Understanding Foreign Exchange Market: The largest Financial Market

Foreign Exchange Market

Foreign exchange market or forex market is a worldwide decentralized over the counter financial market. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The trading starts at 10 am Monday as Australia Market opens and moves towards west as major financial centers such as Tokyo London, New York opens, finally the market closes on Friday at 5 pm in New York. The foreign exchange market determines the relative values of different currencies. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency, for example if I want to import goods from America then I have to make payment in terms of US dollars so I can exchange Indian rupees with US dollars through foreign exchange market. There is not a particular exchange for forex trading unlike equity and commodity exchanges but foreign exchange takes place through small financial institutions that are operating in different countries. Foreign exchange market is the largest and most liquid financial market with a daily turnover of $3.2 trillion. Foreign exchange trading takes place through spot, future, swap forward and options. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors

Major Currency Traders

All over the world there are various financial institutions that are involved in currency trading, majors being Deutsche Bank having 18.06%  share of total currency traded followed by UBS AG with 11.30%,Barclays Capital 11.08%, Citi 7.69% and JP Morgan having 6.35% of the currency traded. Trading in London accounted for 36.7% of the total, making London by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in New York City accounted for 17.9%, and Tokyo accounted for 6.2%. More than 80% of the currency traded is for speculation purpose for earning profit from currency movement. US dollars is the most traded currency which accounts for 84.9% of daily currency traded followed by Euro 39.1%,Japnese  yen 19%, and pound sterling 12.9%.

Currency Trading

A currency is always traded in pairs, this is because when ever currency exchange takes place you are buying one currency and selling the other that you already hold. There are 6 major currency pairs which accounts for more than 95% of the total currency traded. The major currency pairs are:

EUR/USD: Euro and US dollar

GBP/USD: Pound Sterling and US dollar

USD/JYP:  US dollar and Japanese Yen

AUD/USD: Australian dollar and US dollar

USD/CAD: US dollar and Canadian dollar

USD/CHF: US dollar and Swiss currency.

All these major currency involves US dollars other currency which doesn’t involve US dollars are called minor currency.

Lots: In the past, spot forex was traded in specific amounts called lots. The standard size for a lot is 100,000 units. There is also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively. Currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, one need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let's assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.

USD/JPY at an exchange rate of 119.80 (.01 / 119.80) x 100,000 = $8.34 per pip

USD/CHF at an exchange rate of 1.4555 (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

EUR/USD at an exchange rate of 1.1930 (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

GBP/USD at an exchange rate or 1.8040 (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

. As the market moves, so will the pip value depending on what currency you are currently trading.

Leverage

 It a extremely difficult for small investor like us to trade such large amounts of money. In forex trading your broker acts as your bank. He leverage your account deposit in the ratio of 100:1 and sometimes even 200:1 varying from broker to broker. All he asks from you is that you give it $1,000 as a good faith deposit, which he will hold for you but not necessarily keep. This is how forex trading using leverage works. The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a trade deposit, also known as "account margin" or "initial margin." Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account. No problem as your broker would set aside $1,000 as down payment, or the "margin," and let you "borrow" the rest. Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

PIP

A PIP stands for point in percentage. It is unit of measurement to express the smallest change in value between two currencies. A PIP is denoted by the 4 digit to the right of decimal in a currency pair however in pair involving Japanese Yen a PIP denotes 2 digit to the right of decimal. Every movement in pip in a currency pair involving US dollar  in a position of $100000 denotes $10 of profit or loss.

This is how a currency window looks like. Here the figure shows a currency pair of EURO and US dollar  The first currency in a pair is called base currency and the second is called counter currency. All the selling and buying of currency is done in term of the base currency. For example if are buying a currency pair involving EUR/USD then we are buying EURO and selling US dollar similarly if we are selling a currency pair EUR/USD we are selling EURO and buying US dollars. There is a difference in price that you pay to buy a currency and the price you get in selling the same currency this difference is known as spread this difference in price is kept by your broker as its profit.

Exchange Rate Determination

The exchange rates are determined completely on the principles of demand and supply, value of a currency having greater demand tends to appreciate and depreciates for currency with lesser demand. Besides this the market runs on fundamentals that is any national or international events having an impact on the economy will have a bearing on currency market. The market also runs on sentiments.

