The Reader

Nowadays the internet offers a wide variety of green news websites to keep you updated of environmental news and events.

It is interesting to watch this web niche evolve. Social media has brought a new generation of green resources. You can now be a green news source yourself (by participating in green social networks), become a part of huge green communities (by frequenting environmental blogs) or even watch green news using Twitter!

Let’s have a look at a few examples of new creative environmentally friendly resources to help you go green.

User-Generated Green News:

I Do the Right Thing is a user generated resource where “you can get unfiltered information about the impacts of companies on” the environment.

The green stories are rated based on the impact they produce on the society and/or environment. The process of voting for the story is as follows: you should define the impact to be positive, negative or neutral.

The companies are also rated based on the overall score of all stories they were mentioned in.

Care 2 is a green social networking and bookmarking site allowing users to submit and vote for green tips, news and apps.

Besides being a great news resource, it offers quite a few cool green features: you can send “leaves” to the members inspiring you or find support for your own cause by starting a petition.

Green Deals Daily will appeal to all conscious online bargain hunters. The site allows users to submit, comment and vote for online green deals. What a treat for those who want to both save money and help the environment!

Best Green News Blogs:

Environmental Graffiti will appeal to all those who love beautiful imaginary. The site raises environmental awareness by posting impressive pictures of the Nature.

Tree Hugger is the most well-known green blog on the internet, I guess. Besides updating the blog with multiple news-worthy posts daily, the site also offers a very active forum, green guides and even a green job board.

The Good Human (as the name suggests) is more focused on the human aspect: what each of us can do to help save the green planet.

Green Options is an all-in-one resource of green news aggregating stories from all over the environmentally friendly sites and blogs.

Ecorazzi takes a more entertaining perspective by posting green gossip and sensational stories.

Viropop is good for all who loves online video. Besides being a green user-generated video-sharing community, it also maintains a green video blog.

Green Micro-Blogs

Lighter Footstep Twitter Profile will real-time update you of new green tips and articles.

GreenerIdeal is another cool green Twitter micro-blog to follow.

Ecopreneurist micro-blogs on news and advice on sustainable and social entrepreneurship.

GreenNews focuses on environment related news.

How green are you? Do you frequent green websites? Please share your list!

0 Comments

Here is a compiled list containing 5 free clever email applications that will save you time, work, and the possibility of you smashing your computer to bits.

Choose which of these applications benefits you the most and begin to simplify your email usage.

(1) SimpleMail (Firefox Extension)

The first email application is called SimpleMail. It’s a Firefox extension that will simplify your POP3, IMAP and SMTP emailing needs all through the use of Firefox. You’ll be able to turn Firefox into a simple yet handy easy email sender client.

Managing Email

Once you’ve installed it, you’ll be able to manage your mailbox as if it were another tab in Firefox. This extension can be used with POP3, SMTP and IMAP email accounts. You won’t have email assistance as other email clients may have. However, the fact that you’re able to check your webmail with the click of a button (literally) supersedes what SimpleMail lacks in that department.

Added Features & Usability

SimpleMail allows you to set up as many email accounts as you’d like. You’re able to check your messages, reply to them, view any attached files or images, and you can send emails using its rich text editor.

Although you can add an address book, this program was meant to be a straightforward email client therefore it lacks the option to insert signatures and spam filters.

OS Compatibility: Win98/98SE/Me/2000/XP/Vista

(2) Gmail Notifier Beta (Desktop App)

With Gmail Notifier you can check your messages without having to open your browser to the Gmail webpage. You’re able to check email from the system tray, eliminating a visit to Gmail’s webpage.

This application is quite useful. However it falls short of expectancy in some areas such as you’re only able to check one account at a time, and the notifier only checks for new messages when you tell it to.

Gmail Notifier shows you a snippet of every email that enters your mailbox. That way you can decide if it would be worth opening your browser to read it.

This is the Gmail Notifier Button with the options listed:

The notifier takes you to your Gmail account once you’ve clicked on the specified snippet of the email.

OS Compatibility: Win2000, NT, XP, Vista

(3) GmailAssistant (Desktop App)

This is a very useful app because unlike Gmail Notifier, you’re able to automatically check various email accounts at one time. With GmailAssistant you don’t have to constantly log into your Gmail accounts just to check and see if there’s new mail, because this program checks emails automatically for you and briefly displays a snippet of them right above your windows tool bar.

Travis wrote an in-depth review of GmailAssistant here.

Features & Configuration

GmailAssistant can be easily configured and it connects to your Gmail account using IMAP (Internet Message Access Protocol) for a safe connection. You must have IMAP access enabled in order for this application to check for new messages. This is how you enable IMAP access once you’ve logged into your Gmail account: Settings > Forwarding and POP/IMAP > IMAP Access.

Adding a New Gmail Account:

OS Compatibility: Win200/XP/2003/Vista

(4) Gmail Backup (Desktop App)

Backing up your email may not be at the top of your priority list but it can sure save you lots of headaches in the future if something bad and unforeseen were to happen to your email account.

Dreadful possibilities for backing up your email include being locked out of your Gmail account or even accidentally deleting emails yourself. Gmail Backup can be used for any reason you’d like, even though it only has one purpose; to backup your Gmail account messages.

Karl did a write-up of Gmail Backup here.

You’re going to be asked to enter your Gmail details.

Then the app immediately backs up and downloads your Gmail email onto your computer once you’ve directed it too.

Downloaded Emails

The email that has been backed up and downloaded to your computer will show in the folder you specified. You will be able to open the emails in the default email client you have installed onto your pc (i.e. Outlook, Windows Mail and more), in my case it’s Windows Email therefore it appears as this:

Gmail Backup is very easy and simple to use because it allows you to specify dates you want it to back up your email. You can choose any destination folder within your directory and, as stated above, emails can be read through Outlook, Windows Email, or any sort of text reader as well.

OS Compatibility: Win XP/Vista

(5) eCipher (Secure Emails) (Desktop App)

eCipher is a tool that encrypts email messages which can be sent through an easy-to-use desktop interface and shown to be originating from the email client of your choice (i.e. Gmail, Yahoo!, MSN, Outlook, Windows Mail and more). This ensures the privacy of the content your email messages contains.

This app works as an independent email tool that utilizes your email server settings to send messages through the SMTP port.

Compose

You can choose to compose an email once you’ve clicked on the settings button and added an email account.

Protection

Your emails are protected and encrypted with a 256-bit AES and 2048-bit RSA encryption algorithms. The recipient must also have eCipher in order to read your emails; otherwise they will not be able to open them.

Sent encrypted email received by a recipient who does not have eCipher and/or the correct de-ciphering key

Same email received downloaded and opened with eCipher by the correct recipient

Compatibility

eCipher is compatible with several email clients such as Outlook and Thunderbird.

OS Compatibility: Win 2000/XP/2003/Vista

Please feel free to leave your comments and suggestions! Do you use any of these? Do you know of any better ones?

0 Comments

Your computer running Windows isn’t running in the same speed that it used to run when you first used it. It’s slower, crappy, takes a while to start and tests your patience like anything. There are many reasons for this, let’s try fixing up a few things on your slow Windows PC:

Slow Start Up
There can be a variety of reasons to Windows loading slow during start up. Go to Run, type msconfig and hit enter. Under the ‘Start Up’ tab, uncheck the unwanted programs and press OK. Things should be a bit fine the next time Windows boots.

Another program worth mentioning here is StartUp Delayer which will help in setting after how much time programs should be loaded after Windows boots. For instance, you could set your instant messenger program to load 50 seconds after Windows starts up.

Slow Loading Start Menu
If the Start Menu items are loading slowly, you can open the Registry Editor by typing in the Run menu ‘regedit.exe’ and pressing Enter. Go to HKEY_CURRENT_USER\Control Panel\Desktop. Look for MenuShowDelay, and double click to edit the value. The lower the number specified, the faster the Start Menu will load.

