Conventional forex trades offer investors the opportunity to buy currencies using low margin requirements. Currency trades can provide investors with huge profits but carry very high risks. Traders can reduce their risk exposure by purchasing forex options. Forex options give the investor the right to purchase one currency using another at an agreed on price for a specific period of time. Investors purchase forex options to reduce risks for other market positions or as a stand alone trade with risk being limited to the premium the investor paid for the option. Forex options are always a call (buy) or put (sell) options and are simultaneous.
Before any new trader enters the forex options market education is absolutely necessary. New forex traders need to learn how major economic factors and current events influence currency markets. An understanding of forex ‘technicals’ is essential for the novice trader. Technicals are short term trading patterns that provide investors clues that will lead to successful trades. Most forex experts recommend that new traders open a practice account to learn how the forex market works. Most brokers offer clients demo accounts and trades in real time can be made using different levels of leverage. Demo accounts offer ‘hands on’ trading with no real money put at risk.
New investors interested in trading forex options need to open an account with a reputable forex broker. In the US forex brokers are strictly regulated by the Commodity Futures Trading Commission. Not all brokers offer forex options so new investors should make sure the broker they select offers forex options. Regular accounts usually have a minimum deposit requirement of around $2,000 but a mini forex account can be opened for as little as $100.
Generally there are two types of options available to investors. Traditional options let the investor buy one currency of a pair with the other paired currency at a guaranteed exchange rate (the strike price) until the forex option expires. Should the currency move in the investor’s favor the investor can exercise the option and the currency can be sold at a profit. Single payment options trading (SPOT) work differently. A spot option allows the investor to predict a currency pair’s movement. For example an investor may predict the euro will move from $1.40 to $1.41 in two weeks. If the prediction is realized the investor receives a payoff. The ability to trade forex options gives investors protection while allowing them to realize huge profits.
Germany Takes Hard Line
German Finance Minister Wolfgang Schaeuble told the widely circulated Bild newspaper that Greece must adopt new and tougher austerity measures as a condition for the approval of the $60 billion aid package. The Athens government has already implemented tax hikes and wage and pension cuts. The austerity measures are unpopular and have prompted strikes and demonstrations. Schaeuble told reporters, “The fact that neither the EU nor the German government has taken a decision (on providing aid) means that the response can be positive as well as negative. This depends entirely on whether Greece continues in the coming years with the strict savings course it has launched. I have made this clear to the Greek finance minister.” On Friday Greece surrendered to market pressure and asked for the loan package from the EU and the IMF. At the present time the aid package is valued at 45 billion Euros ($60.49 billion USD)but some economists say more may be needed.
Greece Will Not Restructure Debt Says Papaconstantinou
In Germany the Greek aid package is a political hotspot and opposition to the aid package runs deep among the German public. Greek Finance Minister George Papaconstantinou is in Washington for talks with the IMF and is negotiating a three year loan plan with the agency. Papaconstantinou said that investors will “lose their shirts” if they bet that Greece will default. He also said the funds will be available “rather soon” and that Greece will not restructure its debt. Papaconstantinou’s words failed to calm markets and the yield on Greece’s two year bond rose 169 basis points to 12.62%. Greece faces the maturity of 8.5 billion Euros ($11.3 billion USD) worth of bonds on May 19th. Any delay in implementing the loan package could cause a selloff of Greek assets and put global markets under pressure. IMF Managing Director Dominique Strauss-Kahn said that the talks will end “in time to meet Greece’s needs.”
Austerity Measures Must be Sustainable
EU governments have indicated they are ready to loan Greece 30 billion Euros and the IMF will provide an additional 10 to 15 billion Euros. Germany’s Chancellor Angela Merkel said Germany is ready to approve the loan package if the Athens government approves more austerity measures. Germany has taken a hard line regarding the Greek aid package which is highly unpopular throughout Germany. The measures are highly unpopular in Greece and have prompted strikes and protests throughout the country. Merkel said the austerity measures must be sustainable. Investor concerns over Concern over sovereign credit risk have pushed the euro and Greek bank stocks lower in global markets and have pushed the cost of insuring Portugal’s debt to record highs.