Analysis

On the whole a forex market gives us a good trading platform to earn a good return on our investment, since trading on forex market involves high leverage its can give a good return on the same time it can also wipe out your complete investment. Since it is difficult to analyze the changes  in forex market, factors that effects exchange rate, very few people tends to invest in foreign exchange market. Reports are published on daily basis analyzing the movement of market on a particular date so these reports can help you in investing, specially reports published by investments banks are more accurate the best being that of Goldman Sachs. Then you can also study the world economy and economic events in major developed nations as they have great impact on the exchange rate. Ex, right now due to the American debt crisis the demand for US dollars will be less thus the US dollar tends to depreciate in its value, similarly with European economy recovering the demand tends to increase. So if you properly analyze the market forex market can give you greater return than any other market.

                                                                                                

                                                                                                 

Financial Tsunami right ahead: The Fall of Greece

Financial Tsunami Coming right ahead

The Fall of Greece

After three years of struggle and receiving billions of euros as bailout package the Greek sovereign has worsened. Greece is at the edge of the biggest sovereign default and policy makers are worried about global shock waves of an insolvency by a government with 353 billion euros ($483 billion) of debt -- five times the size of Argentina’s $95 billion default in 2001.

There is a monstrously large amount of uncertainty and a massive range of possibilities. A macroeconomic disaster could be averted but only by aggressive policy action by central banks and governments.

After two international-bailout deals, three years of recession and budget-cutting votes that almost cost him his job, Greek Prime Minister George Papandreou says throwing in the towel now would be a “catastrophe.” Potential consequences of a national bankruptcy include the failure of the country’s banking system, an even deeper economic contraction and government collapse.

The fallout may echo the days following the 2008 implosion of Lehman Brothers Holdings Inc. when credit markets froze and the global economy sank into recession, this time with the prospect that the 17-nation euro zone splinters before reaching its teens. The International Monetary Fund, whose annual meetings start in Washington on September 24, reckons the debt crisis has generated as much as 300 billion euros in credit risk for European banks.

Default Risk

Greek two-year yields surged above 70 percent and credit-insurance prices on Greece indicate the chance of default at more than 90 percent. Investors can expect losses on Greek debt of as much as 100 percent.

People, justifiably, think the crisis is what we’re living now: cuts in wages, pensions and incomes, fewer prospects for the young. Unfortunately this isn’t the crisis. This is an attempt, a difficult attempt, to protect Greek and avert a crisis. Because the crisis in Argentina: the complete collapse of the economy, institutions, the social fabric and the productive base of the country.

Even if Greece receives its next aid payment, due next month, default beckons in December when 5.23 billion euros of bonds mature.

 Too Late

It’s too late for Greece, Howard Davies, The Greek situation is tumbling out of hand and Greece will not be able to avoid a substantial default. The introduction of the euro and global financial connections mean previous Greek defaults in the 19th and 20th century, most recently in 1932, don’t provide a decent precedent for a failure to satisfy lenders now.

Contagion will be violent as the price of the two-year Greek note tumbles below 30 cents per euro. The European Central Bank would be the first responders through purchases of government debt.

Greek Banks

The country’s banks, of which National Bank of Greece SA (ETE) is the largest, would be the next dominoes. They hold most of the 137 billion euros of Greek government bonds in domestic hands, a third of the total and three times their level of capital and reserves, says JPMorgan Chase. As those bonds are written down and equity wiped out, banks would lose the collateral needed to borrow from the ECB and suffer a rush of withdrawals that likely triggers nationalizations. No banking system in the world would survive such a bank run.

A hollowed-out banking sector wouldn’t be the only danger to an economy that the IMF says will contract for a fourth year in 2012. Greece will shrink 5 percent this year and 2 percent next year, reversing a forecast of a return to growth in 2012. Unemployment is set to rise to 16.5 percent this year, and to 18.5 percent next year, the highest in the European Union after Spain and dry kindling for potential social unrest. Even after saving 14 billion euros in debt repayments, much depends on what deal Greece could strike with its creditors.

 Large Haircuts

The losses from Greece-related exposures in isolation look manageable, even in a disorderly default scenario with large haircuts, though the ECB would probably require fresh capital from euro-area governments. A debt exchange that was part of the second Greek bailout approved by European leaders in July would impose losses of as little as 5 percent on bondholders. The risk is that the rot spreads beyond Greece as investors begin dumping the debt of other cash-strapped European nations. Portugal and Ireland have already been bailed out, while speculators have also tested Italy and Spain. Italy, the world’s eighth-largest economy, has a debt of almost 1.6 trillion euros, while Spain, the 12th biggest economy, owes 656 billion euros.