Slow Right Click Context Menu
Probably the Windows Right Click menu on your computer is loading slow because too many programs added unwanted entries there. Just download this program called Mmm, install it and then modify your context menu to remove unwanted items to speed it up.

Slow Send To Menu

If the Send To menu loads slowly, you can type ’sendto’ in the Run Dialog, and remove unwanted items in the Explorer Window that appears. This should add some speed to it.

Slow Defragmentation
The Windows Defragmenter can’t get any slower. You need to have an alternative to the Windows Defragmenter, and Defraggler is just one of the best ones available in the market. It’s free, and works like a charm and can speed up defragmentation manifold. For some alternatives, see Five Free Programs to Defragment your PC.

Slow loading My Computer Window

If the My Computer Window loads slowly, in the Explorer Window, go to Tools >> Folder Options >> View and uncheck ‘Automatically search for network folders and printers”

Slow loading Add or Remove Programs Applet
This is one of the most annoying piece of programs present in Windows, it takes ages to load if you have a considerable number of programs installed on your computer. You can either use the all-in-one CCleaner for this purpose, or get MyUninstaller that comes as a speedy replacement for Add or Remove Programs.

Slow Ending of Unresponsive Programs
If you’ve clicked on ‘End Task’ if any program is running unresponsive, you might have noticed that the program is not terminated immediately. You can alter this by going to Run >> regedit.exe >> HKEY_LOCAL_MACHINE\System\CurrentControlSet\Control\ and change this value to 1000.

Disable Animations and Appearance Overhauls to maximize performance
If you’re a serious performance junkie, you probably won’t bother about eyecandy. Go to System Properties in the Control Panel. Click ‘Advanced’, then ‘Performance’ and click ‘Adjust for best performance’. This might boost your PC’s performance up a bit.

Additional Tips:

- Always keep your computer clean. Remove Junk and Unnecessary registry entries. Use CCleaner for this purpose, one excellent tool that just does what it says.

- Don’t keep installing software. Install a program only if it really serves you a purpose.

- Keep as less programs as possible running on the System Tray. This essentially means reducing the number of programs that start during Windows start up.

0 Comments

Ever wanted to master the keyboard shortcuts and get more productive on the web? Here is everything you need - 10 quick cheat sheets for some of the most widely used tools on the web. Download, print and stick them somewhere near your desk.



Google Reader Shortcuts Internet Explorer Shortcut Thunderbird Cheat Sheet


Linux Command Line Ref Firefox Cheat Sheet Mac OS X Cheat Sheet




Gmail Cheat Sheet Google Cheat Sheet Windows Cheat Sheet*



Firefox Cheat Sheet - Mac

UPDATE: Hey folks, due to massive response the download links to above cheat sheets were moved to our must-have downloads page which is only available to MakeUseOf subscribers. So you will need to subscribe before youcan get them. No worries, it takes about 5 seconds. You can subscribe via email (use email form below) or via RSS.

Plus, as a MakeUseOf subscriber you’ll also get regular updates about new cool websites and free software programs we come across. Enjoy!

We hate spam as much as you do. You won’t receive any commercial offers from us.

0 Comments

Since computers are in use more hours per day than they used to be, making your computer more energy efficient is becoming increasingly important. Not only will not only go easy on your wallet, but you get to help out the environment as well.

Here are 5 ways you can help to decrease power consumption on your computer.

1. Tweak Google to Save Power

Blackle was created to provide a front end to Google, but with a black background. Blackle saves energy because the screen is predominantly black. A given monitor requires more power to display a white (or light) screen than a black (or dark) screen, so you get all the goodness of Google and with all the additional environmental benefits.

Yes, the difference a single computer makes is small, put together, this small tweak to Google has a potential to save 750 Megawatt hours a year. As of now, they’ve already saved more than a million watt hours with this tool!

The whole concept of Blackle is slightly controversial though and it has its detractors. This Wall Street Journal article claims that only older CRT monitors w

ill see any benefit from the site.

2. Optimize Windows and Track How Much CO₂ You’ve Saved

CO2 Saver is a free toolbar released by Snap and is a lightweight application that runs in Windows. It adjusts your Windows power settings so that your computer, monitor and hard drive consumes less electricity when you’re not actively using them (similar to what you could do by adjusting your power options in Windows).

It then calculates how much power is saved, and converts it into pounds of CO₂ emissions prevented by having the toolbar installed. You can see the amount of CO₂ saved by yourself and all toolbar users together so you can view the collective effort and what you have contributed to it.

At the time of writing, users of this tool have collectively saved more than 850,000 lbs of CO₂!

3. Use Energy Efficient Products

Energy Star is an international standard for energy efficient consumer products. When you buy electronics, look for the logo (pictured above) or ask for similarly certified products. This ensures that you’ll get something which is pretty much efficient in its class.

4. Use LCD monitors rather than CRT

Some sources quote CRT monitors as consuming 250% more power than LCD screens of similar size. So if you’re looking to cut down on the power bill, consider dumping that old monitor and moving on to a less power hungry LCD which incidentally would also be much sexier looking on the table, and deliver crisper sharper images than a CRT.

5. Adjust Your Computer Settings

Whether you’re using a Mac OSX or Windows, you can adjust your settings accordingly so your system can power down when you’re idle. On Windows, go to Control Panel then power options to fine tune when you want your computer to turn down the hard disk, monitor, or go into standby mode.

On a Mac, go to System Preferences, then Energy Saver pane, and then Sleep to adjust your energy saving settings.

So there you have it, five simple ways you can help save power on your computer. What methods do you use? I’m curious to know. Tell us in the comments!

1 Comment

Printer ink and toner are precious because, well, printing isn’t free and resources have a tendency to run out when you least need that to happen.

If you’re concerned with wasting material and spending too much money on ink and toner, you will certainly learn a thing or two from this article.

However, if your main problem is not having a replacement ready when you need it you’re out of luck here. The only advice I can give you is to shop for backup material in time.

You can save ink or toner on many different levels and it actually starts with the type of printer and ink you purchase. But let’s assume it’s too late for these decisions and move on to what you can do right now.

Level 1: Creation

Obviously, the first step is creating the documents you need to print.

1. Ecofont

That’s right, there are fonts that are more petite than others and because they require less ink or toner in the print, they may be considered eco-friendly.

SPRANQ has developed Ecofont, a font that saves approximately 20% of the ink or toner compared to standard fonts. The download is free and the site contains instructions on how to install it on Windows XP and Vista, Mac OS X, and Linux.

Generally, use less bolded text, use smaller fonts and only write what’s essential. Novels are for writers.

2. Revision

Don’t print anything before you haven’t thoroughly revised the content for mistakes. Otherwise you might end up printing it several times.

Level 2: Selection

Here it’s about carefully selecting what to print.

3. Do I need this?

Print only what you need. Don’t print a whole book, if you’re only interested in a few paragraphs. Don’t print the graphics, if you’re only interested in the text and vice versa.

a) Word options

If you’re printing a piece of text for proofreading, you may not need to print the pictures. In Word you can make use of the print option “draft output”, which prints a fast and low-quality draft copy without images. Go to >file >print. This will open the print menu. In the bottom left click >options and check >draft output. Then go ahead and select the printer. But make sure it’s fine tuned according to the tips listed below.

b) Print What You Like

Basically, this is an online website editor, which allows you to optimize other websites for printing. Eliminate ads and white spaces and only

print what you need.

It’s very simple. Go to the website, enter the URL of a page you’d like to print, for example this article, click start and begin editing. You can use the right-click menu to remove individual items, make them fit the width or isolate them.

