SECTION IV - CHAPTER 27 - Foreign Exchange - Currencies
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Foreign exchange involves the trading of one country's currency for another. It occurs in the foreign exchange market, one of the largest financial markets globally. Exchange rates represent the value of one currency relative to another, with different factors like economic performance, interest rates, and central bank actions affecting fluctuations. Currency derivatives provide benefits like price transparency, risk management, and access to global trading for various participants in foreign exchange markets like importers/exporters, hedgers, speculators, and arbitrageurs.
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2) Investors Intelligence tracks sentiment indicators like advisor reviews and insider activity to measure market participant sentiment.
3) Magazine cover indicators, like analyzing covers of BusinessWeek, Forbes, and Fortune, are sometimes used as a contrary indicator of economic sentiment.
4) Mutual fund liquidity ratios and money market fund assets are also discussed as measures of investor risk appetite and market sentiment.
SECTION V - CHAPTER 37 - Sentiment Measures from Market Data
This document discusses various market sentiment indicators including the Commitment of Traders report, VIX, insider trading, open interest, short interest, and the put/call ratio. The Commitment of Traders report provides data on futures market positions. VIX measures expected market volatility. Insider trading involves trading on non-public information. Open interest tracks outstanding derivative contracts. Short interest measures the number of shares sold short as a percentage. The put/call ratio uses options data to gauge bullish or bearish market sentiment.
SECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It indicates whether investors are feeling bullish and prices are rising, or bearish and prices are falling. There are several indicators that can help measure market sentiment, such as the VIX, high-low index, and bullish percent index. Key takeaways are that market sentiment reflects overall consensus on stocks and whether the tone is optimistic or pessimistic based on price movements.
SECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
The document discusses several theoretical approaches to analyzing financial markets, including the efficient market hypothesis (EMH) and the adaptive market hypothesis (AMH). The EMH suggests that markets are efficient and prices fully reflect all available information, while the AMH combines EMH with behavioral economics by proposing that people are rational but sometimes irrational during periods of volatility, and they adapt and learn from their mistakes over time. The document also examines research on noise trading, informed vs. uninformed traders, and empirical evidence that both past prices and nonpublic information can be used to generate profits.
SECTION V - CHAPTER 34 - Noise Traders as technical Traders.pdf
Trend-following noise traders use technical analysis of stock price charts to inform their trading decisions in a systematic way. This can lead to self-fulfilling trends as many noise traders react to the same patterns. Models attempt to explain bubble and crash behaviors that seem driven by herd instincts rather than fundamentals. The Abreu-Brunnermeier model allows bubbles to form but not certainty that arbitrage will burst them. Shiller's model notes stock prices anticipate dividends more than fundamentals would suggest, implying an impact from investor psychology contrary to prevailing views.
SECTION V - CHAPTER 33 - Noise Traders & Law of One Price
This document discusses the concepts of fungibility, the efficient market hypothesis, and noise traders. It explains that under the EMH, two identical items should have the same price. However, behavioral economists argue that giving items different names could lead to different prices if the names influence perceptions. It then discusses noise traders, who trade based on non-fundamental factors and influence prices away from efficiency. For noise traders to significantly impact markets, their behavior must be systematic and they must economically survive over time, posing a challenge to market efficiency.
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
This document discusses different investment strategies including momentum strategies, mean reversion strategies, and value investing. Momentum strategies seek to take advantage of short-term price movements, while mean reversion strategies assume prices will revert back to a stable trend. Value investing picks stocks trading below their intrinsic value, believing the market overreacts and offers opportunities. The document also discusses how value investing works by finding "secret sales" on stocks trading at a discount to their true value. Finally, it notes that constant financial news reporting can create "noise" that "noise traders" react to, while rational investors focus on their own analysis.
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- 1. Module - 44 Foreign Exchange & Currencies CMT LEVEL - I
- 2. What is Foreign Exchange(Forex) Foreign exchange rate is the value of foreign currency relative to domestic currency Exchange of currencies is done in the foreign exchange market, which is one of the biggest financial market
- 3. Exchange Rate Base Currency • First currency in a currency pair Terms Currency • Second currency in a currency pair
- 4. Example of Exchange Rate Base Currency Term Currency Relationship US Dollar Indian Rupees (US$ - INR) British Pound INR (GBP – INR) Japanese Yen US $ (JPY – USD)
- 5. Currency Table USD EUR GBP JPY USD 1 0.7468 0.6627 99.19 EUR 1.339 1 0.8869 132.66 GBP 1.509 1.1275 1 149.53 JPY 0.0101 0.0075 0.0067 1
- 6. Factor affecting Exchange Rate Fundamental Factor Economy Government Policies Technical Factor Interest Rates Inflation Rate Exchange Rate Policy Central Bank Intervention Political Factor Speculation
- 7. Why Currency Derivative? Transparency & Efficient Price Discovery Elimination of Counter Party Risk Access to all type of Market Participant Standardized Product Trading Platform
- 8. Participants in Currency Trading Importers & Exporters Hedgers Speculators Traders Arbitragers