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Forex Triangular Arbitrage

April 25, 2022 by editor

Risk-Free Arbitrage.

Bank Forex dealers are the prominent participants in Forex triangular arbitrage. Currency arbitrage keeps prices in related currency pairs in equilibrium. Therefore, if the prices in three corresponding currency pairs that are codependent become misaligned, an arbitrage opportunity presents itself. Triangular arbitrage is free from market risk because all the related trades are executed almost simultaneously. No long-term currency positions are held as part of this arbitrage strategy.

Forex Arbitrage Example.

For example, if the USD/YEN rate is 110, and the EUR/USD rate is 1.10, the implied EUR/YEN rate is 100 Yen per Euro. At certain times, the implied rate obtained from two related exchange rates is substantially different than the actual rate of the third currency pair. When this happens, traders can do triangular arbitrage by taking advantage of the difference between the real exchange rate and the implied exchange rate. For example, suppose that the implied EUR/YEN rate obtained from the EUR/USD and the USD/YEN rates is 100 Yen per Euro, but the actual EUR/YEN rate is 99.9 Yen per Euro. Forex arbitragers could buy Yen 99.9-million for Euro 1-million, buy Euro 1-million for US dollar 1.100-million, and buy US dollars 1.100-million for YEN 100-million. Following the three trades, the arbitrager would have Yen 0.100-million more Yen, about US dollars 1.0-thousand, than when they started.

Currency Arbitrage Causes Rates to Adjust.

In practice, the pressure put on Forex prices by currency arbitragers causes Forex rates to adjust so that further arbitrage would be unprofitable. In the above example, the Euro would appreciate relative to the yen, the US dollar would appreciate relative to the Euro, and the yen would appreciate relative to the US dollar. As a result, the implied EUR/YEN rate would fall while the actual EUR/YEN rate would fall. If prices did not adjust, arbitragers would become infinitely wealthy.

Speed and Low Costs Help Bank Forex Dealers.

Bank Forex dealers are natural arbitragers because they are fast traders and their transaction costs are relatively low. These trades generally present themselves in fast-moving markets when most traders are unaware of the changes in the related currency pairs.

Filed Under: Forex Arbitrage Tagged With: arbitrage, currency pairs, EUR/USD, EUR/YEN, implied exchange rates, market risk, USD/YEN

What is the Forex Market?

January 30, 2022 by editor

Traders can use the forex market for speculative and hedging purposes, including buying, selling, or exchanging currencies. Banks, companies, central banks, investment management firms, hedge funds, retail forex brokers, and investors are all part of the foreign exchange (Forex) market – the largest financial market in the world.

Global Network of Computers and Brokers.

As opposed to a single exchange, the forex market is dominated by a global network of computers and brokers. A currency broker may act as both a market maker and a bidder for a currency pair. Consequently, they may either have a higher “bid” or a lower “ask” price than the market’s most competitive price.

Forex Market Hours.

The Forex markets opens Monday morning in Asia and Friday afternoon in New York, the currency markets operate 24 hours a day. The Forex market opens from Sunday at 5 p.m. EST to Friday at 4 p.m. eastern standard time.

The End of Bretton Woods and the End of the US Dollars Convertability to Gold.

A currency’s exchange value was tied to precious metals such as gold and silver before World War I. This was replaced after World War II by the Bretton Woods agreement. This agreement led to the formation of three international organizations focused on promoting economic activity around the world. They were the following:

International Monetary Fund (IMF)
General Agreement on Tariffs and Trade (GATT)
International Bank for Reconstruction and Development (IBRD)

President Nixon changes the Forex markets forever by announcing the US will no longer redeem US Dollars for gold in 1971.

As international currencies were pegged to the U.S. dollar under the new system, gold was replaced by the dollar. As part of its dollar supply guarantee, the government of the United States maintained a gold reserve equivalent to gold supplies. But the Bretton Woods system became redundant in 1971 when U.S. President Richard Nixon suspended the dollar’s gold convertibility.

The value of currencies is now determined by supply and demand on international markets instead of by a fixed peg.

This differs from markets such as equities, bonds, and commodities, which all close for a period of time, generally in the late afternoon EST. However, as with most things, there are exceptions for emerging currencies being traded in developing countries.

Filed Under: Forex Market, Forex Trading Tagged With: foreign exchange, Forex, markets

Forex Funds and Managed Accounts are Popular Alternative Investments.