On the left there’s a menu through which you can edit a group of items simultaneously, remove the background image or simply start printing. You can also save your edits as PDF or HTML. Finally, there’s a bookmarklet available with which you can conveniently start editing any page.

c) GreenPrint

GreenPrint is a piece of software for Windows (2000, XP, Vista) and Mac (OSX 10.5+). The free version comes with advertising, but it is safe and worth trying.

GreenPrint analyzes print jobs and makes you aware of potential waste. You can easily eliminate unwanted pages. Additionally, you can print to a PDF using this tool, which doesn’t require any ink/toner or paper at all.

For some extra motivation, GreenPrint tracks the amount of paper it has saved you.

Level 3: Fine Tuning

Finally, you can improve the technical side of your printer or your use of its options. Make the most of it and save on printer resources.

4. Printer settings

The right settings are essential and will save you the

most when done right. Instead of manually choosing “low quality” settings for each print job (i.e. all the time), you should make “low quality” the default. Hence you’ll have to make “high quality” settings manually, which will make you choose them only when required (i.e. rarely).

To permanently change the default settings of your printer, go to (Windows) >Start >Printers, right-click on your printer and select >printer settings. Now the exact options you’ll see here depend on your printer, which means I can only give guidelines and you’ll have to figure out the details yourself.

a. Print layout

First of all, take note of the layout options you have. You may be able to print several pages on a single piece of paper or you may be able to print on both sides of a paper. Both options can save a ton of ink/toner and even paper. Please remember that if you change settings here, every print job will be printed like this per default. So keep in mind the options you have here for those special cases.

b. Print in black and white

Black ink or toner cartridges are usually much cheaper than the colors. So if you can, print in black and white or grayscales per default.

c. Reduce resolution

On some printers you can reduce the graphic resolution. This option is usually found under >advanced settings. 300 dpi (dots per inch) are usually sufficient for most purposes. Besides, regular paper can’t handle very high resolutions anyways. So applying a high resolution only makes sense when you’re using high quality photo paper.

Some printers have a draft or ink saver option. If you see this, make it a default setting. I’m using a Kyocera laser printer and under advanced settings I can enable EcoPrint.

Did you know that black, when printed in high quality, may be mixed from different colors on some inkjet printers? Of course that is much more expensive than printing black using the black color cartridge. So make sure your general printer settings are smart.

5. Print preview

Before you print anything, make use of the preview option and check whether things look good. At this point you may decide to manually change the settings, for example print several pages on one piece of paper, reduce the size of an image etc.

6. How to handle inkjet printers

First of all, you have to check the manual of your printer to see what the manufacturer recommends. If you have a new printer, it may already take the most common “user mistakes” (or previous design faults) into account and correct them automatically.

That said, here is some general advice.

a) Keep an electricity flow

In general, inkjet printers require a steady stream of electricity. Now if you completely disconnect your inkjet printer from electricity, for example by using a power strip that can be switched off, the printer will go through a cleaning cycle once electricity is back. If repeated on a daily basis, this procedure not only costs energy, but also tons of ink.

b) Turn it on and off manually

To save energy, turn your printer on only when you need it! And to keep the ink from drying out, turn the printer off manually. Don’t use the power strip! Using the manual on/off button activates a program and the printer will properly “park” the ink cartridges. In the park position the ink is protected from drying out quickly.

7. Toner Lifetime

For laser printers, many recommend to shake the toner cartridge to extend its lifetime and get the last bit of toner out of it. For me this has never worked. But since toner basically is powder it may indeed form clumps as it gets old, it may actually work on old cartridges.

Nevertheless, I strongly discourage you to handle toner cartridges in any way not instructed by the manufacturer. As you shake the cartridge, you’re releasing fine toner particles (respirable dust) and that is not healthy. This is a different story, though.

8. Print till it dies

Don’t be alarmed if your printer reports that ink or toner are empty. Chances are you have 10-30% lifetime left. So keep printing until the printer stops. However, don’t waste time and make sure you get replacements in the meantime.

For a ton of information about ink and toner, check out the Ink & Toner Information Website, which also covers several specific printer models.

What tips do you have to make your printer ink and toner last longer?

0 Comments

Question: I have no experience in the stock market, and I'd like to invest some of my money, but I do not have a clue how to go about it. Can you help me or tell me what to do before I make a move that may ruin my life?

Answer: I don't know if I can deal with all the issues that might ruin your life -- but let's look at the financial issues.

If you haven't been involved in the stock market, ask yourself how much can you afford to lose, both financially and temperamentally. Yes, I did say lose. The brokerage community usually asks, ``How much do you want to make?'' A silly question, don't you think?

I know I have no limit to the amount I am willing to make. ``Two million, not a penny more,'' you may say. I don't think so.

After you have decided that you are willing to accept the risk of loss, and how much you are willing to risk (even prudent investment has risk), I would advise starting slowly.

If you have a few thousand dollars to invest, consider starting with a diversified mutual fund, perhaps Vanguard S&P 500 Index or Vanguard US Growth (VWUSX). There are dozens of high quality, no-load funds that invest in larger company stocks. I would avoid individual stocks as they increase both your risk and your potential for reward -- not a prescription for a beginner.

Give your investment some time. Don't invest in equities with the intention to pull the money in weeks, months or even less than five years.

When you're more comfortable with the ups and downs of the market, then you can consider increasing your investments and broadening their diversification, again consistent with your risk tolerance.

The worst luck a beginner can have is making a lot of money right away. After that happens, many decide that investments are guarantees, and they invest all they have.

So my advice to you is to invest a little that you can afford to lose. Watch the ups and downs of the market and become comfortable with the volatility while at the same time increase your knowledge in available investment choices and risks.

Over time, you should have a diverse portfolio of mutual funds consistent with your goals, objectives, risk tolerance and tax situation.

Gary Schatsky is Chairman of the National Association of Personal Financial Advisors (NAPFA). NAPFA, www.napfa.org, is a national organization that represents fee-only financial advisors. He lectures nationally on topics such as personal finance, investment planning, tax planning and estate planning. Visit his Web site at www.objectiveadvice.com.

