An exchange system quotation is given by stating the number of units of "quote currency" (price currency, payment currency) that can be exchanged for one unit of "base currency" (unit currency, transaction currency). For example, in a quotation that says the EURUSD exchange rate is 1.4320 (1.4320 USD per EUR, also known as EUR/USD; see foreign exchange market), the quote currency is USD and the base currency is EUR.
There is a market convention that determines which is the base currency and which is the term currency. In most parts of the world, the order is: EUR – GBP – AUD – NZD – USD – others. Thus if you are doing a conversion from EUR into AUD, EUR is the base currency, AUD is the term currency and the exchange rate tells you how many Australian dollars you would pay or receive for 1 euro. Cyprus and Malta which were quoted as the base to the USD and others were recently removed from this list when they joined the euro. In some areas of Europe and in the non-professional market in the UK, EUR and GBP are reversed so that GBP is quoted as the base currency to the euro. In order to determine which is the base currency where both currencies are not listed (i.e. both are "other"), market convention is to use the base currency which gives an exchange rate greater than 1.000. This avoids rounding issues and exchange rates being quoted to more than 4 decimal places. There are some exceptions to this rule e.g. the Japanese often quote their currency as the base to other currencies.
Quotes using a country's home currency as the price currency (e.g., EUR 0.63 = USD 1.00 in the euro zone) are known as direct quotation or price quotation (from that country's perspective) and are used by most countries.
Quotes using a country's home currency as the unit currency (e.g., EUR 1.00 = USD 1.58 in the euro zone) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone.
- direct quotation: 1 foreign currency unit = x home currency units
- indirect quotation: 1 home currency unit = x foreign currency units
Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating.
Market convention from the early 1980s to 2006 was that most currency pairs were quoted to 4 decimal places for spot transactions and up to 6 decimal places for forward outrights or swaps. (The fourth decimal place is usually referred to as a "pip"). An exception to this was exchange rates with a value of less than 1.000 which were usually quoted to 5 or 6 decimal places. Although there is no fixed rule, exchange rates with a value greater than around 20 were usually quoted to 3 decimal places and currencies with a value greater than 80 were quoted to 2 decimal places. Currencies over 5000 were usually quoted with no decimal places (e.g. the former Turkish Lira). e.g. (GBPOMR : 0.765432 - EURUSD : 1.5877 - GBPBEF : 58.234 - EURJPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places.
In 2005 Barclays Capital broke with convention by offering spot exchange rates with 5 or 6 decimal places on their electronic dealing platform. The contraction of spreads (the difference between the bid and offer rates) arguably necessitated finer pricing and gave the banks the ability to try and win transaction on multibank trading platforms where all banks may otherwise have been quoting the same price. A number of other banks have now followed this.
source : wikipedia, currency trading
Jan 23, 2010
Jan 17, 2010
How to Trade Call Options
Many traders like to use more sophisticated options strategies in their trading but many times the simple call options trade is the most suitable trade for the market condition. Follow the steps below to increase your probability to profit from call option trading.
Steps
1.Determine that the price of the underlying instrument is going up. Trading call option is a directional strategy. This means you have to pick the direction of the market, and in order to profit the market should move up. There are many different ways to anticipate upward market movement.
2.Determine the target price for the movement. The system that you use to indicate an upward price movement should also indicate a target price for the movement.
3.Anticipate the time for the underlying price to move to your target price. How long do you expect the underlying instruments price to move to the target price? This is important to determine the expiration of the call options you want to trade.
4.Look at options chain. Bring out the options chains to see the quotes and other relevant data. Nowadays, real time options chains are easily available through the internet. You can also call your broker to get this information.
5.Narrow down to the exchange, and expiration date. If you trade online, determine the exchange you want your order to be submitted. Determine the appropriate expiration date based on the time you expect the price to move.
6.Compare the Delta, Gamma, Vega and Theta for several strike prices of the same expiration. After you narrowed down your options chain to the specific exchange and specific expiration date, you look at the Greeks. Ideally you want to have high Delta, high Gamma, low Vega and low Theta.
7.Evaluate your risk versus rewards based on your target price. You can also use a risk profile to help you make the evaluation. Calculate you breakeven point using this formula: breakeven = call strike + call premium
8.Look at the open interest and volume. It is better to trade in an active market so that you can buy and sell easily. Another reason is that you don’t lose a lot on the bid/ask spread.
9.Choose the best call option with the highest probability for profits.
10.Determine exit point and stop loss. Do this so that your emotions do not take over your decision making after you place in your trade.
11.Place in your trade. Call your broker or key in your trade online.
12.Watch the underlying instrument’s price movement and the option’s price reaction.