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Greek Debt Figures to be Revised Upward
The Greek tragedy continues as Moody’s downgraded Greece from A2 to A3 and EU officials say Greece’s debt figures may have to be revised upward. After Moody’s cut Greece’s rating US and European equities fell and sparked risk aversion among investors who sought the safety of US Treasuries. Moody’s downgraded Greece’s rating to A3 just four notches above ‘junk’ status and bond spreads hit record levels. The EU’s statistics agency said that last year’s Greek budget deficit was actually 13.6% of GDP and not the 12.7% estimated by the Athens government. The news sent the euro lower for the sixth straight trading session to $1.3260. Mike Lenhoff of Brewin Dolphin stated, “Today it is a Greek story. The market seems to be pricing in some default or restructuring. The Moody’s downgrade is another part of the saga. Each time we have some sort of announcement and get closer to a resolution, there seems to be another stage to overcome.” In mid day trading the Dow Jones Industrial Average fell 78.97 points to 11,045.95 and the Standard & Poor’s 500 Index was down 9.67 points at 1,196.27. The Nasdaq Composite Index also fell 17.98 points, to 2,486.63. In Europe the pan-European FTSEurofirst 300 closed at 1,083.88 points, a decline of 1.1%.
Greece Likely to Seek Aid
Many economists now believe that the only way Greece can finance its debt is to trigger the EU/IMF loan mechanism. Rising bond spreads are making it difficult for Greece to finance its debt in a sustainable manner. Ben May of Capital Economics, said in a client note, “There seems little hope of a significant fall in yields before the markets see cash in Greek hands. The only way Greece stands a chance of refinancing the 8 billion euros or so of debt that matures in mid-May without paying an exorbitant interest rate will be to put the bailout package in motion as soon as possible.” Austrian Finance Minister Josef Proell said that the Athens government is hesitant to accept conditions attached to the aid package and said that “the time for action is now.”
Austerity Measures Causing Social Unrest
In Athens about 10,000 students and government workers marched to parliament demanding that the government resist further spending cuts and austerity measures putting the Papandreou government in a difficult political position. Also adding to investor fears is the possibility that the German government of conservative Angela Merkel will delay the aid package should Greece ask for help.
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High US Earnings
The US dollar and the yen pared earlier gains after a rise in risk sentiment among investors. Investor demand for riskier assets was prompted by positive US data which pushed US stocks higher and eased fears caused by recent fraud charges brought against Goldman Sachs. Investors remain wary of the euro due to the ongoing Greek debt crisis and a recent statement by European Central Bank Governing Council member Axel Weber who said Greece may require 80 billion euros to avoid default. The amount is far greater than the 30 billion euro aid mechanism approved by EU finance ministers earlier in the month. Lee Hardman of Bank of Tokyo-Mitsubishi UFJ stated, “No one believed that initial amount would be enough to cover Greece’s funding needs. The short-term liquidity risk may be reduced, but that doesn’t resolve the issue of debt sustainability. It’s difficult to see a way out for Greece.”
EU Economy Hammered by Ash Cloud
The Greek debt crisis has been further exacerbated by the transportation faced by European nations due to the massive ash cloud from a recent Icelandic eruption which has sent millions of pounds of ash towards Europe. Airlines report losses of $300 million dollars per day because of the grounding of most flights in Europe. Greece’s Aegean Air is losing 50,000-600,000 euros per day because of the flight disruptions and the airline has cancelled about 60% of its international flights. The disruption of European air travel forced the Athens government to reschedule its meetings with EU, ECB and IMF officials. The Euro Zone economy, which is already fragile, has been adversely affected by the giant ash cloud. The disruption is so serious that European Commission President Jose Manuel Barroso ordered the formation of a group to study the economic impact of the ash cloud. Last Sunday Barroso stated, “The volcanic ash cloud has created an unprecedented situation. I have asked Vice President Kallas to coordinate the Commission’s response and fully assess the impact of the situation created by volcanic ash cloud on the economy, and the air travel industry in particular.”