0 Comments

FORWARD PRICES
An actual forward price for any asset is a price that be agreed now for a future transaction in that asset. The date of that future transaction defines the period of the forward price.Thus the one year actual forward price for gold is the price that can be agreed today for a purchase / sale transaction of gold taking place in one year's time.The 'fair', 'implied', 'theoretical' or 'arbitrage free forward price' for an asset is that which is determined with reference to the currently existing 'spot' price, interest rates, yield on the asset and other cost items incurred in holding that asset to the forward date. Such an arbitrage free forward price is precisely the forward price that allows no arbitrage between spot price and forward price. To see this examine the following set of data :
At t0 Gold trades at £100 per ounce.
The interest rate on money for one year is 10%
Storing one ounce of gold risk-free for one year costs £1.
The yield derived from holding gold for one year is £ 0.
The arbitrage free forward price for gold is then determined by setting up a cash flow representation in which the arbitrageur buys one ounce of gold today using borrowed money, stores the gold for one year and resells it in one year's time at a price agreed at time 0 making no profit or loss in so doing. In other words the entire transaction must make no profit for the arbitrageur if the forward price agreed at time 0 is to be called an arbitrage free forward price.
t0 t1
Borrow £101 at 10% +101
Repay loan -111.1
Buy 1 ounce of gold -100
Sell gold at forward price +f
Pay storage costs -1
Total cash-flow 0 0
The forward seller of one ounce of gold at a forward price of £f per ounce of gold agreed at time 0 must set his price f such that no arbitrage is possible. In other words the totals of column t1 must sum to zero as shown. (We can see that the totals in column t0 sum to zero since the arbitrageur borrows exactly what is needed to finance the purchase and storage of gold for one period). The only value for f that can satisfy the requirements of column t1 is obviously 111.10 and in agreeing a forward sale of one ounce of gold at £111.10 for one year delivery, no arbitrage profit is possibly.
The process of purchasing and holding an asset until delivery is made into a forward contract is sometimes termed 'cash and carry'. Since the cash and carry procedure here yields no profit, no arbitrageur should engage this arbitrage. Of course the existence of transaction costs would make the process yield an actual loss.
The difference between actual forward prices and arbitrage free forward prices is often very small or non-existent in financial markets. However many traders specifically watch for arbitrages of this kind between the forward market price and the cash market price in many products, for instance foreign exchange. Where actual and implied forward prices differ by a sufficient amount, a profit can be made through cash and carry or 'reverse cash and carry'.
This latter arbitrage is simply the act of selling the asset now and agreeing a forward purchase simultaneously. In our above example, if the actual forward price bid in the market at t0 was £112, a cash and carry trade would yield a £0.90 profit. If the actual forward price offered in the market was £110, reverse cash and carry would yield a profit of £1.10.
There is one assumption here, namely that the trader could borrow the gold to sell at t0 without associated costs. Selling an asset one does not own ('shorting') in a cash or spot market, usually involves some kind of arrangement to borrow the asset for a given period (here one year) for which the asset's owner will usually demand a fee in one form or other. Without having access to the borrowing facility a reverse cash and carry would not be possible. Furthermore, the fee charged for the borrowing facility would have to be included in the calculation of the implied forward price.
Some assets such as bonds yield a return over a given holding period. Gold in contrast offers no return to the holder. Where an asset offers some kind of return, the arbitrageur will have extra cash-flows to take into account in his calculation of the implied forward price.
Let us take the following example ;
Asset is a long bond, current spot price 100% Bond has a running yield of 10% over one year.
Money market rates for a one year loan are 5%
We can now set up a cash-flow representation of the arbitrage procedure as before :
t0 t1
Borrow £100 @ 5% +100
Repay loan -105
Buy bond -100
Sell bond at forward price +f
Receive interest on bond +10
Total cash-flow 0 0
In the above example, the only value of f that produces a value of £ 0 for total cash-flow at t1 is 95. Thus the implied forward price for t1 , bid at t0 , is 95%. A simple forward price formula describes the above procedure;
Fa = Sa (1 + rf - ra )t
Where,
Fa = Forward price of asset a
Sa = Spot price of asset a
rf = Financing rate on borrowed money
ra = Yield on asset over holding period
For our above bond example, the one year implied forward price Fa is :
Fa = 100 ( 1 + 0.05 - 0.10)1
= 100 (0.95)
= 95

FORWARD RATES
The fully arbitraged cash-flow method of calculating forward rates is an alternative to the more simple methods found in elementary treatments of the subject. The elementary method suffers from a problem which can best be highlighted by showing an example of it in action:
One year spot rate = 5% per annum
Two year spot rate = 10% per annum
One year, one year forward rate (F) is calculated as follows :
(1 + 0.05 ) (1+F) = 1.12
1 + F = 1.21 / 1.05
F = 0.1524 or 15.24%
If the forward rate of 15.24% is correct as an arbitrage free rate for the period, then there should be no arbitrage profits available between the two spot rates and the forward rate. However the following arbitrage is possible.
At time 0 ;
Borrow £100 for one year at 5% annual.
Enter one year forward contract to borrow £95 in one year's time at 15.24%
Lend £100 for two years at 10% annual.
Net Cash-flow at time 0 is zero.
At time 1 year ;
Receive £10 interest on two year loan.
Borrow £95 at 15.24% for one year.
Repay £105 on one year loan.
Net Cash-flow at time 1 is zero.
At time 2 years ;
Repay £109.478 on loan of £95 at 15.24%
Receive £110 (repayment of principal and final interest payment on two year loan).
Net Cash-flow is +£0.522
Remaining liabilities and assets are zero.
The arbitrage profit available from the forward rate of 15.24% is £0.522 on the sums transacted. Clearly then the forward rate that was calculated earlier is not arbitrage free.
It is a simple matter now to adjust the 15.24% to a rate that erodes the arbitrage profit of £0.522 to zero. Here, the true arbitrage free rate would have to be such that the repayment of a £95 loan after one year exactly cancelled the receipt of £110 from the two year loan repayment. In other words the net cash-flow at time 2 years would then be zero. The true arbitrage free forward rate must therefore be 15.789%, since £95 borrowed for one year at 15.789% leads to a repayment of £110. The above procedure is termed the 'fully arbitraged cash-flow method' of calculating forward rates. It compensates for the assumption implied in the simple forward rate method described earlier, namely that the first interest payment of 10% received at the end of year one can be reinvested at the same rate of 10% for the second year.
Clearly even the simple forward rate calculation provides a reinvestment rate of 15.24% for the second year and to assume a reinvestment of rate of 10% in the very
same calculation seems contradictory.

ZERO-COUPON DISCOUNT FACTORS
A bond that pays no interest during its life is said to be a 'zero-coupon' bond. This is due to the fact that interest payments on bonds are usually referred to as 'coupons'. In the early days of bond issuance, and in fact to this day, it was common for a bond investor to tear off a perforated piece of the bond paper (a coupon) and return it to the issuer in order to claim the interest due. Those unfamiliar with bonds may wonder why any individual would wish to purchase a bond that pays no interest. The answer is that a bond that promises to repay £100 at final maturity with no coupons in the meantime, will have a market price today of less than £100. If the current market price of the bond were £90, then the investor would know that by holding the bond to maturity he would gain the amount of £10, being the difference between redemption value and price paid for the bond. Now, if such a zero-coupon bond were to redeem in one year's time at £100 and have a current price of £90, one could say that the return to the holder would be :10 / 90 .1111 i.e. 11.11%.
Thus we might say that the yield on a one year zero coupon bond is 11.11%.
By taking a two year zero coupon bond that is priced at 80% of face value (and which repays at 100%), one could say that the return to the holder is ;
20 / 80 = .25 = 25% over the two year period.
The implied yearly rate derived from the two year return of 25% is ; (1.25)0.5 -1 = 0.118034 i.e. 11.8034% per annum.
The rate of 11.8034% per annum assumes that reinvestment of interest if any were paid would occur at this same rate of 11.8034%. In fact since all the return to the holder of a zero-coupon bond comes in the form of capital gain, the reinvestment rate is said to be guaranteed since the capital gain received in place of interest is automatically reinvested at the zero-coupon rate. This is one major attraction of zero-coupon bonds to investors.
Now that we have seen how to calculate zero-coupon rates from zero-coupon bond prices we can develop a further theory of how to determine a fair forward yield.
Notice first however that the price of a zero-coupon bond is determined mathematically as :
P = F (1 + r)-t
P = present value of bond (here this is the theoretical current bond price)
F = Future value of bond at time t (here the redemption value of the bond, 100%)
r = interest rate used in present valuing (here the zero-coupon bond yield)
t = number of periods to the redemption date In our above example ;
P = 100 (1.118034)-2
= 100 (0.8) = 80
The amount 0.8 representing the factor (1 + r)-t in the above formula is of course the discount factor (the amount by which one must multiply the future value in order to arrive at the present value). In this case 0.8 is the two period discount factor. We might easily calculate the one, three, four etc. discount factors given the zero coupon bond prices for each maturity of bond. Conveniently, the discount factor for each maturity would be the percentage price of a zero-coupon bond which redeems at 100. A three year zero-coupon bond trading at 70 would imply a three period discount factor of 0.7. We can now progress to a discussion on forward rates.
A zero-coupon yield curve is derived from a given yield curve of interest rates. In our earlier example of a one year spot rate of 5% and a two year spot rate of 10%, we saw that the one year discount factor was (1.05)-1 which equals approximately 0.952381. We could similarly calculate the two year discount factor as (1.10)-2 which equals approximately 0.82644. But this two year discount factor is not the same as the two year zero-coupon discount factor. The problem here is once again that the two year discount factor of 0.82644 assumes that the first year's interest of 10% can be reinvested at a rate of 10% during the second year, whereas the forward rate for this second period is actually much higher.
The correct discount factor for the second year is the two year zero-coupon discount factor and it can be calculated as follows. Take the below series of cash-flows representing a two year money market loan of £100 where interest payments are agreed to be made annually at 10%.