Grand Solution

The possible ripple effects explain why policy makers won’t let Greece default. Policy makers would only allow a Greek default if they think they can contain the fallout, which is a dangerous presumption. If Greece, Ireland, Portugal and Spain all impose haircuts, European banks could lose as much as $543 billion with those in Germany and France suffering the most.

Even those figures don’t tell the full story because they omit indirect exposure via derivatives such as credit-default swaps. U.K. and U.S. banks hold such insurance on Greek debt totaling 25 billion euros and 3.7 billion euros respectively. Extend that metric to the whole European periphery and U.S. banks have a 193 billion euro exposure.

Even Worse

Such linkages threaten an “even worse crisis” than the folding of Lehman Brothers, The amount of outstanding debt is more than with Lehman and we don’t know the amount of derivative exposure.

Governments must create a fund to inject capital into banks as the U.S. did with its $700 billion Troubled Asset Relief Program.

If banks fail, or if they fear big losses, they will stop lending. As things stand today, a credit crunch will corset euroland and a depression will ensue when Greece fails and takes out euroland’s banking system.

G-20 Signals

Signaling efforts to contain the crisis, European officials including French Finance Minister Francois Baroin yesterday said they may be willing to use leverage to boost the firepower of their 440 billion-euro bailout fund. Group of 20 finance chiefs said after talks in Washington late yesterday that European authorities are willing to “maximize” the fund’s impact by the time the group next meets Oct. 14-15.

The ECB may also intensify its own attempts to support growth and ease financial market tensions as early as next month. Potential measures include the reintroduction of 12-month loans to banks. A disorderly Greek default with spillover into Spain and Italy could mean the euro-area contracts 1.3 percent in 2012, using the Lehman Brothers episode as a benchmark.

Rebounds

After shrinking 10.9 percent in 2002 following its decision to default and devalue, Argentina’s economy grew eight years straight, exceeding 8 percent in every year aside from 2008 and 2009. Russia was growing in double digit just two years after defaulting on $40 billion of local debt in 1998.

In contrast, facing only hard choices, EU officials have taken half-measures in the hope that the situation would somehow turn around. What they have done so far is a patchwork approach, Now things are much worse. It’s becoming more expensive not only in economic terms but also in social terms for Greek citizens because now there will be redundancies, now there will be more taxes there will be less jobs and things will get worse.

If Greek defaults the contagion will soon spread to other Euro zone countries and the systemic risk will be beyond measures.  It’s certain that Greek has to default and it will default soon. If central banks and government fail to manage the ripple effect it would be impossible to survive the financial tsunami coming ahead. 

Rupee posts biggest weekly fall in 15 years

RBI Intervenes the Forex Market by selling Dollars

The rupee posted its biggest weekly fall in more than 15 years on Friday on heightened risk aversion amid the possibility of a recession in the developed world, even as it rebounded from a 28-month low on suspected intervention by the central bank.

Traders said the rupee will not be able to stay strong as growing concern about the impact of a possible Greek default on the banking sector will negate any move by India's central bank to support the unit.

"Rupee's loss is more than what is warranted when compared with gains in the dollar index. But we could see rupee hit 50.50 if the index touches the level of 80.

The Reserve Bank of India has not intervened in a big way in the currency markets, unlike most of its emerging Asian peers, because it can ill-afford to expend a limited and fragile holding of foreign exchange reserves.

That reluctance to intervene is just one of the factors that sets the RBI apart. It also is currently the most hawkish in the region, waging an expensive and tough war against inflation, while most of the world frets about slowing U.S. growth and a European debt crisis. A persistent current account deficit and realization that an uncertain global environment is bound to keep markets volatile are reasons the RBI is loath to intervene in a big way, spending its small pool of dollar reserves. While many Asian central banks including South Korea, Indonesia and Philippines have been spotted selling dollars to protect their currencies, the RBI has put up only a token show, with some minor intervention in recent weeks.

India's partially convertible rupee has been the worst performer among major Asian currencies -- so far in 2011, losing nearly 12 percent of its value since touching its 2011 high of 43.855 against the dollar on July 27. Intervention depends upon the pace of volatility. But the threshold for volatility also changes with the situation. Look at how the euro has been behaving, how gold, U.S. Treasuries have been moving. If all asset classes are so volatile, then the tolerance level will also rise.