Euro Zone Will Grow Only 1% in 2010
Euro Zone recovery has been shaky at best and the ash cloud is adding to the euro’s woes in currency markets. According to a forecast by Ernst & Young the euro zone will grow by 1% this year after contracting 4% in 2009. Giovanni Bisignani, director general and CEO of the International Air Transport Association stated, “This crisis is costing airlines at least $200 million a day in lost revenues and the European economy is suffering billions of dollars in lost business.”
Quick Forex Tip: Generally there are two types of options available to investors. Traditional options, which let the investor buy one currency of a pair with the other paired currency at a guaranteed exchange rate until the forex option expires, and single payment options, which allow the investor to predict a currency pair’s movement. The ability to trade forex options gives investors protection while allowing them to realize huge profits.
Greece to Decide Whether to Seek Outside Aid
On Monday the Greek government will begin talks with EU and IMF officials to hash out details of a loan agreement which could provide Greece with loans estimated at 45 billion Euros ($63 billion USD). Greek Prime Minister told reporters, “We will have to make a decision about whether we activate this mechanism in the next few weeks.” Most investors believe Greece will ask for outside aid as high borrowing costs pressure the debt ridden nation. A lack of clarity about how the agreement will work has also sparked investor concerns. Many investors are wondering if the parliamentary approval required to set the aid mechanism in motion will delay the implementation of the loan package. Germany remains opposed to the proposed bailout. Greek Finance Minister George Papaconstantinou said it would take “one week, two weeks maximum” for the EU to implement the aid mechanism. Papaconstantinou also said, “We are quite comfortable that once the framework is in place, meaning the program together with the financing elements, we will be able to move very fast.”
Austerity Measures Unpopular But Necessary
Last month the Athens government implemented several austerity measures and cut the pay of about 600,000 public workers, froze pensions and raised taxes in an attempt to reduce the nation’s debt by a third to 8.7% of GDP. The European Commission said that if Greece taps the aid agreement there should be no need for further austerity measures. Greece’s central bank governor said the country should close several “loss-making and spendthrift” government agencies. Bank of Greece Governor George Provopoulos told reporters, “This is how we will manage to positively please the markets by ourselves, by reducing the deficit by 5 percent (of GDP), instead of the 4 percent we have pledged for in the Stability and Growth Plan.” The austerity measures are unpopular with Greek citizens. A recent poll showed that about half of those polled said their incomes no longer covered their needs and a majority believes that if the government triggers the aid package their standard of living will deteriorate further.
Greece Will Not Default Says Prime Minister
Prime Minister Papandreou said that the loan package was not a ‘bailout’ and will give Greece more time to deal with predicted economic contraction. Papandreou stated, “It gives us the room to maneuver to make the necessary changes to make our economy a viable one.” Greece faces future bond sales in April and May. In Madrid Papandreou said that Greece will not default. Papandreou stated, “We will not default. The problem is the cost of borrowing, and how long we can sustain that. I don’t see a problem even in May, but that doesn’t mean that we have closed the option of using this mechanism.”
Quick Forex Tip: Knowledge of the foreign exchange market, or forex, allows traders and investors to make a profit by trading one currency for another. Those who wish to be involved in the world currency trading market should learn as much as they can about currency exchange and market rates by keeping up with current forex news. The world currency trading market is the world’s largest and about $4 trillion dollars in currencies are traded every day. Because currency markets are open twenty four hours a day, there are incredible opportunities to make a profit.