t0
t1 t2
P +10 +110
P, the present value of the loan, equals £100 in this example. P must also equal the present value of the £10 received by the lender at t1 plus the present value of the £110 received at t2. Now we know that P must equal the amount of £10 received at t1 multiplied by the one year discount factor of 0.952381 plus the amount of £110 received at t2 multiplied by the two year discount factor. In other words,
P = 10 (d1 ) + 110 (d2 )
Where,d1 = the one year zero-coupon discount factor
d2 = the two year zero-coupon discount factor.
We know that d1 is 0.952381 since there is no reinvestment problem to take account of in its calculation, in other words that the discount factor and the zero-coupon discount factor for t1 are the same.Meanwhile, d2 is calculated as follows: since,
P = 9.52381 + 110 d2
and since,
P = 100,
then,
100 = 9.52381 + 110 d2
d2 = 0.82251
So whilst the two year discount factor is 0.82644, the two year zero-coupon discount factor is 0.82251.
Zero-coupon discount factors help us greatly in calculating the arbitrage free forward rate for any given period within the yield curve. In our current example: d1 = 0.952381 and d2 = 0.82251 The arbitrage free forward rate for the period can now be obtained by dividing the one year zero-coupon discount factor (d1) by the two year zero-coupon discount factor (d2) and subtracting one (0.952381 / 0.82251-1 = 15.79%). This result can also be obtained from the zero-coupon forward discount factor for the period d1 to d2, which equals d2 / d1 = 0.82251 / 0.952381 or 0.8636. The inverse of the zero-coupon forward discount factor, minus one, once more provides us with the arbitrage free forward rate for the period t1 to t2 (i.e. 1 / 0.8636 - 1 = .1579 or 15.79%).
These are the same results (ignoring rounding errors) as the forward rate given by the FACF method used earlier. In general, fab = da / db - 1
Where, fab= forward rate for period a to b da = zero-coupon discount rate for time 'a' db = zero-coupon discount factor for time 'b'

THE FUTURES STRIP
Our previous examination of forward rates and spot rates showed that in order for there to be no arbitrage opportunities between any given set of spot rates and forward rates, there should be a distinct relationship between the two sets. In our discussion of yield curves we also saw that traders often compare yield curves of different assets to identify trading opportunities.
Many traders will spend their time deriving yield curves from a set of deposit rates or a set of forward rates or perhaps a set of short term interest rate future prices.
Each set of rates should provide a yield curve of approximately the same shape in order for there to be no arbitrage opportunities. For instance, if a trader creates a yield curve from a set of deposit rates and finds that it is substantially below the yield curve derived from FRA rates, he may be advised to borrow in the deposit market and lend in the FRA market. The process of deriving a yield curve from a set of forward rates is described as 'stripping out' a yield curve from forward rates. Similarly the 'futures strip' is a yield curve derived from the interest rates implied by prices in the short term interest rate futures market. If any of these stripped rates are sufficiently different from deposit rates offered in other money markets for the same periods, the trader may wish to arbitrage the futures strip against that other money market instrument by simultaneously borrowing at the lower rate and lending at the other.

0 Comments

THE FINANCIAL MARKET

The financial market is a market in which individuals and institutions can sell or purchase financial instruments from other individuals or institutions. A distinction is often drawn between wholesale users of the market, usually institutions, and retail users, usually private individuals.

Since the majority of the products referred to in this discussion are denominated in large amounts, both buyer and seller will normally be a wholesale institution. It is important to realize however that activity in the
wholesale market will often be determined by the aggregate of the activities of a large number of retail users who, for example, may have deposited funds for investment with an investing institution. Such an institution might then resort to the wholesale market in order to invest those funds in one lump sum, say a money market deposit.

Whilst an individual purchasing £100 worth of unit trusts is strictly using the financial market our discussion of financial market instruments will revolve around the wholesale market only. Regulation is less stringent here since wholesale users are deemed by the authorities to be professionals, possessing a more advanced
understanding of financial instruments and markets than the layman. For instance, it is not a legal requirement for a wholesale participant in the futures market to warn his counterparty that the value of a future contract can go up as well as down, though to offer a retail investor this product without such a warning is illegal.
One possible list of functions performed by the financial markets, both retail and wholesale, is as follows :
a) To intermediate between investors and borrowers, nationally and internationally. b) To offer means of risk transferral, risk reduction or risk increase, (i.e. risk management). c) To offer investment management services. d) To provide a means of procuring foreign exchange. e) To provide a liquid secondary market. f) To provide corporate services such as trade finance, leasing and merger and acquisition advice. g) To provide government with a means of enacting monetary policy.

INSTITUTIONS IN THE FINANCIAL MARKET
The following is a list of the major institutions operating in the financial market : Commercial banks
Commercial banks are private, or also in some countries publicly owned banks, that deal with business entities, private individuals and other clients principally in taking deposits and making loans. They usually offer a cheque service and 'clear' cheques drawn on or paid into their customers' accounts. Hence the term 'clearing banks' in the UK (and 'money centre banks' in the USA). Such banks increasingly offer their customers products such as trustee and executorship services, life and private health care insurance and estate agency in their efforts to develop a more diversified business income. The process of taking deposits and then lending them out to borrowers is often termed 'intermediation'. The term 'disintermediation' arises in a situation in which borrowers go directly to non-bank lenders in their search for funds. Such may be the case where a corporation raises funds through the issue of a bond or commercial paper instrument
Building societies
Building societies originated as mutual societies and co-operatives where savers would deposit funds that would subsequently be loaned to finance the purchase of (mainly) residential property. Borrowers and savers would all become members' of the society upon borrowing or depositing funds and would have a share in ownership of the society. Hence the term 'mutual' which signifies mutual ownership of the society by its members.

The Central Bank
The central bank of any given country acts as a banker to the commercial banks, the government and publicly owned companies. Usually it is also responsible for the issuance of the State's money and, upon government direction or of its own decision, implementation of monetary policy. The central bank will also act on the markets to purchase or sell domestic currency and government debt and deal with other central banks. In some countries the central bank is given independence of the governing authorities in its decisions as to policy, whilst in others it is the government that has ultimate control in these matters. Finally, the central bank will usually have a responsibility to oversee and regulate the activities of banks that operate in the domestic arena.

The Discount Houses
The function of these houses is severalfold, though their name derives from the fact that their major role is to discount bills issued by government or commercial
organisations. The price of a bill is calculated with reference to a discount rate, hence the name 'discount house'. Commercial banks will place money with the discount houses on which the latter pay interest and use to fund their purchases of bills. Commercial banks in need of funds will withdraw them from the discount houses at short notice. Such funds are usually referred to as 'money at call' with the discount houses since they can be withdrawn at very short notice. In a situation in which there is a general shortage of liquidity, the central bank (here, the Bank of England) guarantees to repurchase short term bills and/or provide unlimited amounts of funds (usually termed 'assistance') to the discount houses. The latter may then meet the demand of the commercial banks for liquidity. This guarantee gives rise to the term 'lender of last resort' that is one of the functions of the central bank. The market in which the discount houses lend and borrow funds is essential to the liquidity of the commercial banks, although for some years now the commercial banks have relied increasingly upon the 'parallel market' for such purposes.
Another name for the parallel market is the 'wholesale money market' in which banks deal not with the discount houses but rather with one another direct (and other non-bank institutions) in their efforts to place or attract funds.

