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For those of you who aren’t familiar with the history of Forex market, it’s ok. While you may trace the origin of the stock market way back in history, the Forex market, although quite old, seems to be a rather new concept in today’s world.

Forex History:

While some may say that the Forex Market dates back when men shorted rocks against feathers, but, there isn’t much evidence to support it. However, one thing is for sure; they were the messenger of currency.

More specifically, the presence of Forex dates back in the era where men started trading currencies. Trading an Egyptian coin with a Greek coin for more money has been going on since ages.  Except in the new era, this approach took a more formal definition and thus. The difference in the value between the two currencies replaced the previous definitions.

It Was All Gold:

Now the reason there wasn’t any real formal market of Forex was because most currencies were derivatives of gold and silver. Any debasement was adjusted through exchanging holdings through a more responsible currency.

Paper Money:

As far as the paper money and its excessive printing are concerned, it did happen. Many nations worldwide were printing excessive money so that they could pay bonds and public debts. When this happened, where some obligations were quickly met, inflation turned one notch up in the countries.

Bretton Woods:

This system aimed to fix the currencies permanently. By deciding a set value against the dollar currency, the U.S dollar was handed a separate peg.  This meant that the U.S. dollar became a reserve currency and all other governments stayed in gold, within their stated value.

Time Changed:

After Bretton Woods (BW), things changed. As the world moved on, trade grew, some nations flourished while other lagged and pegs were left distorted. Read the full story

The world is following a free market system today. In this system, even gold can be considered as a currency. It is thought in relation with the US Dollar. There is an inverse correlation between the US dollar and gold. What many people do not understand that the [rice of gold can be considered as an exchange rate. After all, gold can be exchanged for any form of paper currency in the same way as the US dollar can be exchanged for the euro for instance.

Gold as a Currency:

Gold is a currency by all means in today’s market system. It has exchange rates like any other currency that fluctuate with the changing market trends. Although gold is not used for direct transaction, it can be readily converted to any other currency. Otherwise, it can be stored for future use.

The rates of gold fluctuate much like any other currency. It generally fares better when there is not much public faith in paper currencies. The rates for gold especially increase when there are chances of war, a lack of confidence in paper currencies and loss of faith in trading instruments.

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Generally, two distinct methods are used for the analysis and to predict the forex market behavior. These two methods are Technical analysis and Fundamental analysis. Both of these methods distinctly vary from each other; however forex traders can use both of these methods to get accurate results for the reading of forex markets.

These two methods work for the same goal i.e. to forecast the movement or price of the forex market.   In technical analysis, traders can study and determine the effects of market movement, while in the case of fundamental analysis traders can study the causes that trigger the market movement.

Majority of traders prefer fundamental analysis due to its broad spectrum. It can be used for both qualitative and quantitative factors involved in market movement.

Fundamental & Technical Analysis in Combination

Basically fundamental analysis is based on the future predictions about the price change based on future events. It uses various important factors and statistical methods for predicting the effects of future events such as how they will affect demand and supply and the forex rates.

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There are many factors that effect the exchange rates. These few reasons have effect on the economy of the country. Exchange rates play a very important role in our todays world. Any up and down in there rates can have great affect on the people and economy as well as the investors who invest their money. In the trading of exchange rates great effect is faced by the economy. This is beacause if there is a high exchange rate then the country’s balance of trade can be lower and if there is a lower exchange rate then there are chances for the balance of trade to increase.

There can be many reasons why the exchange rate is effected but few are mentioned below.

Differentials in Inflation:

Inflation leaves a great effect ont effecting the country’s economy as there is difference in th inflation of every country. A country which has a low inflation rate keeps a rising currency value and it’s purchasing power also increses as compared to the other countries. Read the full story

Some important terms being used in FOREX trading are precisely defined below:

Ask Price:

Sometimes also known as Offer Price. It is the market rate for traders to purchase currencies. These are displayed on the extreme right side of a quote like EUR/USD 1.8899/ 78 which means that one euro can be purchased for 1.1965 USD.

Bar Chart:

A variety of chart which is used in Technical analysis. Every time partition on the chart is viewed as a vertical bar which means the following information: – the extreme top bar is the maximum rate, the below bar is the lowest rate, the horizontal bar displays the opening price and horizontal line on the right is the closing rate.

Base Currency:

It is the very first currency in a pair and the quote demonstrates how much of the base currency prices in the quote of other currency. Like in the quote – USD/JPY 122.90 – USD is the base currency worth 1 USD being rated as 122.90 Yen.

An increase in general prices for goods and services is referred to as Inflation. If an inflation is to be considered, then the rise in prices must be widespread and occur over an extended time frame. In simple words, reflect changes in the economy as a whole must be reflected by the rise in prices. The value of money is reduced by the inflation. When inflation prevails in an economy, then for the same goods consumers have to spend more money  and services they were previously able to purchase at lower prices.

Methods of Measuring Inflation

In order to measure inflation there are several methods.

The Consumer Price Index (CPI)

The most common measurement is the Consumer Price Index (CPI). As suggested by the name, by the CPI inflation is measured in terms of consumer prices.

Gross Domestic Product Deflator (GDP-Deflator)

Gross Domestic Product Deflator (GDP-Deflator) is another common method for measuring inflation. By the GDP-deflator inflation is assessed in the overall economy as it affects all branches of government and business, as well as consumers.

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A decline in price levels is referred to as deflation. It is the opposite of inflation in the sense that inflation usually leads to rising prices. Despite of all the facts, deflation can be a very dangerous situation, while in one sense consumers may welcome a decline in price levels. Generally, economies do not like severe inflation or deflation and both these situations can be volatile and full of worries.

It makes money Valuable

Deflation makes money more valuable and it is similar to as inflation makes money less valuable. As such, deflation occurs at times when interest rates are high and the lock on money is tight, thus all these factors create such a situation where there is a reduction in credit.

4 Reasons for the occurrence of Deflation

In fact, there are four reasons due to which deflation can occur.

1. If there is an increased demand for money,
2. If there is an increased supply of goods,
3. If there is a decreased supply of money or
4. If there is a decreased demand for goods.

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This past Friday the market finally broke from momentum after a strong surge in risk appetite through much of the week. However,this stall cannot be called a reversal, at least not yet. When we have analyzed the overall sentiment in the market, it has been found by us that the benchmark Dow is just off 10-month highs, for the current a new low has been set up by dollar and  we can see that money-market funds are at their lowest levels since late October of last year .

Still all of the above mentioned signs are  pointing towards a healthy appetite for yield with relatively little concern for market disruptions. However, when compared to the fresh highs these assets reach with each week the fundamental quality of this rally looks more and more bleak . A question may arise that how far can this divergence extend? Now that depends on how stable risk appetite is?

In finance, a general term that is used to denote the class into which the option falls is the style or family of an option. It is usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options  as well as others where the payoff is calculated similarly are known as "vanilla options". Options where the payoff is calculated differently are referred to as "exotic options". Challenging problems in valuation and hedging can be posed by exotic options.

American and European Options

The key difference between American and European options is related to when the options can be exercised:

• It is possible that a European option might be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time.
• On the other hand, an American option might be exercised at any time before the expiry date.

For both, the pay-off when it occurs is:

For a call option it is via Max [ (S – K), 0 ],

For a put option it is via Max [ (K – S), 0 ],:

(Here K is the Strike price and S is the spot price of the underlying asset)

Option contracts that are traded on futures exchanges are mainly American-style, whereas those that are traded over-the-counter are mainly European-style.

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