Risk Sentiment Pushes Dollar Lower
Policy tightening in Singapore and positive performance from technology giant Intel raised risk appetite and helped to push the US dollar and the yen lower in currency markets. The Monetary Authority of Singapore (MAS) tightened policy and revalued the nation’s currency and markets perceived the move by the central bank as an expression of confidence in the economic outlook for the country. Better than expected forecasts from Intel also boosted risk appetite and pushed high yielding currencies such as the Aussie dollar. Robert Ryan of BNP Paribas in Singapore stated, “The dollar is being sold against Asia and that’s extended to the majors. Risk-on is the order of day at least in Asia but I wonder how much the MAS influence will extend into Europe.” The euro gained 0.3% vs. the yen trading at 127.25 yen and the Aussie dollar gained 0.4% to trade at 86.86 yen. Some traders say the move by Singapore has prompted speculation that China may revalue its currency. An unnamed trader at a European bank in Hong Kong said, “What Singapore did this morning just increases the pressure on China because the rationale for Singapore to allow currency strength is similar for why China should de-peg. It’s domestic reasons rather than just external pressure.”
Bernanke to Testify Before Congress
Fed Chairman Ben Bernanke is scheduled to testify before the Joint Economic Committee of Congress about the Fed’s economic outlook. Bernanke is widely expected to reaffirm the Fed’s position of low rates for an ‘extended period.’ On Tuesday the euro fell against most major currencies and investors remain concerned about Greece’s high borrowing costs and flat euro zone growth. Investors remain unsure whether Greece can resolve its debt crisis without outside help from the EU and the IMF. Vassili Serebriakov of Wells Fargo stated, “Even though we had a pretty good Greek auction today, people are still finding few reasons to buy the euro in the medium term. Growth prospects are still quite subdued in the euro zone compared to that of the U.S. That’s what really preventing a strong bounce in the euro.”
Soros Warns of Greek ‘Death Spiral’
At a London event organized by the Economist billionaire investor George Soros warned that the risk of a Greek ‘death spiral’ is very real. Soros pointed out that borrowing costs should Greece seek EU/IMF aid are too expensive. Soros stated, “While it’s better than what the market is currently willing to offer, it’s still rather high. It is a question of solvency. If you start charging very high rates as the market does in anticipation of solvency then that pushes you into insolvency.” Soros also warned that the credibility of the euro and the EU is at stake.
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Investors Demand High Premium for Greek Debt
The euro fell against the US dollar as results of a Greek T bill auction showed that investors still demand a high premium to hold Greek debt. Greece sold its entire allocation of 6 and 12 month t bills but high yields made borrowing costs high for the debt ridden nation. The yields Greece has to pay is significantly higher than those paid at January auctions. Audrey Childe-Freeman of Brown Brothers Harriman stated, “The higher yield confirmed the high risk premium demanded for Greek assets and that has put the euro bears in a stronger position. The euro was already showing signs of fatigue.” On Monday the euro rose near a one month high after a teleconference of EU finance ministers agreed on a rescue package for Greece. The euro pulled back after investors sought clarification about the rescue package. After nearing a one month high of $1.3691 the euro fell back to $1.3587. Ben May of Capital Economics said, “(The auction) does not really change the underlying position that Greece has very tough times ahead, it’s going through a deep recession and that’s going to lead the debt to GDP ratio to surge higher.”
Greece in Stronger Position
European policymakers remain positive about the rescue package for Greece. Ewald Nowotny who heads the Austrian Central Bank and is also a member of the ECB Governing Council said that Greece will have to decide whether to activate the loan mechanism established over the weekend and also said that policies will not be dictated by speculators. European leaders agreed on a 30 billion euro ($40 billion USD) rescue plan on Sunday. Nowotny told reporters, “Greece will go to the markets with debt issues in the near future. One will see how that develops. But Greece is now in a stronger position because we have built up a back-stop position.” Nowotny said that Greece must implement austerity measures energetically and that Greece should use the breathing room provided by the agreement to make structural changes. Nowotny stated, “The aid program is not a gift, it is a loan. It is helping Greece to help itself. The program of the euro zone states and the IMF is also a potent sign that the community of nations does not allow itself to be driven by excessive speculation.”