Investment banks
Investment banks' main activities include trading and underwriting of capital market securities. The market in which such securities (bonds or shares, for example) are first issued is often termed the 'primary market', whilst the market in which these banks subsequently trade old issues is termed the 'secondary market'.

Merchant banks
Merchant banks deal primarily with commercial entities in offering trade finance, corporate finance and related services.

Insurance companies
With a long term bias to investment policy similar to that displayed by the pension funds, although with a greater need for liquidity, life insurance companies take the contributions or 'premiums' of those insured in return for specified pay out commitments. The nature of these commitments is very varied but basically falls into two categories, namely 'life', and 'non-life' (or 'general') insurance. The kinds of risk covered by these two basic types of insurance are self explanatory, but a further two sub-sets of life insurance should be mentioned here. These sub-sets are 'whole-life' and 'term' insurance. A term insurance policy simply takes premiums from the insured in return for a pay out of a stated amount in the event that the insured dies within the term of the insurance. Whole-life insurance guarantees to pay out a stated sum in the event of the insured's death, but also pays out a given sum upon expiry of the term of the insurance even if the insured does not die. Whole-life insurance premiums are higher than term premiums. Whole-life insurance can be arranged on a 'with-profits' (or 'endowment') basis, or on a fixed pay out basis. The latter pays a fixed amount at the end of the term whilst the former pays an amount related to the return achieved on the fund's investments.

Investment trust management companies
In contrast to unit trusts, investment trusts are 'close-ended' investment funds, usually in the form of a limited company. Investors are effectively purchasing shares in this company. Once all the shares of the trust have been purchased it is usual that no further amounts will be raised by the trust. The value of the trust's shares can then fall or rise above the net asset value of the underlying investments held by the fund, according to market supply and demand. The investment trust share price is of course quoted regularly for investors to monitor. Until recent years there was a tendency for investment trust shares to trade substantially below the net asset value per share. This feature became known as the 'discount'. Due to several factors, of which arbitrage is a major one, the discount has become far less marked in recent years, though still exists in many investment trusts

Mutual fund (unit trust) management companies
Unit trusts are funds that take investments predominantly from private individuals, and invest them in them in capital market securities such as bonds and shares and other financial instruments such as money market deposits, both domestically and internationally. The unit trust by virtue of having a large pool of funds to invest can insulate its exposure to poor performance on any one investment by holding a large number of individual investments thereby spreading its risk accordingly. Such a strategy (termed 'diversification') may not be available to a private individual with a limited sum to invest, since minimum dealing sizes and transaction costs may make it impossible or very expensive to do so. The unit trust's assets are valued at net asset value per unit on a regular basis, and the value of each unit in the fund is published for investors to monitor. The trust manages funds invested according to the policy of its management company. Any new contributions are invested according to this policy. Hence there are few limits to the amount of contributions which the unit trust can accept, and the fund is thus said to be open-ended. Investors may redeem their holdings at the net asset value quoted (less any charges) by dealing with the unit trust administration company or department, which will then match the sale with a buyer, or liquidate part of its investments to meet the redemption demand.

Pension funds
Such institutions place invested funds on behalf of retail customers and corporate entities predominantly into capital, money and property markets. The returns derived from what are usually long term investments will be used along with the initial investment to provide pension payments or lump sums on retirement to investors. Generous tax provisions (contributions to a pension scheme are tax deductible) encourage their usage. The government has encouraged individuals to opt out of the State Earnings Related Pension Scheme (SERPS) in favour of their own private pension. This policy has been introduced as it appears on current trends that the burden upon government finances of providing SERPS payments will become increasingly difficult to bear in coming decades. One of the principal causes of this problem has been the 'pay-as-you-go' basis on which both SERPS and the basic state pension (payable to all those individuals above the official retirement age) are funded. This means that each year's current pension payments are provided from the tax revenue of the currently employed population.

Hedge fund companies
In recent years the hedge fund has come to prominence as a player in financial markets. The term is usually used to describe activities of leveraged arbitrageurs. A trader that borrows money in order to buy a bond will find that if the bond price rises, he or she can repay all of his borrowing and interest obligation and keep the remaining capital gain on the bond as a profit. Theoretically, the trader's profit as a percentage of his own funds would then be infinite since the trader had no funds of his own to begin with. The trader who borrows to take a position in a financial market instrument is said to have 'leveraged' him or herself. A fund that operates on the same principal is said to be a leveraged or a 'hedge' fund. Such a fund will usually enact arbitrages in large amounts in various financial markets, perhaps by buying a cash instrument and selling a future on that instrument to exploit some pricing discrepancy. In this sense one might say that the fund is hedged since a purchase and sale of similar instruments has taken place. Hence the term 'hedge fund'.

Other users of the financial markets
The following users of the financial markets should also be noted as they play an important part in providing turnover and revenue in a variety of markets. Investment bankers and professional trading houses often refer to the users of their products and services as 'retail' customers and it is important to note that the word 'retail' does not usually refer to private individuals in the earlier sense of our discussion. Along with insurance, hedge and pension funds, and a variety of other users, any of the following institutions could be classified as retail customers for any other professional market trading institution.
a) Foreign central banks
b) Supra-national entities (e.g. World Bank, European Investment Bank)
c) State sponsored and sovereign institutions
d) Local authorities
e) Corporate users
f) Private individuals

CLASSIFICATION OF MARKETS
Financial market instruments can be classified in a number of ways. Sometimes participants in the same market adopt different classifications which can lead to confusion for the outsider. Here are some of the various classification systems that one comes across, listed according to the main differentiating feature.
Time of delivery and settlement
A cash market is one in which the instrument traded is delivered more or less immediately. 'More or less' is a rather hazy phrase usually signifying between one and seven days according to the appropriate market convention. A future of forward market is one in which the delivery of the instrument occurs at some date in the future in excess of the cash market delivery dates.

Type of asset
Some participants will describe the market that they are involved in according to the nature of the asset or liability that is being traded. This classification system gives
rise to an enormous number of categories, comprising all of the possible underlyings that can be traded in any market. Thus traders of gold futures, physical gold
and gold options would all describe themselves as being involved in the gold market.

Derivative markets
A derivative product is one whose price (or rate, where the instrument is rate quoted) is derived from the price or rate of another product or set of products. Hence a gold option is a derivative product since its premium is derived from the price of gold. Traders involved in the derivatives market could naturally be involved in an enormous variety of different underlying instruments since most are capable of supporting several types of derivative product.

Discount and parallel markets
As discussed earlier, banks have access to two main markets for short term funds, these being the discount market and the parallel (or wholesale) money market Participants may classify their activities along these lines when describing their market area.
Primary and secondary markets
The issue of capital market instruments is often said to take place in the primary market, whereas the subsequent trading of such instruments takes place in the secondary market.

Accounting treatment
The accounting treatment applied to the instrument being traded can also form a basis of market classification. In this case, an instrument will either be an 'on-balance-sheet' instrument or an 'off balance sheet' instrument. The former includes any asset or liability that is shown on the holder's balance sheet at the accounting date and includes items such as bonds and shares and physical commodities. The latter term includes items such as swaps that are not shown on the holder's balance sheet at the accounting date. Such off-balance-sheet instruments usually involve contingent liabilities on contracts for differences, and their existence is stated in a set of notes to the accounts. Such accounting treatment may be of vital importance to a bank, for example where a bond purchase will show on the balance sheet and may affect capital requirements, but a swap position gaining a similar exposure to long term interest rates has no impact on the balance sheet and subsequent capital requirements.

Time horizon
Participants may well classify their market area according to the time horizon of the underlying instrument being traded. Typically, traders divide the financial markets into two sectors, namely that dealing with short term instruments where the words 'short term' describe any instrument or contract that redeems within one year of the trade date, and long term signifying instruments and contracts with longer than one year to redemption. Often the short term sector is called the 'money market' and the longer term sector the 'capital market'. The money market includes such underlying instruments as FRA's, deposits and foreign exchange, whilst the capital markets include bonds, shares and swaps. Naturally there is an ambiguity where bonds or swaps with less than one year to maturity, or deposits and FRA's with over one year to settlement are concerned, hence the basic terminology is frequently interpreted in a variety of ways.

