Dollar, not that green anymore..

It is interesting to discuss some causes of weak performance of dollar against several other major currencies:

(quoted from yahoo finance, click image to magnify)

Left: Dollar versus pound sterling, right: Dollar vs Eur.


Over the last two months dollar has reached lowest point on Eur, many times, not only once.
Using supply and demand argument we could say that decreasing value in dollar is simply because there is more offer to sell dollar than offer to buy it. It is also could be used as indicator that recently people didn't trust dollar that much anymore, further it could be interpreted as people no longer believe in USA economy.

This situation is triggered by announcement of china's government to switch some proportion of its dollar foreign reserve into another currencies. As a big world player, china's decision made some other investment players interpreted in the similar way. The situation of internal USA market, such as crisis in mortgage backed securities (related with housing market, to simplify), dropping value of index equity (S&P 500, Dow Jones), Oil price crisis (hitting new record 100$, from 50$ in less than 3 years) and almost any other indicators strengthen this reasoning, USA is heading to something unfavorable.Even OPEC is pushed to change the standard currency for trading oil from dollar to some other currencies.As you know, some countries (including Indonesia) decision of spending budget is very much influenced by oil price, which is valued by dollar.

As time goes on, people try to find the origin of the problem, one possible(and very possible i think), USA spend too much on Iraq and Afghanistan. Approximately, it could be from $1 trillion to $3.5 trillion. to remind you, starting with thousand, million, billion, and trillion (3,6,9 and 12 zeros respectively).

After all, I really worry about what my government decision will be, regarding these matters.

Hello Blog

Hi, this is my first time contributing to this blog. About me and why I'm here, just read my intro post.

Blog.

What is a blog? According to Wikipedia, the definition of a blog (short of weblog) is a website where entries are written in chronological order and commonly displayed in reverse chronological order. "Blog" can also be used as a verb, meaning to maintain or add content to a blog. In Wikipedia we can also read the history of blog, and many stories about it. In this article, I will be focusing on personal blogs.

Originally, blog (weblog) was used to publish logs (hence the name) on the network. Nowadays people blog for various reasons, for fun, to log a journey, to make online diaries, political reasons, advertising, self-advertising, and some people even make real money from blogging.

According to Technocrati, the number of blog worldwide now exceeds 70 million. About 120,000 new blogs are created every day. In countries worldwide, there are organizations or groups of people that coordinates gathering of bloggers. Blogging is a phenomenon.

So why does blogging become so popular for the common people? I think everyone who have access to internet connection have at least thought about blogging. Maybe it's because of the freedom blogging gave someone. Blogging gives someone the freedom to speak, freedom to express oneself to the world. Blogging exposes you to the world. Just look at the number of personal blogs worldwide. I still remember a time when someone writes a diary, she/he would lock or keep the book in a very safe place, where no one else can read it. Nowadays many people write about everything publicly, even about sensitive matters.

That's why blogging is not without consequences. Some people get violent reactions, some were fired from their jobs, some lose their credibility, and some were even jailed. All of this because of what they write in their blog.

There's a saying that I know (I forgot the exact wordings) that says, "The tongue is sharper than a sword". When you speak (or write) offensively, you will stab someone in their chest. And then there's the consequence. Of course, in the other hand, even when someone doesn't mean to hurt anybody and even intended to do something for the greater good, some people still hate them. It's just the rule of the world.

The point is, what people write in their blog doesn't get the proper treatment like professional media does. Sometimes some of the writing can become offending to some people.

Sorry, I tend to get to the dark side of things. But bad things aside, by blogging, someone can easily share their knowledge with others. Personal knowledge or experience that we would probably never able to discover on books or other things. I personally have solved many technical problems and got many answers on my personal questions by reading blogs.

In this blog, we would like to share something that we think about as interesting, and hopefully there's someone who can benefit from it. So please don't hesitate to give feedback and I hope the posts will do you good.

Peace.

Is it gambling or certainty..?

As more people think about randomness of financial instrument, more and more people argue whether investing in financial world is gambling or not.., well again as you may guess my answer would be both, depend on what part you want to take in this world.

There are mainly 3 players in investment:

1.Speculator:
If you insist investment is gambling then it is the right one for you, speculator is simply speculate for their payoff.
they profit depend on market movement, for those who take position in buy they hope market will bullish(increase) and sell at higher price, and the opposite way for those who take the sell position and hoping market will fall(bearish).
however, historically(at least in written history), no one will make consistently positive payoff, at average you will be very close to 0 return, most of the time people will exit the market because of their big loss and they cant hold on anymore, while people in high profit position tend to play more and more until bankruptcy, leaving Everyone with negative return for most of the time.
From my point of view, if you do this it just mean you enter another variation of casino game, you could name other that it: soccer bet, roulette, etc. Again, its not recommended.