The rupee has weakened nearly 7.2 percent against the dollar since late August, on heightened concerns over European sovereign debt and a likely Greece default. The euro has fallen on most days since Aug. 29, 7.3 percent down in the period and touched a seven-month low of $1.3499 on Sept. 12. In the same period, the key Asian currencies -- Korean won, Indonesian rupiah, Philippine peso have fallen between 1 percent and 10 percent.

UNDERVALUED

The RBI's modest approach would be understandable if they were keeping the rupee stable in trade-weighted terms, but that is not the case. The rupee has been increasingly undervalued in nominal trade-weighted terms.

However, this approach is not new. Its forex policy has by definition been hands off. Asia's third largest economy has reserves that are merely a tenth of the size of mighty neighbour China's. Because India runs a trade deficit, the reserves also comprise a pool of borrowed money that can dwindle quickly should foreigners pull short-term investments away from the country.

Still, many traders and economists are now questioning the wisdom of sticking to that practice amid high inflation, a large trade deficit and heightened uncertainty across currency markets. Downside pressure remains strong, and one-off intervention may not be enough in an environment of growing contagion risks. This begs the question of whether an increase in the frequency and magnitude of RBI intervention is likely.

The RBI was last a net seller of dollars in April 2009, when the Lehman crisis weakened the rupee, and any intervention since then has always been aimed at checking a rise in the local unit. But the biggest impediment to dollar sales is the country's current account deficit, a stark contrast with its Asian peers such as Indonesia, South Korea and Taiwan, all of whom are running current account surpluses.

There is an asymmetry when a central bank buys dollars to intervene and when it sells dollars to intervene. When you are selling dollars, you are losing the country's FX reserve, which is not a very comfortable thought given that we are a current account deficit country.

In the face of foreign fund outflows and India's trade deficit, the RBI's absence from the FX market has only fuelled investor pessimism towards the rupee. India's current account deficit in January-March narrowed to $5.4 billion from $12.8 billion deficit a year earlier, but the global slowdown could hurt exports, widening the deficit again. A wider current account deficit would put pressure on the country's ability to buy oil which is by far the largest component in India's import bill.

INFLATION AND INTERVENTION

Though the RBI maintains that it will never use the foreign exchange rate to contain inflation, selling dollars to arrest the rupee's current sharp drop has the added attraction of helping to ease imported inflation.

India's big state oil companies last week raised the price of petrol by nearly 5 percent.

"Yes, the petrol prices were raised because of the rupee depreciation and not due to any rise in global oil prices and that will have an impact on inflation". But any impact on inflation due to intervention will be incidental and not our objective.

India's inflation has stayed over 9 percent for the last four months and persistently above the central bank's comfort zone of 4.0-4.5 percent despite the RBI's aggressive 18-month rate tightening cycle. It is a sentiment spiral that started in August and I don't think the rupee will turn around unless there is some positive development globally.

Quantative Easing and its effect on Financial Market

Quantative Easing

Quantitative easing (QE) is a monetary policy tool used by some central banks to stimulate their national economies when conventional monetary policy has become ineffective. The central bank creates money through open market operations, such as buying government bonds and other financial assets, in order to increase the money supply and the excess reserves of the banking system.  Quantitative easing shifts monetary policy instruments away from interest rates, towards targeting the quantity of money. The term Quantative easing came into lime light when the US Federal Reserve announced two successive measures on March 18^th 2009 and November 2010 so as to boost the ailing US economy from the subprime crisis and the worst  recession since the great depression of 1930’s. 