13.Close your position. If you made a profit, close your position by either selling the call options that you bought or exercise the call option and sell the shares. If you made a loss, close your position by selling the call options.
Tips
- When you buy options, avoid buying when the volatility is high.
- If you are a longer term trader, you can choose out-of-the-money call options because they are cheaper.
- If you are a shorter term trader, you would prefer at-the-money or in-the-money call options because they can give you faster and higher profits.
Warnings
Required Disclaimers: Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. The past performance of any trading system or methodology is not necessarily indicative of future results.
source : wikihow, forex, reuters
Steps
1.Determine that the price of the underlying instrument is going up. Trading call option is a directional strategy. This means you have to pick the direction of the market, and in order to profit the market should move up. There are many different ways to anticipate upward market movement.
2.Determine the target price for the movement. The system that you use to indicate an upward price movement should also indicate a target price for the movement.
3.Anticipate the time for the underlying price to move to your target price. How long do you expect the underlying instruments price to move to the target price? This is important to determine the expiration of the call options you want to trade.
4.Look at options chain. Bring out the options chains to see the quotes and other relevant data. Nowadays, real time options chains are easily available through the internet. You can also call your broker to get this information.
5.Narrow down to the exchange, and expiration date. If you trade online, determine the exchange you want your order to be submitted. Determine the appropriate expiration date based on the time you expect the price to move.
6.Compare the Delta, Gamma, Vega and Theta for several strike prices of the same expiration. After you narrowed down your options chain to the specific exchange and specific expiration date, you look at the Greeks. Ideally you want to have high Delta, high Gamma, low Vega and low Theta.
7.Evaluate your risk versus rewards based on your target price. You can also use a risk profile to help you make the evaluation. Calculate you breakeven point using this formula: breakeven = call strike + call premium
8.Look at the open interest and volume. It is better to trade in an active market so that you can buy and sell easily. Another reason is that you don’t lose a lot on the bid/ask spread.
9.Choose the best call option with the highest probability for profits.
10.Determine exit point and stop loss. Do this so that your emotions do not take over your decision making after you place in your trade.
11.Place in your trade. Call your broker or key in your trade online.
12.Watch the underlying instrument’s price movement and the option’s price reaction.
13.Close your position. If you made a profit, close your position by either selling the call options that you bought or exercise the call option and sell the shares. If you made a loss, close your position by selling the call options.
Tips
- When you buy options, avoid buying when the volatility is high.
- If you are a longer term trader, you can choose out-of-the-money call options because they are cheaper.
- If you are a shorter term trader, you would prefer at-the-money or in-the-money call options because they can give you faster and higher profits.
Warnings
Required Disclaimers: Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. The past performance of any trading system or methodology is not necessarily indicative of future results.
source : wikihow, forex, reuters
Jan 7, 2010
How to Calculate Return on Equity (ROE)
Return on Equity (ROE) is one of the financial ratio used by stock investors in analyzing stocks. It indicates how effective the management team is in converting the reinvested money into profits. The higher the ROE, the more money a company able to generate for the same dollar amount spent.
Steps
1 Calculate Shareholders' Equity (SE) by subtracting the Total Liabilities from the Total Assets (TA). (SE=TA-TL)
2 Calculate the average shareholders' equity from the beginning (SE1) and the ending (SE2) of financial year, (SEavg=(SE1+SE2)/2)
3 Find the Net Profits (NP) as listed on the company's annual report.
4 Calculate ROE by dividing the net profits by the average of shareholders' equity, (ROE=NP/SEavg).
Tips
Company with ROE of 15-25% is simply exceptional.
Avoid company that have ROE of 5% or less
Warnings
The management can made up the ROE to looks good by distributing dividends to its shareholders. So, you should look for consistently giving excellent ROE rather than just a one year performance.
source : wikihow, Stock Investment Made Easy
Steps
1 Calculate Shareholders' Equity (SE) by subtracting the Total Liabilities from the Total Assets (TA). (SE=TA-TL)
2 Calculate the average shareholders' equity from the beginning (SE1) and the ending (SE2) of financial year, (SEavg=(SE1+SE2)/2)
3 Find the Net Profits (NP) as listed on the company's annual report.
4 Calculate ROE by dividing the net profits by the average of shareholders' equity, (ROE=NP/SEavg).
Tips
Company with ROE of 15-25% is simply exceptional.
Avoid company that have ROE of 5% or less
Warnings
The management can made up the ROE to looks good by distributing dividends to its shareholders. So, you should look for consistently giving excellent ROE rather than just a one year performance.
source : wikihow, Stock Investment Made Easy
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