2. Hedger:
New term for some people, its method is quite well known in investment world as hedging, basically it protect your capital for market movement against you. Example will always provide nice interpretation, suppose you want to trade in gold with stranger (btw, you are in Indonesia using rupiah and stranger is from US using $). in 1 week both of you agree to trade 100 grams of gold for 1000 dollar, you are buyer and stranger is seller.
What will you do? easiest way is to provide 1000$ now and wait a week and pay him the money for the gold. this method easy, however it is unlikely done because people like to circulate their money before they using it, hoping it would grow before it is used, deposit in bank and take the interest is just an example.Again to remind you, this example use 1 week time of period, what happen if we agree in 6 months, 1 year or even 10 years? providing 1000$ now will be like sacrifice all the opportunity in time between.
Another strategy is just provide 1000$ later in a week, wait 1 week, meet the stranger and pay it, done!! is it? remember you are in Indonesia, in 1 week you have to bring rupiah to currency converter and ask for 1000 dollar, what if in 1 week rupiah get weak in respect with dollar? then you have to provide more rupiah to get 1000$, you dont want it. what you want is rupiah getting stronger. now you choose, if you want to speculate about it, do nothing and wait for 1 week. if you want to assure what amount you should provide, do hedging(to remind you again that we talk about hedger not speculator). How? you make agreement with another stranger , call it stranger II, that in 1 week he would provide you 1000$ for fix rupiah, say 9.000.000 rupiah (using 1$=9.000 of course). and you can stop worrying about what happen in 1 week, its stranger II problem, none of your business :). Is stranger II exist? fortunately yes, it is known as a product called "future" or "forward", actually it is not the same but the idea is similar.
The question is can you imagine how big is hedging world? it is everywhere, bank to protect their capital, insurance company to protect their client, government to protect their people, thats why there exist such unit called treasury, risk management.

3. Arbitrageur: It act like speculator with different reason, it sure that his position will give profit payoff. As most of people believe in equilibrium, that every asset should stay in its price, while most of the time we see that all asset price will deviate, or called volatile(it is the reason to introduce randomness in modeling the asset price movement). Arbitrageur could interpret if stock price is not at its equilibrium and take the opportunity, although its not as good as it seems, competition in market demand player to be able to execute in very short time, millisecond, otherwise the opportunity went away taken by other player. thanks to computer that make all the flash-trading happen, also blame the computer that make todays trading is getting more complicate.

After All, sometimes you could have more than 1 role at a time from this 3 position.I also think all things in the world will be speculation, you open a company, you speculate in customer behavior, product trend, political situation. you buy food, you speculate with its taste, whether it satisfy you or not.but if you have to deal with speculation, try to manage your risk, get as small as possible. Take risk that you can handle.

why i'm here..

Hi,

Creating this blog is to remember what i get and to give my opinion about anything, quantitative finance most of the time.

I really would like to write all blogs material in English, it'll give broader coverage of people, however it will take more efforts since its not my home language (Its Bahasa Indonesia), still, i very much motivated to write in English to sharpen my English writing skill. So, please read it and i'm so so sorry for not accommodate some people in several blogs, not intentional of course, purely because of my limitation. fell free to comment and to complain about anything.

Also, this blog probably could be used as overview for those who interested in this area or just anyone who want to find another source of interest.

I really hope feedback or sharing or discussion from people interested in this area, as I know, modern financial tools already use wide area discipline in its implementation it could be economy, finance, accountancy, programming, etc. I assure you, no matter in what area you are ,it could be related to financial technology, there are multi-discipline finance professional in todays world, they are not throwing out their background in finance world, its even become their own unique strength . Physic, for example, Stock price modeling widely used in finance now based on principle of random particle movement, the so called random walk process.

To end it, it is a very large of interest in finance world today, why? first, because its deal with money of course, secondly simply because financial information could be accessed by anyone at anytime and its the most rapid data transformation in certain area, million of dollars executed in millisecond and those who could take advantage of this situation will be appreciated very much, and it could be anyone.There are several other reasons but the first two i think the most significant.

About me, I'm a master student in financial mathematics, also had bachelor degree in mathematics. I had experience in financial institution, almost 1 year in asset management company and currently i will do my final project and internship in option trading company.Because of this background, i need another perspective in seeing this world, and to give you another point of view as well.

Hahan.

p.s word in italic probably strange for some people.

asset management company: investment company, manage fund for their investor using a product called mutual fund(or reksa dana in Indonesia term).

option: one of the most used instrument in financial world, it create certain payoff scheme based on underlying asset movement. underlying asset could be stock(saham), bond(obligasi), interest rate(suku bunga), etc.

random walk process: it model random movement of the object, numerically it is implemented using random number generator.