On-exchange and off-exchange markets
Here the classification relates to the trading of forward and futures prices. Futures prices are those agreed today for the delivery of a given instrument at a given future date. A futures price is therefore a kind of forward price, since forward prices are also prices agreed today for the delivery of a given instrument at a given future date.
Whilst the word 'forward' is used in the sense quoted above, it is also used in the following context, a context which explains the difference between futures and forward prices.
Futures prices are those agreed in trading on a futures exchange, whilst forward prices (in their second sense) are agreed outside an organised futures exchange.
Thus we have the terms 'on-exchange' and 'off-exchange' markets. An example of a futures market is Liffe (the London International Financial Futures Exchange) whilst an example of a forward market is the FRA market.
The latter has no single geographically located exchange, but operates informally through the use of telephone, telex and fax contact between participants who are located in many different geographical locations. For example, banks in New York, London, Tokyo and other locations, may telephone banks and brokers in London to agree a £ FRA contract.
Those same banks might equally have used the Liffe to gain similar exposures by trading short term interest rate futures contracts. Both products involve the trading of a forward rate of interest but, in the former case, the bank deals in a forward (i.e. off-exchange market) and in the latter case, a futures market (i.e. an on-exchange market).

0 Comments

Traditionally, the term 'money market' comprises the market in short term interest-based instruments and the foreign exchange market. The following are some of the common products encountered.

Bills
Bills are securities promising repayment of a specified amount, the face value, at a specified date, the redemption date.The price paid for the bill implies a rate of return to the holder. This rate of return is expressed not as a rate of interest on the amount paid for the bill, but as a rate of discount from its face value. Major issuers of bills are the government which issues Treasury bills (deemed to be risk free), and companies which issue commercial bills. Any bill which can be sold to the Bank of England in one of its repurchase operations is said to be an 'eligible bill'. When such bills include commercial bills they must be of top credit quality. Eligible bills are very liquid and virtually risk free since the Bank guarantees to buy whatever amount of such bills as are offered it by the discount houses.

Deposits
When an amount of funds is lent to a borrower for a pre-agreed period of time, a deposit is said to have been made by the lender. The length of the deposit is the pre-agreed period of time for which the loan is made and a rate of interest will be charged by the lender, repayable with the amount initially borrowed, on the maturity of the deposit.

FRA's
An FRA (Forward rate agreement) is an agreement made between two counter parties based on the interest rate of a deposit of a given period that begins at a specified future date. An FRA for a period of three months that begins in six months time is described as a 6's 9's FRA, whilst a 2's 4's FRA relates to a period of two months that begins in two months time. There is no physical transfer of cash between the two counter parties, the settlement of the FRA being dependent upon the prevailing market interest rate for a deposit of the quoted length on the specified future date, termed the 'settlement date'. The payer of the FRA rate is the 'taker' and the receiver of the FRA rate is the 'giver'. Should the actual deposit rate at the settlement date be above that agreed on the FRA, the giver will pay the difference between the FRA rate and the actual settlement rate, multiplied by the nominal amount and discounted at the settlement rate. Should the settlement rate be below the FRA rate, then the settlement amount will be paid by the taker to the giver. An FRA is therefore an example of a 'contract for differences', since it is the difference between two rates that is the subject of the FRA trade rather than any actual transfer of funds. For example, a 3's 6's FRA is traded at 10% in $20 million (A gives to B). Say that the FRA relates to a deposit period of 90 days (this being the number of days between the 3 and 6 month date). The money market basis in $'s is Actual/360. On the settlement date (three months from the trade date), the actual rate for a three month deposit quoted in the market is 11%. The settlement amount is calculated as follows:
Difference between FRA rate and settlement rate = 1%
Settlement amount before discounting = 20,000,000 ´ 0.01 ´ 90/360 or $50,000
Settlement amount after discounting = 50,000 / (1 + .11 ´ 90/360) or $48661.80

Short term interest rate futures
An interest rate future is a future contract on any interest bearing instrument. Thus a future contract on a bond is termed a bond future contract, and a future contract on a three month money market deposit is termed a 'three month interest rate future contract' (or sometimes a 'short term interest rate future contract'). Since futures contracts always operate in price terms, short term interest rate future contract prices are quoted as (100 - interest rate %) in order to conform to the standard future market convention. An FRA rate of 10% therefore equates to a future price of 90.00.Since the future is quoted on a given contract value (£500,000 in £), traders will need to trade the appropriate number of contracts in order to achieve their desired nominal exposure.
Thus to locking a borrowing rate on £5,000,000 in a three month deposit beginning in June, a trader will need to trade10 June futures contracts. Since the trader is locking in a borrowing rate he will structure his trade such that it benefits from any increase in rates. An increase in rates will be reflected in the future contract by a price fall. The trader will therefore sell the future contract. Any gain in the future contract trade enacted will then offset the increased interest cost of borrowing incurred under the new higher rate of interest. The future contract trade is therefore said to be a 'hedge' of the underlying borrowing requirement. If the trader's futures contract hedge is a perfect one, then the profit or loss resulting from the future trade will exactly offset the increase or decrease in the actual borrowing rate incurred.

Since the future contract is quoted in percent of nominal, 100% of nominal should represent 100% of contract value. Since contract value in £ is £500,000, 1% of contract value should be worth £5,000 and 0.01% of contract value £50. However, when one examines the value of 0.01% in £ (the so called tick value, being the smallest move that the future price can make up or down), one will see that it is in fact worth only £12.50. This is because the future contract represents a three month period of interest. A trader who buys one contract at 90.00 and sells it at 90.20, will therefore profit by an amount of:20 ticks * £12.50 per tick = £250.00.

Swaps
A swap is an agreement between two counter parties to exchange different kinds of interest payment at agreed dates for an agreed length of time. This length of time is called the term of the swap. Swaps fall broadly into two categories. Firstly, swaps in which interest payments in the same currency are swapped, commonly called 'interest rate swaps', and secondly swaps in which interest payments in different currencies are swapped, commonly termed 'currency swaps'. Each category can be further divided into two further swap types, namely those swaps where the interest payments swapped are both floating rates of interest (called 'basis swaps'), and those swaps in which one of the rates swapped is a fixed rate (called 'fixed for floating' swaps). In 'zero-coupon' or 'bullet' swaps, payments of the fixed rate in a fixed for floating swap are paid in one future valued lump sum at the end of the swap term.
Currency swaps in which payments of the interest obligations on the two currencies are both paid in terms of the same currency are called 'diff' swaps. Asset swaps involve the packaging of a swap with an asset such as a bond, to enhance or change the basis of that asset's yield. A fixed for floating interest rate swap is priced according to the expected market repo rate for the government bond during each period of the swap's life. A currency basis swap is priced according to the related currency swap and fixed for floating interest rate swap.

