Forex Markets

Glossary of Terms 

• Spot: The current price of a financial instrument is called a spot price. The price at which a financial instrument can be sold or purchased immediately. Buyers and sellers create the spot price by placing their buy and sell orders. 

• Commodity: Commodity is the name given to all of the agricultural goods such as gold, silver, oil, natural gas, copper, cotton, corn, wheat, sugar, and coffee which are the subject of trade. This is called the purchase and sale of goods Commodity Exchange market is carried out in 133 pieces and Turkey Union of Chambers and Commodity Exchanges Turkey has attached commodity exchanges. Factors affecting commodity prices include seasonal changes, natural disasters, economic activities, supply and demand. Traders who want to invest in commodities should follow the effects of these factors and they should contribute to making the right investment. Although commodity products are usually traded in futures markets, some products also have a spot market. 

• Forex (Foreign Exchange): Forex is an abbreviation of the word foreign exchange, which is the conversion of two countries' currencies against each other. In time, forex transactions became popular, not only foreign currencies but commodities also entered into forex platforms and started to be traded as forex products. Forex market is the highest and most liquid market in the world. The trading volume of the Forex market is around 5.5 trillion USD per day. Due to the fact that there is a leverage factor in the Forex markets, it can be traded even with small investment amounts, making the market so attracted. Although there are countries and institutions where 1: 400 leverage ratio and even 1: 1000 leverage ratio are used in the world, it is not possible to be successful in this market with such high leverage rates. In  stockbrokers what linked to Turkey Capital Market Board (CMB), leverage ratios are limited to legal limits set by CMB. The leverage ratio was revised to a maximum of 1:10 in Turkey. As an example of Forex market transactions; a person can open a $ 100,000 position if the leverage ratio is 1:100 (hundred times) by depositing only $ 1,000. In other words, by depositing $ 1,000 collateral, he can dominate the position of $ 100,000 and gain the opportunity to profit from the price movements of this size position. In reverse price movements, there 

is also the possibility of loss in the same dimension. As a result, this leverage application is like a sword on both sides.

• Organized Market: In organized markets: Buyer and seller do not know each other, transaction principles are standard. Subject to these trading principles, trading hours, trading sizes, order types, leverage, initial guarantees, maintenance guarantees, clearing conditions. Buyer and seller match on the stock market. A clearing house acts as a seller to the buyer and a buyer to the seller. The parties do not have to trust each other in these markets. BIST (Borsa İstanbul) and VIOP (futures and options market) are examples of these markets.

• Over The Counter Market: In over-the-counter markets: Buyer and seller know each other, the parties determine the operating principles. There is no transaction standard. Mutual trust is essential and clearing is done by the parties. 

• Swap: Swap means "change, exchange, swap" as a word. In the financial markets; is a settlement agreement between the two parties within a certain time frame. In Forex transactions, the money received is borrowed and the money sold is borrowed. Clearing fees are calculated based on the relationship between low interest and high interest. 

Foreign Exchange Spot Market 

The spot market is where financial instruments are traded for immediate delivery, such as; commodities, currencies and securities. The delivery is the exchange of cash for the financial instrument. Spot markets are also named as “physical markets” or “cash markets” because trades are swapped for the asset effectively immediately. The spot foreign exchange (forex) market trades electronically around the world. The foreign exchange market (or forex market) is the world's largest OTC market with an average daily turnover of $5 trillion.  Most interest rate products, such as bonds and options, trade for spot settlement on the next business day. Foreign exchange spot contracts are the most common and are usually for delivery in two business days, while most other financial instruments settle the next business day. Contracts are most commonly between two financial institutions, but they can also be between a company and a financial institution. 

Foreign Exchange Forward Market 

A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading many instruments, but the term is primarily referred to the foreign exchange market. It can also apply to markets 

for securities and interest rates as well as commodities. A forward market leads to the creation of forward contracts. While forward contracts can be used for both hedging and speculation. Forward contracts can be customized to fit a customer's requirements. Prices in the forward market are interest-rate based. In the foreign exchange market, the forward price is derived from the interest rate differential between the two currencies, which is applied over the period from the transaction date to the settlement date of the contract. Forwards are executed between banks or between a bank and a customer; futures are done on an exchange, which is a party to the transaction. 