US Federal Reserve is the central bank to United States created post 1907 market crash in 1913 to ensure safe and sound financial system. The main aim of the Fed is to review monetary policy aiming at providing maximum employment and price stability for a healthy economic growth. At present Ben Bernanke is the chairman to the US Federal Reserve. Post Lehman Brother Bankruptcy in September  2008 there was a complete financial meltdown with credit market freezing all over the world, we saw not only financial giants like Washington Mutual failing but also countries like Ireland and Iceland went bankrupt. With US economy on its knees the US Federal Reserve planned out a $720 billion bailout to save the American economy. With unemployment  rising Fed came out with a stimulus package called Quantative Easing plan on 18^th May 2009 to bring back US economy on path of positive growth.The first round of Quantative easing came with a stimulus package of $1.7. But it did not prove much useful to the economy, the unemployment level went from 7.2% to 10.4 % in September 2009. The US dollar depreciated by more than 11% within few months, though there was some positive sign in the equity market and again a rising equity market does not portray the real picture of the economy. Even it had very less effect on the commodity market as investors remained cautioned on investing in commodities and with demand of goods falling, commodities were trading at their lowest point. The demand for crude oil was falling and so was the price though there was some uptrend seen in the gold with gold trading in the range of $700-$930. There were several other factors responsible for soaring of gold prices such as sovereign crisis and unstable equity market people were finding gold as safe heaven for investment purpose.  On the whole QE1 failed to achieve its objective.

With unemployment rate soaring in double digit Bernanke came with QE2 on November 2010 , a stimulus package of $600 to further strengthen the US economy.  There was lots of uncertainty created across the globe as many feared that QE2 will further depreciate dollar creating a currency war with other large economies. A depreciated dollar will increase the commodity price in the world market, China feared the most of the negative impact QE2 would have on the export competitiveness , similarly with excess liquidity flow in emerging market asset could cause significant inflation in recipient countries. From here we would try to analyze the real effect of QE2 on various financial market across the globe.

Implication of Quantative Easing 2

QE consists in creating money and purchasing government debt or other financial assets to add liquidity to the markets with reduced long term interest rate. As a result of QE the government has managed to bring back the positive GDP growth while the private sectors are still weak and contracting. Now i ll discuss the implication of QE on various sectors.

Increase Liquidity: The most immediate effect of QE is an increase in the liquidity of the overall financial system. Private banks and institutional investors have re-directed the cash received into lending to private businesses or individuals. Alternatively, they focused on acquiring assets in emerging market there by making profit by generating revenues on investment made in emerging economies. They also gained from the predictable appreciation made by local currency against the US dollar. China has blamed US of devaluating dollars through QE so as to increase its Global competitiveness. This can also have a negative implication on emerging economies in the form of soaring inflation.

Equity Market: In November 2010 Ben Bernanke said that "Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."  He successfully attained this goal as US stock market has outperformed major economies and even developing BRIC nations in past few months till may 2011 though the 3.4% gain this year is still lagging behind its long term historic pace. However the market is falling since 5 consecutive weeks, its longest fall since 2004 pulling down the S&P index by 5% and with increasing unemployment there are further chances of market making a correction by another 5% in coming weeks. 

Unemployment: The main main reason behind these QE was to generate employment  in turn strengthen the economy  but after some initial success again the unemployment rate is on a rise since two weeks and with new regulations imposed by Fed on financial institution there are chances that major investments giants such as Goldman Sachs, JP Morgan, Bank of America and Morgan Stanley might go for layoffs so as to reduce their operating cost. Increasing unemployment rate can hamper US recovery and can further pull down the equity market.

Housing: Ben Bernanke aimed at increasing the house prices through QE but after some initial positive signs the demand is falling and the housing prices has reached its minimum level since 2005 and there are very little chances of any recovery in near future, Thus we can see that QE2 has failed even at pulling the economy out of housing crisis.

Interest Rates: Ben Bernanke has mentioned that by the use of QE he tends to lower interest rates and help the housing sector and mortgage lending.  From March 18, 2009 to May 18, 2011, interest rates have risen on the 10-year Treasury from 2.62% to 3.17%, a 20% increase. Despite that the public debt has increased by 30% during the period, interest rates have nominally increased about 1% from the record lows in the 10-year Treasury hit during the financial crisis. While the Fed hasn't been successful in lowering interest rates, it has been able to contain a sharp rise in them by buying more of a third of the mammoth amounts of debt that are being offered to the market by the US government. The expected fiscal deficit for this year totals $1.5 trillion, 9.8% of GDP and an increase of 10% of the US public debt. With QE part two ending in June, one would expect that interest rates should start to rise as the market will lose one of its principal debt buyers. 