Other EU Problems Not Addressed say Economists
Markets were positive about the agreement reached by EU finance ministers over the weekend which reduced investor fears of a default by Greece. Some economists remain critical saying that the agreement did not address other problems in the euro zone such as slow growth and other economic problems in the EU.
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Euro Close to 11 Month Low vs. Dollar
The troubled euro fell close to an 11 month low vs. the US dollar last week as rising spreads on Greece’s debt prompted speculation that the Athens government may default. Although Greece has not requested aid from the EU Euro zone finance ministers will hold talks Sunday to work out the details of how a safety net for Greece will work. The European Central Bank and the European Commission will also take part in the talks. A spokesman for Eurogroup chairman Jean-Claude Juncker stated, “There will be a teleconference on Sunday on Greece in the usual Eurogroup composition,. Greece has not asked for help, but you have to be ready if they do”. Throughout the week markets hammered Greek bonds and bank stocks and drove up borrowing costs for the already indebted nation pushing the Athens government to requesting aid.
Papandreou Says Greece May be Forced to Use Aid Mechanism
In a newspaper interview Greek Prime Minister George Papandreou told reporters that Greece may be forced to use the rescue mechanism if markets remain skeptical. Papandreou said, “The question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.” Greece’s Finance Minister George Papaconstantinou told another newspaper that Greece needs clarification on the conditions of the EU/IMF agreement. Papaconstantinou told reporters, “The aid mechanism is a very important safety net. We have repeatedly said that it was crucial to create and detail it, but we hope and believe that Greece will not use it.” Sunday’s EU teleconference will take place at 1200 GMT and will discuss details of the aid mechanism.
Greek Bonds and Bank Stocks Hammered
EU nations have promised to aid Greece if it cannot finance its debt through financial markets and Greece needs to finance 300 billion Euros ($401.2 billion USD)of debt. Markets have not responded and remain skeptical due to a lack of clarity in the EU IMF agreement. 300 billion euro ($401.2 billion) told the Realnews newspaper, “Until now all (bond) issues have been oversubscribed, that shows that despite the turbulence in bond markets there is interest and trust from investors. Our target remains to have better rates and borrowing terms.” EU leaders decided this week that any aid to Greece would be made on similar terms to IMF bailouts. Adding to Greece’s woes was Fitch’s downgrade to BBB-minus, just above ‘junk’ rating and said further downgrades are possible. The effect of Sunday’s teleconference will not be felt until Monday when markets open.
Quick Forex Tip: If you have extensive knowledge of forex markets, you may want to trade forex futures. A forex future is an agreement to buy or sell a specific amount of currencies at a predetermined price on a set date in the future. Essentially those who trade forex futures are hoping to profit from a currency’s future fluctuations.
Yen, Dollar Fall Against Majors
The yen and US dollar fell against most major currencies after Greece employed banks to sell seven year bonds in the first Greek bond sale since the EU agreed on a loan mechanism to aid the heavily indebted Athens government. The announced bond sale sparked a rise in risk sentiment although some experts believe the relief will be temporary. John McCarthy of ING Groep NV I stated, “There’s temporary relief over Greece. It’s also all across the board. The Aussie and kiwi are higher, firmer equity markets, relief over Greece helped pushed the dollar lower.” The yen fell 0.4% vs. the euro trading at 124.56. The euro advanced 0.3% vs. the dollar to $1.3450. The euro has gained ever since the EU IMF deal was announced although details remain unclear. IMF head Dominique Strauss-Kahn said that Greece has not yet asked the IMF for aid and shows no signs of needing IMF aid anytime soon. Strauss-Kahn told an audience in Warsaw, “I hope that the EU strategy for Greece works. We are ready to help Greece as with any of our members but it is not obvious today that help will be absolutely necessary.”