Forex
Foreign exchange or 'forex' markets allow counterparties to exchange different currencies at market exchange rates. An exchange rate can be seen as the price of one currency in terms of another. There are thus two ways of quoting a forex rate, for example $/£ or £/$. If $/£ = 1.50 this signifies that the number of dollars one receives for one pound is $1.50. If £/$ = 0.66667, this signifies that the number of pounds one receives in exchange for one dollar is £0.66667. The latter amount is simply the inverse of the former and denotes the same exchange rate but in each case the base currency is alternated.
The base currency is the one which appears on the right hand side of the notation, thus for the quote £/$, the base currency is $. Each market has its own convention for which currency to use as the base. In sterling against dollars, exchange rates are quoted as the number of dollars per pound. For other currencies against the dollar, it is the dollar that is the base currency.
A cross rate is an exchange rate that is derived for a currency from two other exchange rates in which that currency is quoted. For example, if DM/$ = 2.00 and DM/£ = 3.00, one can derive the $/£ cross rate as 1.50.This is simply DM/£ divided by DM/$.
A forward foreign exchange rate is the forward price for a given exchange rate determined with reference to the spot exchange rate and the money market rates of interest available in the two currencies. Thus if £ one year deposit rates are 10%, $ one year interest rates are 5% and the spot forex rate is $/£ = 1.50, then the fair forward foreign exchange rate must be $/£1.4318. £1 borrowed at 10% for one year requires repayment of £1.10. The borrower of the £1 can exchange it into $1.50 at the beginning of the period and invest this amount for one year at 5% to produce $1.575. In order for there to be no arbitrage between the money market and the forward foreign exchange market, the forward foreign exchange rate must therefore offer a rate which exchanges $1.575 for £1.10 in one year's time (1.575/ 1.10 = 1.4318). Should the forward exchange rate be lower than this, say $/£ = 1.00, then the holder of $1.575 could exchange this amount for £1.575 at the forward date, repay the loan and interest amount of £1.10, leaving a profit on the arbitrage of £0.475.
Securities borrowing and lending
A security borrowing agreement is an agreement between two counterparties, one of whom accepts cash from the other, that other receiving a security as collateral for the duration of the loan period. Traders may use securities borrowing facilities because :
a) it allows the lender of the security to access liquidity
b) the security acts as collateral for the lender of cash and may result in lower interest charges thereby
c) the borrowing of a security allows the borrower to 'short' that security in the market
d) security borrowing or lending allows uses to build up leveraged short or long positions in the market
e) market-makers in securities borrowing and lending may profit from the operation of a bid/offer spread.

0 Comments

When does Forex trading occur?
The first session, which is the Tokyo Session, begins each week on Monday morning in the Asia-Pacific region which is Sunday evening in the Americas. Trading continues non-stop moving into the London Session and on to the New York Session until all markets close on Friday afternoon.

Is there a central location for the Forex Market?
Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.

Who participates in the FX market?
Central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.

When is the FX market open for trading?
Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.

How fair is the Forex Market?
The Forex market is so large and is composed of so many participants that no one player, not even a large government, can completely control the long-term direction of the market. So, many experts have called Forex the “most level playing field” on earth.

What are the most common currencies in the Forex markets?
The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.

What is Margin?
Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with WPP includes a pre-trade check for margin availability; the trade is executed only if there are sufficient margin funds in your account. The WPP trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.

What are “short” and “long” positions?
Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.

What is the difference between an "intraday" and "overnight position"?
Intraday positions are all positions opened anytime during the 24 hour period after the close of Fx desk of WPP normal trading hours .Overnight positions are positions that are still on at the end of normal trading hours.


How is pricing determined for certain currencies?
The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among
important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.


How can I manage risk?
The most common risk management tools in Forex trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders.

What trading strategy should I use?
Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.

How often can trades be made?
As one might expect, trading activity on any particular day is dictated by current market conditions. Some small to medium size traders might make as many as 10 transactions in a day. By not charging commission and offering tight spreads, Washington Prime Plus Inc. investors can take positions as often as is necessary without concern for excessive transaction costs.

How long a position should be maintained?
Forex traders generally hold positions until one of three criteria is met:
1. A sufficient profit has been realized from the position.
2. A pre-set stop-loss order is triggered.
3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.

How do margin calls work?
A margin call is generated when the equity balance in an account drops below the margin requirement for that size account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.

What is the difference of Forex from Futures?
As a potential investor it is important for you to understand the differences between cash Forex and currency futures. In currency futures, the contract size is predetermined. Futures traders exercise leverage by utilizing Margin to control a futures contract. (Margin is money deposited by both the buyer and the seller to assure the integrity of the contract.)
But with liquidity in mind, the futures market may seem limiting because the data flow comes to a stop at the end of the business day (just as it does with the stock market) thus disrupting your perception of the market. For some traders this could lead to a certain level of anxiety.
For example, if important data comes in from England or Japan while the U.S. futures markets are closed, the next day's opening could be witness to sharp movements..
In contrast to the futures market, the spot forex market is a 24-hour, continuous currency exchange that never closes. There are dealers in every major time zone, in every major dealing center (i.e., London, New York, Tokyo, Hong Kong, Sydney, etc.) willing to quote two-way markets. The size of this market, over one trillion dollars per day gives you near perfect liquidity. Because of the advantages of sheer volume and daily volatility, the excitement of this market is unparalleled.

Liquidity
The spot Forex market is a $1.4 trillion daily market, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the $30 billion per day futures market it becomes clear that the futures markets provide only limited liquidity. The market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.

24-Hour Market:
The forex market is a seamless 24-hour market. At 5:00 pm Sunday, New York time, trading begins as markets open in Sydney and Singapore. At 7:00 pm the Tokyo
market opens, followed by London at 2:00 am, and finally New York at 8:00 am. As a trader, this allows you to react to favorable/unfavorable news by trading immediately. It also gives traders the added flexibility of determining their trading day.
By comparison, the currency futures markets in the United States, such as the Chicago Mercantile Exchange and Philadelphia Exchange, have regulated hours. The CME, for instance, opens at 8:20 am New York Time and closes at 2:00 pm. Therefore, if important data comes in from England or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride.

Execution Quality and Speed:
The futures market is known for inconsistent execution, both in terms of pricing and execution time. Every futures trader has experienced a half hour wait for a market
order to be filled and has been executed at a price far away from where the market was supposed to be trading. Even with electronic trading and limited guarantees of execution speed, the price for fills on market orders is far from certain. This does not happen in Forex market. On the currency trading station, traders execute directly off real time streaming prices. There is no discrepancy between the displayed price and the execution price. This holds true even during volatile times and fast moving markets. In the futures market, execution is uncertain because all orders must be done on the exchange. This creates a situation where liquidity is limited by the number of participants, which in turn limits quantities that can be traded at a given price. Real time streaming prices ensure that market orders, stops, and limits are executed without slippage and/or partial fills.

In the forex market traders must pay a spread and a commission. All traded financial products have a bid (buy) price, and ask (sell) price, with the difference defining the spread, or cost of execution. Up until recently, lack of transparency in the futures market has disguised the spread. Now online trading platforms, which show the depth of the market by including both the buy and sell price, allow traders to see the real cost of the trade. Because the currency market offers round-the-clock liquidity, traders receive tight; competitive spreads both intra-day and night. Futures traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after hours trading.

Many Forex Brokers charge no commission or transaction fees to trade currencies online or over the phone. The over-the counter structure of the currency market eliminates exchange and clearing fees, which in turn lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. All clients have access to deal able bid/ask quotes. In the futures market the prices represent the last trade, not necessarily the price for which the contract will be filled. This lack of transparency hides the true cost of the trade.

In the spot Forex market, traders can see the value of their positions and account equity move up and down with the market in real time. The key information for every account is re-calculated and updated every time the exchange rates change. Traders have immediate access to detailed information regarding every open position, open order, and the generated P/L per trade. Traders also have 24-hour access to full, real time snapshots of their account statement since inception, or on a daily, weekly, monthly or yearly basis. As a trader this means you never have to approximate your account equity or be uncertain in regards to available margin.

Margin / Risk Management:

For the purpose of risk management, traders must have position limits. This number is set relative to the money in a trader’s account. Risk is minimized in the Spot FX market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the dollar value of the account as a result of trading losses. All open positions will be closed immediately regardless of the size or the nature of positions held within the account. If futures market moves against you your position may be liquidated at a loss and you will be liable for any resulting deficit in the account when using Forex Brokers.

0 Comments