Commodity Market: QE has has influenced global commodity prices, dollar depreciation has pushed the commodity prices. Until 2004, the correlation between commodity price and the exchange rate was negative. This was because US economy slowdown would normal cause both the dollar to depreciate and the dollar price of commodity to fall. In recent years, commodity demands have been driven by large developing countries. Under the circumstance dollar depreciation, unlike the pat, has been associated with the increase in commodity price. In 2009, the dollar price of oil and copper appreciated 1.2% while the dollar depreciated 1%. With Fed holding a large chunk of US bond, it reduces the supply of safe investment asset for global institutional investors, reducing the US bond circulation in the market and low interest rate prompted global institutional investors to investment  in other financial market, commodity market attracting some investment. Traditionally , investing in commodity market has been a popular as a mean of hedging against inflation. High inflation brings down the return in bond and stock market, commodity future tends to do better in times of inflation. There was seen a sharp rise in the commodity price since 2009 when QE1 was announced, Gold gaining the most showing a rise by 80% in two years a rise from $800 to $1530 per ounce. Other precious metal such as platinum gained too. Overall it was the commodity market that gained the most from QE with commodity price soaring to new heights.

Forex Market : To fund QE Fed has to print notes, this increased the supply of dollar in the market there by depreciating the dollar in term of other currency.  This will help US in recovery as a depreciated currecy increases the competitive advantage in the world market but on long term it can boost inflation.

Overall QE1 & QE2 has helped US recover from deep recession of 2008 but the outcome has been much less than expected and the US finds itself at the same situation as it was a year earlier with stock market falling and unemployment rising.

QE3 at the Corner

With QE2 coming to an end in June 2011 there are negative signs from the Fed of a possible QE3 however Bernanke also hinted that if economy growth remain sluggish than the Fed might go for QE3. End of QE2 will hamper Fed goal of keeping interest rate low. Low interest rates makes credit cheaper promoting people to borrow, helping in increasing home prices. With US borrowing limit coming to an end and congress demanding to reduce deficit and chances of a possible US default on its payment  there are very little chances of QE3 moreover QE3 can have a catrostrophic effect starting with high inflation. 

With no further quantative easing in sight, the effects are already visible. The most effected will be commodity market as the price are likely to come down. The most effected will be gold price, since 2009 when QE1 was announced gold has seen an uptrend with prices rising from $700 to $1540. Since recession there have been several factors caused soaring of gold prices. The sovereign crisis and inflation in major developing nation, gold has attracted the investors the most. Even though other factors are still the same, the end of quantative easing will surely bring down the gold prices.  Similarly prices of other  precious mental and other commodity will also fall. The price of pulses, soybean has also been on rise post recession, the commodity future has given return as high as 36% , but soon these growth rate will ease off. 

On the whole the return from quantative easing has been much less. Bernanke in an interview said that the Japanese Tsunami  has been the major cause for downfall of market since May and the second half should see a growth pick up. He further added that there are very less chances of QE3 because a further stimulus can cause serious problem of inflation however the Fed will continue to keep the borrowing interest rate at 0.25%  to boost economic growth.

                                                                                           

Tips for getting a job as Investment Banker

Investment Banking Interview Prep.

Landing a job in Investment Banking

An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities, and equity securities.

Unlike commercial banks and retail banks, investment banks do not take deposits.

There are two main lines of business in investment banking. Trading securities for cash or for other securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) is the "sell side", while dealing with pension funds, mutual funds, hedge funds, and the investing public (who consume the products and services of the sell-side in order to maximize their return on investment) constitutes the "buy side". Many firms have buy and sell side components.

An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.

Career as an Investment Banker

An investment banking career provides great challenge, a chance to learn the ins and outs of corporate finance, and develop analytic skills that are useful in any business field. Investment bankers, with firms such as Goldman Sachs, Blackstone Group and Morgan Stanley,  HSBC, BNP Paribas, Barclays act as a link between the corporate world and the investor, whether an individual or an investment fund. This sector offers excellent job opportunities for hard working finance students and professionals who are ready to face the challenges provided by globalization and consolidation.

Before going for an investment banking jobs interview, be sure that you have done your homework and can respond to the toughest questions that aim to judge your analytical and other skills and your attitude towards risk. Count on the standard questions like, your greatest strengths and weaknesses and “tell me about yourself.” Beyond those types of question, there are some questions commonly asked in an interview for an investment banking job.

Investment Banking Job Interview Questions

1.     Why investment banking? Why do you want to work at our bank?

In your response, highlight that investment banking is a very competitive and lucrative area, offering tremendous growth opportunities. Talk about the latest industry trends and how they impact businesses in the bank’s specialty. Talk about the opportunities presented recent mergers and acquisitions and the challenges due to by the sub prime crisis. Has Lehman Brothers responded appropriately? What are your thoughts on JPMorgan and Bear Stearns? Be prepared to discuss the firms on the front page of today’s Wall Street Journal.