Trichet Says Including IMF Could Damage Euro’s Credibility
Under the deal reached with the EU the IMF would provide one third of necessary funds if a rescue package for Greece is needed with the euro zone providing the rest of the funding. Details of the agreement are still unclear and have yet to emerge. IMF involvement was a condition imposed by conservative German Chancellor Angela Merkel despite opposition by the European Central Bank. Jean Claude Trichet has repeatedly stated that requesting IMF aid could create the impression that the EU cannot manage its own problems and puts the credibility of the euro at risk. Greece has imposed austerity measures including tax hikes and wage cuts and is hoping for a successful bond sale.
Fitch Outlook For Greece Remains Negative
Despite the EU IMF agreement Ftich’s rating for Greece remains negative. Ratings agencies Standard and Poor’s and Moody’s said their outlook on Greece will not be affected by the EU IMF deal. In a statement Fitch said, “The (EU) statement was positive for Greece’s credit profile by enhancing its near-term financing options and flexibility as well as reaffirming the support of euro area member states for economic and fiscal reform in Greece. Nonetheless, the rating outlook remains negative because of continued uncertainty over the medium-term economic and fiscal adjustment, as well as the continuing lack of clarity over the fiscal financing strategy.”
Quick Forex Tip: Generally there are two types of options available to investors. Traditional options, which let the investor buy one currency of a pair with the other paired currency at a guaranteed exchange rate until the forex option expires, and single payment options, which allow the investor to predict a currency pair’s movement. The ability to trade forex options gives investors protection while allowing them to realize huge profits.
Most Predict Dollar Gains
Most currency experts expect the US dollar to continue last week’s gains as concerns about Greece’s debt situation remains. The agreement between the European Union and the International Monetary Fund to provide a safety net for the Athens government has prevented a euro freefall but euro sentiment remains negative among investors. Details of the agreement remain unclear causing investor concern. Some analysts fear that a similar crisis could occur in other EU nations. John McCarthy of ING stated, “Although we have this agreement on a Greece aid package, it is somewhat unclear as to whether it is going to be applied, when is it going to be applied…and the fact is Greece still has considerable debt. What’s to say that we will not go through this again with Greece or Portugal. This is not going away in the immediate future.” Some currency strategists have predicted that the euro could fall as low as $1.30 in spite of the EU IMF agreement. So far the euro has fallen 6.4% in 2010.
Germany Sets Conditions
In early 2010 concerns about the solvency of the Athens government emerged and the euro has remained under pressure since then. Although last week’s agreement decreases the likelihood of a sovereign debt default be Greece some are questioning the stability of the euro. Germany imposed strict conditions and almost one third of all Germans believe that Greece should be asked to leave the EU. Almost 40% in Germany believe that Germany would be better off outside the euro zone. Earlier in the month German Chancellor Angela Merkel said that EU members should help Greece if it is “at the brink of bankruptcy, which it luckily is not at the moment.” Many believe Greece has lived beyond its means and fear the crisis could spread to other EU states. Of particular concern to investors are other debt ridden euro zone members including, Portugal, Italy, Ireland, and Spain.
Concerns About Spain
Spain is of particular concern. Unemployment in Spain is at 20% and Spain’s deficit amounts to 9% of GDP and the nation is expected to take on more debt with bond issues. Many fear that a similar crisis in Spain would be devastating to the euro. Simon Tilford of the Centre for European Reform stated, “Spain is going to pose a big problem. It is in all sorts of trouble about how it will increase growth. It lost a great deal of competitiveness, and costs have gone up. Any economy regarded as having poor growth prospects is going to struggle to borrow at affordable levels.” Some have proposed the creation of a new currency bloc with Germany as the leader and would be composed of mostly northern European nations.
Quick Forex Tip: Knowledge of the foreign exchange market, or forex, allows traders and investors to make a profit by trading one currency for another. Those who wish to be involved in the world currency trading market should learn as much as they can about currency exchange and market rates by keeping up with current forex news. The world currency trading market is the world’s largest and about $4 trillion dollars in currencies are traded every day. Because currency markets are open twenty four hours a day, there are incredible opportunities to make a profit.
