Financial markets Tahira Jaffery

Currency markets Equity markets (Pakistan – KSE)

Major players in the currency market Central banks Banks Dealers Brokers Speculators Other financial institutions

FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders. Shift of trade volume has been towards financial institutions (1/2 of transactions are inter-bank), but share of others has been increasing. At the end of each business day in Asia, traders pass their open currency positions on to their colleagues in Europe, who – at the end of their business day – pass their open positions on to American traders, who just begin their working day and pass positions on to Asia at the end of their business day. And there, the circle begins anew. This makes FX truly global and very liquid.

Concepts in currency trading Market maker Price maker Price taker Spot Market Rollover Exchange Rate Currency Pair Base Currency Counter Currency Rollover A spot transaction is generally due for settlement within two business days (the value date). The cost of rolling over a transaction is based on the interest rate differential between the two currencies in a transaction. If you are long (bought) the currency with a higher rate of interest you will earn interest. If you are short (sold) the currency with a higher rate of interest you will pay interest. Most brokers will automatically roll over your open positions allowing you to hold your position indefinitely.

ISO Currency Codes USD = US Dollar EUR = Euro JPY = Japanese Yen GBP = British Pound CHF = Swiss Franc CAD = Canadian Dollar AUD = Australian Dollar NZD = New Zealand Dollar

Currency Pair Terminology EUR/USD = "Euro" USD/JPY = "Dollar Yen" GBP/USD = "Cable" or "Sterling" USD/CHF = "Swissy" USD/CAD = "Dollar Canada" (CAD referred to as the "Loonie") AUD/USD = "Aussie Dollar" NZD/USD = "Kiwi"

BID/OFFER Spread Pip size The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY. Pip value

Margin Leveraged position Indirect quote Direct quote A foreign exchange rate quoted as the domestic currency per unit of the foreign currency. The foreign currency is fixed, while the domestic currency is variable USD/PKR 84.45 Indirect quote A foreign exchange rate quoted as the foreign currency per unit of the domestic currency. PKR/USD 1/84.45 = 0.1184

Exchange rate determination PPP theory The PPP derives from the assumption that in the world there exists the "law of one price". This law states that identical goods should be sold at identical prices. Assumptions Perfect arbitrage No government intervention Fluid movement of goods with little or no transportation cost.

Balance of payments Approach The idea is that there exists an exchange rate at which there exists internal and external equilibrium The internal equilibrium assumes that there is full employment: unemployment is in the natural rate of unemployment. The external equilibrium refers to equilibrium in the balance of payments. Very difficult to assess equilibrium levels.

Cross rates Currency pairs that do not involve USD are called cross rates.

Cross rate calculation Y140/$ DM1.5/$ (Order is the same ) 140/1.5 = Y93.333/DM (Order not the same) $/DM 0.666 140*0.666/DM = Y93.333

Currency swaps An arrangement between two parties to exchange a given amount of currency with another and to give back those currency with interest in the future. Types . . . What are the benefits??

Currency scandal Pakistani currency was already onslaught with external pressures Speculation Hawala and hundi bypassing legal channels, billions of dollars flowed out of Pakistan worsening the exchange rate Exchange dropped from 60 to 84.5 Travellers allowed $10,000 when travelling.

Stock Markets Indexes KSE 100 KSE 30 All- share index KMI -30 Index ss

Sectors in KSE Open-end Mutual Funds 19 Oil & Gas Marketing Companies 2 Close-end Mutual Funds 20 Oil & Gas Exploration Companies 3 Modarabas 21 Engineering 4 Leasing Companies 22 Automobile Assembler 5 Investment Banks/Securities Cos. 23 Automobile Parts & Accessories 6 Commercial Banks 24 Cables & Electric Goods 7 Insurance 25 Transport 8 Textile Spinning 26 Technology & Communication 9 Textile Weaving 27 Fertilizer 10 Textile Composite 28 Pharmaceuticals 11 Woollen 29 Chemical 12 Synthetic & Rayon 30 Paper & Board 13 Jute 31 Vanaspati & Allied Industries 14 Sugar & Allied Industries 32 Leather & Tanneries 15 Cement 33 Food & Personal Care Products 16 Tobacco 34 Glass & Ceramics 17 Refinery 35 Miscellaneous

KSE CRASH 2008 and 2009 Karachi Stock Exchange Crisis April 20 : Karachi Stock Exchange achieved a major milestone when KSE-100 Index crossed the psychological level of 15,000 for the first time in its history and peaked 15,737.32 on 20 April 2008. Moreover, the increase of 7.4 per cent in 2008 made it the best performer among major emerging markets.[3][4] May 23: Record high inflation in the month of May, 2008 resulted in the unexpected increase in the interest rates by State Bank of Pakistan which eventually resulted in sharp fall in Karachi Stock Exchange.[5][6] July 17 :Angry investors attacked the Karachi Stock Exchange in protest at plunging Pakistani share prices.[7][8] July 16 : KSE-100 Index dropped one-third from an all-time high hit in April, 2008 as rising pressure on shaky Pakistan's coalition government to tackle Taliban militants exacerbates concern about the country's economic woes.[9]

August 18: KSE 100 Index rose more than 4% after the announcement of the resignation of President Pervez Musharraf but Credit Suisse Group said that Pakistan's Post-Musharraf rally in Stock Exchange will be short-lived because of a rising fiscal deficit and runaway inflation.[10][11] August 28 :Karachi Stock Exchange set a floor for stock prices to halt a plunge that has wiped out $36.9 billion of market value since April.[12] December 15: Trading resumes after the removal of floor on stock prices that was set on August 28 to halt sharp falls.[13]

World Financial crisis What were the makings of it. What happened World Financial crisis What were the makings of it??? What happened? Bailouts? shou