Foreign Exchange Future Market 

A currency future, also known as an FX future or a foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. Currency futures contracts are legally binding and counterparties that are still holding the contracts on the expiration date must deliver the currency amount at the specified price on the specified delivery date. Currency futures can be used to hedge other trades or currency risks, or to speculate on price movements in currencies. Currency futures were first created in 1970 at the International Commercial Exchange in New York. Investors use these futures contracts to hedge against foreign exchange risk. If an investor will receive a cashflow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cashflow. Most participants in the futures markets are speculators who close out their positions before futures expiry date. They do not end up delivering the physical currency. Rather, they make or lose money based on the price change in the futures contracts themselves. 

Foreign Exchange Opsion Market 

A foreign exchange option is a derivative financial instrument that gives the right. Forex options trade with no obligation to deliver a physical asset. The foreign exchange options market is the deepest, largest and most liquid market for options of any kind. Forex options are derivatives based on underlying currency pairs. Trading forex options involves a wide variety of strategies available for use in forex markets. The strategy a trader may employ depends largely on the kind of option they choose and the broker or platform through which it is offered. Forex options come in two varieties, such as; vanilla options and SPOT options. Options traded in the forex marketplace differ from other markets in that they allow traders to trade without taking actual delivery of the asset. Forex options trade over-the-counter (OTC), and traders can choose prices and expiration dates which suit their hedging or profit strategy needs. Unlike futures, where the trader must fulfill the terms of the contract, options traders do not have that obligation at expiration. Traders like to use forex options trading for several reasons. They have a limit to their downside risk and may lose only the premium they paid to buy the options. Traders also like forex options trading because it gives them a chance to trade and profit on the prediction of the market's direction based on economic, political, or other news. Once you buy an option contract, they cannot be re-traded or sold. Forex options trading is complex and has many moving parts making it difficult to determine their value. Risk include interest rate differentials (IRD), market volatility, the time horizon for expiration, and the current price of the currency pair. Basically, Forex Options Trading is a strategy that gives currency traders the ability to realize some of the payoffs and excitement of trading without having to go through the process of buying a currency pair. 

Foreign Exchange Swap Market 

A foreign currency swap (FX swap), is an agreement to exchange currency between two foreign parties. The agreement consists of swapping principal and interest payments on a loan made in one currency for principal and interest payments of a loan of equal value in another currency. One party borrows currency from a second party as it simultaneously lends another currency to that party. An FX swap allows sums of a certain currency to be used to fund charges designated in another currency without acquiring foreign exchange risk. That opportunity permits companies that have funds in different currencies to manage them efficiently. A foreign exchange swap has two ways, such as; a spot transaction and a forward transaction, that are executed simultaneously for the same quantity, and therefore offset each other. Forward foreign exchange transactions occur if both companies have a currency the other needs. It prevents negative foreign exchange risk for either party. Some institutions use currency swaps to reduce exposure to anticipated fluctuations in exchange rates. That situation is one of the mentioned risks. 

Foreign exchange spot transactions are similar to forward foreign exchange transactions in terms of how they are agreed upon; however, they are planned for a specific date in the very near future, usually within the same week. The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position 

will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades.  

Finally, the purpose of engaging in a currency swap is usually to procure loans in foreign currency at more sufficient interest rates than if borrowing directly in a foreign market. The World Bank first introduced currency swaps in 1981 in an effort to obtain German marks and Swiss francs. This type of swap can be done on loans with maturities as long as 10 years.  

Swap operations can be given as an example. Buying in EURTRY (Euro / TL) parity (long) means buying Euros and selling TL in return. Selling EURTRY (short) means selling Euros and buying TL in return. Euro policy rate is 0.05% and Turkish Lira policy rate is 7.5%. Therefore, buying (holding) EUR, borrowing TL in return means paying swap costs. 

With the knowledges, let's assume that we are buying at the price of 1 lot EURTRY 2.80 (long). This means actually buying 100.000 Euros and selling 280.000 TL at 2.80 exchange rates. Assuming Euro interest as 0.05%, daily interest yield of 0,11 Euro will be obtained for 100,000 Euro. Assuming TL interest rate as 7.5%, we will pay 48.91 TL borrowing interest daily as we sell 280.000 TL. So, in summary, we will have a daily swap cost of approximately 48.50 TL for 1 lot of EURTRY purchase. If we had done the EURTRY sale (short) transaction, the opposite of the above example would be our swap revenue. The calculation is done in the same way, the only difference is that we would borrow the Euro and get TL interest. 

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