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Fx Swap and Forward Market
As we all know, our positions in the FX market are liable to either a credit or a debit at the end of each trading day. Known primarily as Carry, swap or rollover the charge made to the trading account is dependent on interest rates. Before we go further, we need to understand what an FX swap is, It is the buying/selling of a spot currency pair, while simultaneously selling/buying a forward contract of the currency pair of the same value.
The FX swap market is the biggest single market in the world, taking up about 40% of the FX markets, which is by far the largest in the world by asset class
To understand the idea here, we need to know about interest rate parity, while there is a pretty basic formula, the idea is as follows. If one country has a higher interest rate than the other country in the trade, then it is feasible to suggest that I could buy the higher yielding currency by selling the lower yield one and park it in risk free deposits and receive a return, this is the entire concept of the carry trade.
However, to prevent arbitrage, buying a currency pair in the future must discount this.
As we can see above, this is the forward curve for the AUDU…
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Daytrader21 avatar

Thanks again for reinforcing some basic concept that I almost forgot. Your article are always very informative. keep up the good work

Airmike avatar
Airmike 21 Mar

very nice article. best of the bests :)

mimuspolyglottos avatar

Another financial HAIKU from Adrian. Short, deep, impressive. Thank You very much. Why are British so good in teaching high finance but are not good in teaching football? :(    I do not know about today but thirty-twenty years ago some theories  have considered  the forward rate as the best  forecaster of currency's rate in the  future. May I consider my portfolio of currencies with positive swap points and with future rate hike expectations on more than half of them as ALPHA trade ( trying to create some analogue to stocks)? Best Regards.

AdrianWS avatar
AdrianWS 24 Mar

Hehe Mimus - thanks for the kind words. Interesting you mention that last point... Normally people consider FX markets Zero-sum, and while the transactions are. Every trade (as highlighted above is exposed to interest rates) as such, they are receiving cash flow, so over time FX strategies (such as G10 carry trades) have outperformed a 0% return for all parties, which is an odd thing to think about but its true! However most don't consider generating alpha as an FX tactic, but its perfectly valid imo and works percectly.P.s. Have you not seen Southamptons academy? really good at training.

Maria_r avatar
Maria_r 26 Mar

large information flow

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After discussion in a recent webinar on the price action of the GBPUSD we stumbled across a huge aspect of the market that is barely touched upon (or even known) about from a retail perspective. That is Delta and gamma hedging in the spot FX market. Firstly we need to define these, and in the least mathematical way (to keep it simple)
Delta - the change in value of the derivative compared to the change in price of the underlying asset. Delta can be expressed in a few ways, but in the FX markets it will normally be represented as a % of the notional position. For example, if I have an option position in EURUSD worth €1,000,000 and a delta of 25% then my option increases or decreases in value at 25% of what the EURUSD moves. I.e. If the EURUSD rises 1%, then my option rises by 0.25% etc
Gamma - this is the second derivative, so this is the change of delta for a change in the underlying. Delta is not constant, and as the EURUSD rises the delta changes (this relationship is defined by gamma). Once again quoted in %. For example the same option above with a delta of 25% (€1,000,000 value) might have a gamma of 10%. This means that for a 1% change in the EURUSD the delta changes by 10%. …
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P3tr4 avatar
P3tr4 19 Fev

well done. Solid article

mimuspolyglottos avatar

This is N. Taleb's "Dynamic Hedging" in 1:100 scale with effortless reading. Trading FX from spot trading perspective is very much like sitting on iceberg without much and proper information what is beneath waterline, and You are trying to uncover this "underworld" for us. Thank You so much. Valued.

jezz avatar
jezz 20 Fev

This month we have some hidden treasures of Forex introduced. Hedging strategies are my cup of tea, yet I still have a lot to learn

scramble avatar
scramble 27 Fev

well exposed concept! well done! :)

AdrianWS avatar
AdrianWS 27 Fev

Cheers everyone! Am just trying to drill home the idea that FX options are far more important than they may originally seem.


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Why Am I Here One of the most common advices you can find in “how-to-trade“ books/lectures/articles for begginers is “do not copy others‘ actions“ and “only follow your own strategy“. I would like to challenge this point of view. In addition, I will try to show you how herding may help you to avoid losses and even gain profits. Few Explanations Lets get over some things from the beginning. Even though primarily dedicated to FX spot traders, information in this paper may be used by any traders, who trade any financial instrument. At no point of this paper I will intend to suggest that mimicking others blindly is rational and profitable in the long run. Nor I will try to challenge the idea that one must follow his own strategy. What I will try to do is to show that with sufficient knowledge and understanding, following others may be profitable. You may ask how does this work: follow your own strategy, but also follow other traders. It is not that hard to tackle. You have to have your own money and risk management rules (two most important nuances in trading). You have to have rules for entry and exit. You have to know how to manage your trades at any point in time. All of these ar…
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SpecialFX avatar

The argument against "herding" is mostly used to prevent traders from entering at the end of a trend, when it is about to reverse. And it makes sense. because If you are about to do something that most traders have already done, it surely will not be profitable. But if you follow the market at the beginning of a trend, when most traders are still out of it, then the odds are in your favor. Following trends is a very good strategy, as long as traders do it well :)

alifari avatar
alifari 24 Set

nice read

captain avatar
captain 25 Set

An interesting point of view.

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FX Options Strategy:This strategy Is a Fairly complex Trade style that involves using ~Spot Forex~ trades in conjunction with ~One Touch Options~. Where You are set up in a similar method to that of a Volatility Straddle using Stock options.One Touch Option:  For those of you who don't know What a One Touch option is. It is a form of Binary options which by definition have two potential endings. If the Price you have decided (barrier) is hit then the Counter party will pay out a set amount of money (anywhere from $100 to $100,000). However if the price never rises or falls to reach that point then there will a total loss of the premium paid up which can range from 25-100% of the payout. In other words a $10,000 Payout if EUR/USD rises and reaches 1.34 will cost, depending on the expiration date, between $2,500 and $6,600.Even if you don't use my strategy, I hope you can see the potential for trading with One touch Options as you can easily Double your money with a limited downside risk.I will run through a guide on how to trade this method as clearly as I can With Live quotes as I write.Imagine, you Believe AUD/USD is to rise to 1.0850 in the next month (it doesn't matter if you ar…
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TheTiger avatar

Hi Adrian, do u recommend and broker who provide this service? I mean one touch and no touch options

AdrianWS avatar


msimek76 avatar
msimek76 11 Mar

Hi Adrian. You state that "If it rises to 84.01 then you Profit 10.000 USD from the option and lose 7,613 USD from the trade." I am afraid this is not quite true. You do not profit net 10.000USD from the option because in every case you loose the premium 5.394 USD. The option payoff would only be 4.606 USD which cannot offset the loss from your spot trade (7.613 USD). Any thoughts?

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