, else the foreign currencies received and delivered don't offset and one is left with residual risk.
Non-linear payoff
The payoff for a vanilla option is linear in the underlying, when one denominates the payout in a given numéraire. In the case of an FX option on a rate, one must be careful of which currency is the underlying and which is the numéraire: in the above example, an option on USD/GBP gives a USD value that is linear in USD/GBP (a move from 2.0000 to 1.9000 yields a .10 * $2,000,000 / 2.0000 = $100,000 profit), but has a non-linear GBP value in USD/GBP. Conversely, the GBP value is linear in the GBP/USD rate, while the USD value is non-linear in the GBP/USD rate. This is because inverting a rate has the effect of , which is non-linear.
Change of numéraire
The implied volatility of an FX option depends on the numéraire of the purchaser, again because of the non-linearity of .
Example
For example a GBP/USD FX option might be specified by a contract giving the owner the right but not the obligation to sell £1,000,000 and buy $2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 USD/GBP or 0.5000 GBP/USD and the notionals are £1,000,000 and $2,000,000 (£1,000,000 from the eyes of a USD investor, $2,000,000 from the eyes of a GBP investor).
This type of contract is both a call on dollars and a put on sterling, and is often called a USD/GBP put by market participants, as it is a put on the exchange rate; it could equally be called a GBP/USD call, but isn't, as market convention is to quote the 2.0000 number (normal quote), not the 0.5000 number (inverse quote).
If the rate is lower than 2.0000 USD/GBP come December 31 (say at 1.9000 USD/GBP), meaning that the dollar is stronger and the pound is weaker, then the option will be exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 USD/GBP - 1.9000 USD/GBP)*1,000,000 GBP = 100,000 USD in the process. If they immediately exchange their profit into GBP this amounts to 100,000/1.9000 = 52,631.58 GBP.
This type of contract is both a call on dollars and a put on sterling, and is often called a USD/GBP put by market participants, as it is a put on the exchange rate; it could equally be called a GBP/USD call, but isn't, as market convention is to quote the 2.0000 number (normal quote), not the 0.5000 number (inverse quote).
If the rate is lower than 2.0000 USD/GBP come December 31 (say at 1.9000 USD/GBP), meaning that the dollar is stronger and the pound is weaker, then the option will be exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 USD/GBP - 1.9000 USD/GBP)*1,000,000 GBP = 100,000 USD in the process. If they immediately exchange their profit into GBP this amounts to 100,000/1.9000 = 52,631.58 GBP.
Foreign exchange option
In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.
The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts. The global market for exchange-traded currency options was notionally valued by the Bank for International Settlements at $158,300 billion in 2005
The FX options market is the deepest, largest and most liquid market for options of any kind in the world. Most of the FX option volume is traded OTC and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts. The global market for exchange-traded currency options was notionally valued by the Bank for International Settlements at $158,300 billion in 2005
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in India, Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in India, Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
Determinants of FX Rates
The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In a fixed exchange rate regime, FX rates are decided by its government):
(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
(a) International parity conditions viz; purchasing power parity, interest rate parity, Domestic Fisher effect, International Fisher effect. Though to some extent the above theories provide logical explanation for the fluctuations in exchange rates, yet these theories falter as they are based on challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate). This model, however, focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face of soaring US current account deficit.
(c) Asset market model (see exchange rate) views currencies as an important asset class for constructing investment portfolios. Assets prices are influenced mostly by people’s willingness to hold the existing quantities of assets, which in turn depends on their expectations on the future worth of these assets. The asset market model of exchange rate determination states that “the exchange rate between two currencies represents the price that just balances the relative supplies of, and demand for, assets denominated in those currencies.”
None of the models developed so far succeed to explain FX rates levels and volatility in the longer time frames. For shorter time frames (less than a few days) algorithm can be devised to predict prices. Large and small institutions and professional individual traders have made consistent profits from it. It is understood from above models that many macroeconomic factors affect the exchange rates and in the end currency prices are a result of dual forces of demand and supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Non-bank Foreign Exchange Companies
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but currency exchange with payments. I.e., there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments[9] are made via Foreign Exchange Companies.[10] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
It is estimated that in the UK, 14% of currency transfers/payments[9] are made via Foreign Exchange Companies.[10] These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Retail foreign exchange brokers
There are two types of retail brokers offering the opportunity for speculative trading: retail foreign exchange brokers and market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated by the CFTC and NFA might be subject to foreign exchange scams.[7][8] At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD (No Dealing Desk) and STP (Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.
Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.
Central banks
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[6] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[6] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Commercial companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
Banks
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
Market participants
Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.
Market size and liquidity
The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to "traditional" turnover, $2.1 trillion was traded in derivatives. Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account. FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
its trading volumes,
the extreme liquidity of the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to "traditional" turnover, $2.1 trillion was traded in derivatives. Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account. FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).
Foreign exchange market
The foreign exchange market (currency, forex, or FX) market is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. [1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
Now, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.
Now, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.[3]
The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.
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