THE FOREX MARKET

Andrew Murphy, Erin Boyle,

Tesori Montoya, and Walsh
Kang
Presentation
Outline

I. Forex Market Overview

A. Defining Characteristics
B. Forex Business
C. Alumni Interviews
II. Geopolitical Events
A. Role of Government
B. Effect on Currency Rate
2
WHAT IS THE
FOREX
▫ Created in 1970
MARKET? ▫ Operates 24 hours a day, 5 days a
week
▫ $6 Trillion per day market
▫ “Day trading”
▫ Relative value

3
 “Forex is a very
dynamic market,
with huge liquidity,
that trades in every
corner of the planet
Earth.”
- Cummings, J. N., Butler, B., & Kraut, R.

4
 THREE PILLARS OF FOREX BUSINESS

Trading Strategy Broker or Bank Trading Capital

Investing in other Assisting Finding capital is
currencies based companies in not difficult in the
on future proceeding in Forex market
expectations of business because of the
values transactions, mass amounts of
despite a change money traded
in currency per day and the
Donald Howard
strong potential
for high return
David Daley
5
HOW PEOPLE ▫ Banks facilitate exchange for
PARTICIPATE
foreign investment
▫ Silicon Valley Bank
▫ Sends and receives payments
▫ All business is for clients
▫ Less about profit, more about
exchange

6
HOW PEOPLE ▫ Some invest in the market itself
PARTICIPATE
▫ Dollar to Euro
▫ Not as widespread as the regular
stock market
▫ Relative value trade
▫ World events have big impact on
whole market

7
 “When exchange rates are not fixed, a crucial role is
played by either legal restrictions on asset
holdings or anticipated government

“
intervention. These are the only forces that
determine exchange rates when rates are not
explicitly fixed, and these are not comparable
to the fundamentals that determine prices in
other markets.”
- Wallace, N

8
GOVERNMENT
INTERVENTION ▫ Federal Reserve
▫ Intentional appreciation and
depreciation
▫ Low interest rates → more
demand
▫ Monetary/quantitative easing
▫ U.S. market affects every other
9 market in the world
 “Although the Federal Reserve
does not recognize it, it sets

“
monetary policy not just for the
United States but also for the
world.”
-Raghuram Rajan
10
EXCHANGE
RATES IN THE
PRIVATE
MARKET Actual exchange vs. Equilibrium
rates exchange rates

Government
11 intervention?
 GEOPOLITICAL EVENTS

European Brexit
Debt Crisis

Greece’s Japan’s Aging

Financial Population
Failure
12
 European Debt Crisis
● October 2008-May 2010:

➢ European financial sector bailouts

➢ Government stabilization programs

→ More Debt

➢ Most European member states

afflicted by fiscal deficits

13
 Sovereign debt crisis

Rating downgrades by credit rating agencies

Affect country’s financial policies (e.g. raise corporate tax)

Reduces corporate cash flows and stock prices

Massive sell-off of the domestic currency

14 FX Currency Depreciation
 Brexit

15
 Leaving the E.U. gives up tariff-free trade
BREXIT
AND THE
POUND
Adding tariffs adds costs to investors
interested in the U.K.

Less investment, less demand for the

pound
16
 Greece’s Financial Failure
● Circa 2001, Greece prepared to meet the EU’s admission
requirements

● Goldman manipulated the market currencies with FX contracts

involving the U.S. dollar, Japanese Yen and Euro currencies

17
 Greece’s Financial Failure
● Structured an untenable arrangement
○ Off-market FX rate
○ Lenient rules

● By the date of the forward contract, Greece did not possess the
money or the creditworthiness to pay debts

● Greece’s unsustainable debts due to high expenditures

18
Japan’s
Aging
Population

http://www.economist.com/blogs/dailychart/2010/11/japans_population
19
Japan’s Slow Growth
● An aging population +
● No M2 growth +
● Stagnating supply of money =
● Currency appreciation
● More expensive currency =
● Less exports =
● Weakened economy
20
IN CONCLUSION
▫ Overview of Forex
market
▫ Government
participation
▫ Geopolitical events

21
Bibliography
Corsetti, Giancarlo, Presenti, Paolo, Roubini, Nouriel. (2002). The Role of Large Players in
Currency Crises. Preventing Currency Crises in Emerging Markets, 8303, 2-47.

Schmidt, Robert. (2006, Robert Lang Publishing). The behavioral economics of foreign
exchange markets; a psychological view on human expectation formation in foreign exchange markets. Reference & Research Book News Nov. 2006.
Academic OneFile. Web. 14 Oct. 2016.

Cummings, J. N., Butler, B., & Kraut, R. (2002). The quality of online social relationships.
Phil's stock world: The 3 pillars of forex (2016). . Chatham: Newstex. Retrieved from http://search.proquest.com/docview/1795683595?accountid=

IBISWorld Business Environment Profiles. (2016, August). UK Pound Sterling Exchange Rate.
Retrieved October 13, 2016.

IBISWorld Business Environment Profiles. (2016, August). Japanese Yen Exchange Rate.
Retrieved October 13, 2016.

Karpava, M. (2012). Determinants of forex market movements during the European Sovereign
debt crisis: The role of credit rating agencies. (Unpublished master's thesis). Jonkoping International Business School.

Rajan, C. (2011). Currencies Aren't the Problem. Retrieved October 14, 2016, from
https://www.foreignaffairs.com/articles/united-states/2011-03-01/currencies-arent-problem

Shapiro, D. M. (2013). Greece, Derivatives, and FX: What Went Wrong? Journal of Corporate
Accounting & Finance, 24(6), 15-17. doi:10.1002/jcaf.21886
Communications of the ACM, 45(7), 103-108.

Wallace, N. (1990). Why markets in foreign exchange are different from other ma. Federal
Reserve Bank of Minneapolis.Quarterly Review - Federal Reserve Bank of Minneapolis, 14(1), 12. Retrieved from
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 THANK YOU

Any questions?

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