You need to convince the interviewer that you have the necessary drive, capabilities, and personality best suited to become a successful investment banker. Gaining the trust and respect of the recruiters is very important for cracking these interviews. Talk about the company’s position in the industry and how it differs from that of other Wall Street listed firms – both bulge bracket and boutique.

2.     What value is our stock trading at? Trading volume compared to bulge bracket firms.

Before going for an investment banking interview, go through the financial profiles of the bulge bracket firms and identify the highlights. Be aware of the rankings of the investment banking firms in various segments, such as advisory services or asset management. Stock movements are often a reaction to the latest happenings and have less to do with the company’s fundamentals. Study the recent stock price movements and be ready to answer questions related to a sharp movement in the share price or jumps in trading volume.

3.     Walk me through the high points and low points in your resume. What were your greatest accomplishments and challenges?

Communication, leadership, problem solving, and working under pressure are the key skills in an investment banking job. You should highlight that you are flexible enough to adopt new styles and methods of functioning, while being willing to work as part of a bigger team.

Talk about your core competencies and how you used them to achieve measurable results at a previous job or during your education. Discuss your failures, how you handled the situations, and what you took away from them. Whenever possible, talk about deals you’ve participated in. There are few things than interest an Associate or Senior Vice President more than deals.

4.     Describe some risks you’ve taken. How did you make the decisions?

An investment banker’s job often involves tough decisions, keeping in mind the political changes, various macroeconomic variables and the market trends. The ability to take risks is important. You need to demonstrate adequate analytical skills and how they were used in managing risk associated with a particular deal. You should highlight the logical assumptions and calculated guesses made by you while undertaking a risky project or decision. In an investment banking career, it is often more about being “roughly right” than “precisely inaccurate.”

5.     Describe an ethical decision you had to make.

Ethics, trust and integrity are often challenged in an investment banking job. Look at the sub prime crisis, the near collapse of the mortgage giant, Fannie Mae, and the restatement of financial accounts of several investment banking firms in recent years. It is often unethical (or even unlawful) practices that are the main contributors to situations like these. Discuss an instance when you had to make an ethical decision – what did you take into consideration? How did you finally come to a decision? These are insights into how you work and what the firm can expect from you in tough situations.

6.     Why should we hire you?

Be ready for this one. Be confident but not cocky. Highlight that you are the right candidate because you can hit the ground running and are flexible enough to move with the changing environment. As Lehman Brothers puts it, the core competencies essential to an investment banking career are: problem solving ability, professional attitude with willingness to adapt and remain flexible, leadership and communication abilities, resourcefulness and the drive to succeed.

7.     When you are not working, what do you do?

Investment banking jobs involve long hours and a lot of hard work – there are simply no two ways about it. That does not mean that firms want to hire people without a personality and other interests outside of work. Highlight activities you enjoy that demonstrate risk taking, recharging and an outgoing personality. Let you personal life reflect what investment banking firms are looking for.

8. How much do you read? What do you read?

The types of books and magazines you read reflect your personality and highlight your passion for the industry and the finer things in life (why else take an investment banking job?).The Wall Street Journal and your industry specific trade magazines must be on your list. Also include other readings that show you are not one dimensional in your interests.

9. Do you learn more from success or failure?

Your attitude toward both success and failure could be the difference in determining whether or not you get an investment banking job offer. Deals flop, it’s part of the investment banking game. Discussing how you do a quick post mortem and lessons learned discussion, then move on to the next deal is the best approach. Learning from but not dwelling on the past is the key.

10. What questions do you have?

Count on this one and have several pointed, challenging questions prepared. Ask about the firm’s growth strategies and particular specialties. Discuss a recent news report about a particular deal done or lost. Don’t be afraid to ask a personal question of the interviewer as well; nothing offensive but something but, rather, something that prompts them to think about their own investment banking career choices.

If you’ve landed an investment banking job interview, being prepared for these questions should put you on solid ground and get you one step closer to the offer you are looking for.

If you would like to find an investment banking job opportunity, you could look at the numerous investment banking jobs available. You can do this by browsing sites like Job Search Digest. You can also get in touch with leading executive search consultants for details of current

Best of Luck