July 13, 2021 by editor

Forex funds and managed accounts have become popular alternative investments. The term “Alternative Investments” is defined as investment securities trading outside traditional investments like stocks, bonds, cash, or real estate. The alternative investment industry includes:

Hedge funds.
Funds of hedge funds.
Managed futures funds.
Managed accounts.
Other non-traditional asset classes.

Investment managers are known for delivering absolute returns, despite market conditions. Using strategy-driven and research-backed investment methods, alternative managers try to provide a comprehensive asset base and benefits such as less risk through lower volatility with the probability of improved performance. For example, currency funds and managed account managers are in the business of delivering absolute returns regardless of how the traditional markets, such as the stock market, are performing.

Forex fund manager’s performances will not be correlated to any of the conventional asset classes listed above. For example, if the US stock market is down, most US equity advisor’s performance will be down. However, the direction of the US stock market will not affect a Forex fund manager’s performance. Consequently, adding a currency fund or managed account to a portfolio of traditional investments, such as equities, stocks, bonds, or cash, is an excellent way to diversify a portfolio and potentially decrease its risk and volatility profile.

Filed Under: Forex Funds, Forex Managed Accounts Tagged With: asset class, investors

Redemption Provisions for Forex Managed Accounts.

May 25, 2021 by editor

Forex managed accounts and hedge funds typically provide specific redemption frequencies, such as monthly, quarterly, and yearly. They may also require a particular notice period, such as 60, 90, or 180-days. In addition, some Forex managed account programs and hedge funds can stop redemptions once they exceed a certain percentage of the total assets under management in the program. Most Forex manager account programs and hedge funds disclosure documents contain language to the effect that the trading manager may suspend withdrawals if those redemptions put the remaining investors in an unfair position. Trading managers often “lock up” investor’s capital for some time upon the initial investment. These lock-up periods can be “hard,” meaning the investor cannot take any of his money out, or “soft,” meaning the investor can take a percentage of his total assets under management out of the fund or managed account program.

Redemption provisions are an essential part of a Forex managed account program. It important for the investor to read the Forex funds or managed account program’s disclosure documents so he is not surprised when he attempts to withdraw his funds from the trading account.

Filed Under: Disclosure Document, Forex Account Withdrawal, Forex Funds, Forex Managed Accounts Tagged With: redemptions

What Is The Difference Between A Hedge Fund and a Managed Account.

March 3, 2021 by editor Leave a Comment

A hedge fund is defined as a collection of managed investments that uses sophisticated investment methods such as gearing, long, short and derivative positions in the domestic and global marketplaces with the objective of producing high returns (either in a total sense or more than a particular sector benchmark).

A hedge fund is a private investment partnership, in the form of a corporation, that is open to a limited number of investors. The corporation almost always mandates a substantial minimum investment. Opportunities within hedge funds can be illiquid because they frequently demand investors maintain their capital in the fund for a minimum of twelve months.

Filed Under: Forex Funds, Forex Managed Accounts, Hedge Funds, Investment Tagged With: corporation, partnership, structure

Forex Managed Account Program Disclosure Document

September 22, 2018 by editor Leave a Comment

A Forex managed account program disclosure document provides potential investors with important information about the program and should be carefully read by all investors. The document is similar to a hedge funds private placement memorandum, except that the emphasis is on the disclosure of facts and not on the Forex managers trading results. The disclosure document can be thought of as a short business plan. The document includes a discussion of the trading methodology that is used to

Disclosure documents should be part of the Forex managed account program’s account opening procedure.

manage the program’s accounts. It also discusses basic information such as trade allocation and the risk factors involved in the Forex trading strategy. A Forex managed account program disclosure document will contain information about the programs trading manager, including his background and qualifications, as well as information regarding what currencies might be traded. The disclosure document contains important information that the Forex investor should review. The Forex managed account program disclosure document will be signed by the investor as part of the account opening process.

Filed Under: Disclosure Document, Forex Managed Accounts, Investment Tagged With: account opening process, disclosure, document, Forex managed accounts, open a Forex account

Forex Triangular Arbitrage

Risk-Free Arbitrage.

Forex Arbitrage Example.

Currency Arbitrage Causes Rates to Adjust.

Speed and Low Costs Help Bank Forex Dealers.

What is the Forex Market?

Global Network of Computers and Brokers.

Forex Market Hours.

The End of Bretton Woods and the End of the US Dollars Convertability to Gold.

Forex Funds and Managed Accounts are Popular Alternative Investments.

Redemption Provisions for Forex Managed Accounts.

What Is The Difference Between A Hedge Fund and a Managed Account.

Forex Managed Account Program Disclosure Document

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