Question

Describe in brief the following concepts;
1. The Bretton woods system
2. Technical Analysis in FOREX trading
3. Uncovered interest Arbitrage
4. International short-term Investments
5.currency portfolio

Answer 1

1. The Bretton woods system

The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Thus, the name “Bretton Woods Agreement.

Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods System effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.

Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. The Bretton Woods Agreement and System were central to these goals. The Bretton Woods Agreement also created two important organizations—the International Monetary Fund (IMF) and the World Bank. While the Bretton Woods System was dissolved in the 1970s, both the IMF and World Bank have remained strong pillars for the exchange of international currencies.

Though the Bretton Woods conference itself took place over just three weeks, the preparations for it had been going on for several years. The primary designers of the Bretton Woods System were the famous British economist John Maynard Keynes and American Chief International Economist of the U.S. Treasury Department Harry Dexter White. Keynes’ hope was to establish a powerful global central bank to be called the Clearing Union and issue a new international reserve currency called the bancor. White’s plan envisioned a more modest lending fund and a greater role for the U.S. dollar, rather than the creation of a new currency. In the end, the adopted plan took ideas from both, leaning more toward White’s plan.

It wasn't until 1958 that the Bretton Woods System became fully functional. Once implemented, its provisions called for the U.S. dollar to be pegged to the value of gold. Moreover, all other currencies in the system were then pegged to the U.S. dollar’s value. The exchange rate applied at the time set the price of gold at $35 an ounce.

Benefits of Bretton Woods Currency Pegging

The Bretton Woods System included 44 countries. These countries were brought together to help regulate and promote international trade across borders. As with the benefits of all currency pegging regimes, currency pegs are expected to provide currency stabilization for trade of goods and services as well as financing.

All of the countries in the Bretton Woods System agreed to a fixed peg against the U.S. dollar with diversions of only 1% allowed. Countries were required to monitor and maintain their currency pegs which they achieved primarily by using their currency to buy or sell U.S. dollars as needed. The Bretton Woods System, therefore, minimized international currency exchange rate volatility which helped international trade relations. More stability in foreign currency exchange was also a factor for the successful support of loans and grants internationally from the World Bank.

2. Technical Analysis in FOREX trading

Technical analysis is the study of price patterns on a particular asset. There are many ways to identify patterns in the market, but most technicians will focus on the following:

• Technical analysis chart patterns. In this study, technicians use drawing tools such as horizontal lines, trend lines and Fibonacci levels to identify well-known classical chart patterns such as symmetrical triangle formations and consolidation patterns, among others. These patterns give clarity to the strength and weakness of buyers and sellers in the market.

• Technical analysis candle patterns. In this study, technicians use technical analysis charts such as candle charts, which display the open, close, high and low price levels of a particular timeframe to identify clues on the behaviour of buyers and sellers in a short period of time.

• Technical analysis indicators. In this study, technicians use price action indicators to help in understanding the market condition. For example, many indicators provide signals on when the market is overbought or oversold. Other indicators provide clues on the rising and falling momentum.

There are many ways to perform technical analysis of a particular security. In all cases, the technician draws upon historical price information to identify recognisable, and repeatable, patterns. These patterns are then used to help traders identify the correct market condition, as well as possible points to enter and exit the market.

Financial markets are impacted and influenced by a wide range of factors including, for instance, monetary policies administered by central banks, fiscal policies delivered by governments, and many internal economic factors that are determined by companies and consumers alike. Studying all those factors, realising how they impact different assets and markets, and knowing which factors have the most impact is an incredibly difficult task. This type of study is also known as fundamental analysis.

Equally important is that, when analysing these factors, traders can make errors in cause and effect. This is particularly true for individual traders who have limited time and focus. However, the good news is that there is a reliable short-cut whereby analysts can focus a lot of their attention on just one piece of data – price movement. Technical analysis is also known as chart analysis, and allows traders to analyse historical price movements.

This analysis can then offer traders:

1. The ability to judge whether the chart is interesting to trade on or not.
2. How traders can look for a potential trade setup.
3. Where traders can find potential trade setups.
4. How to manage those potential trade setups.

3. Uncovered interest Arbitrage

Uncovered interest arbitrage is a form of arbitrage that involves switching from a domestic currency that carries a lower interest rate to a foreign currency that offers a higher rate of interest on deposits. There is a foreign exchange risk implicit in this transaction since the investor or speculator will need to convert the foreign currency deposit proceeds back into the domestic currency some time in the future. The term "uncovered" in this arbitrage refers to the fact that this foreign exchange risk is not covered through a forward or futures contract.

Uncovered interest arbitrage involves an unhedged exchange of currencies in an effort to earn higher returns due to an interest rate differential between the two currencies. Total returns from uncovered interest arbitrage depend considerably on currency fluctuations, since adverse currency movements can wipe out all the gains and in fact even lead to negative returns. If the interest rate differential obtained by investing in a foreign currency is 3%, and the foreign currency appreciates against the domestic currency by 2% during the holding period, the total return from this arbitrage activity is 5%. On the other hand, if the foreign currency depreciates by 4% during the holding period, the total return is -1%.

4. International short-term Investments

Short-term investments, also known as marketable securities or temporary investments, are those which can easily be converted to cash, typically within 5 years. Many short-term investments are sold or converted to cash after a period of only 3-12 months. Some common examples of short term investments include CDs, money market accounts, high-yield savings accounts, government bonds and Treasury bills. Usually, these investments are high-quality and highly liquid assets or investment vehicles.

Short-term investments may also refer specifically to financial assets—of a similar kind, but with a few additional requirements—that are owned by a company. Recorded in a separate account,
and listed in the current assets section of the corporate balance sheet, these are investments that a company has made that are expected to be converted into cash within one year.

5.currency portfolio

Current Portfolio means the portfolio (measured by the outstanding principal balance) of (a) the Loans, (b) Principal Collections held as cash and (c) Eligible Investments purchased with Principal Collections existing immediately prior to the applicable Measurement Date.

Current Portfolio means the portfolio (measured by the outstanding principal balance and treating Revolving Loans and Delayed Draw Term Loans as fully funded) of (a) the Loans, (b) Principal Collections held as cash and (c) Permitted Investments purchased with Principal Collections existing immediately prior to the applicable Measurement Date.