Currency Market
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Transcript of Currency Market
Foreign Exchange Market
The market where one currency is traded for another is called foreign exchange market
Every international sale or purchase of commodities, services or assets, there corresponds an international sale or purchase of currencies
Features of Foreign Exchange Market
Location: OTC Market – banks and brokers at a financial centreWholesale and Retail segments
Size : Daily turnover of over $3.98 trillion 24 hours marketEfficiencyCurrencies traded
Most traded currencies by valueRank Currency Symbol % daily share( April
2010)
1 United States dollar USD ($) 84.9%
2 Euro EUR (€) 39.1%
3 Japanese yen JPY (¥) 19.0%
4 Pound sterling GBP (£) 12.9%
5 Australian dollar AUD ($) 7.6%
6 Swiss franc CHF (Fr) 6.4%
7 Canadian dollar CAD ($) 5.3%
8 Hong Kong dollar HKD ($) 2.4%
9 Swedish Krona SEK (kr) 2.2%
10 New Zealand dollar NZD ($) 1.6%
11 South Korean Won KRW (₩) 1.5%
12 Singapore dollar SGD ($) 1.4%
13 Norwegian Krone NOK (kr) 1.3%
14 Mexican Peso MXN ($) 1.3%
15 Indian rupee INR ( ) 0.9%
Other
12.2%
Total
200.0%
Top 10 currency traders % of overall volume, May 2011
Rank Name Market Share
1 Deutsche Bank 15.64%
2 Barclays Capital 10.75%
3 UBS AG 10.59%
4 Citi 8.88%
5 JP Morgan 6.43%
6 HSBC 6.26%
7 Royal Bank of Scotland 6.20%
8 Credit Suisse 4.80%
9 Goldman Sachs 4.13%
10 Morgan Stanley 3.64%
Foreign Exchange Market
Participants:
Corporates Commercial banks Exchange brokers Central banks
SWIFT :
Society for Worldwide Interbank Financial Telecommunications
- a co-operative society owned by about 250
banks in Europe and North America
- registered in Brussels, Belgium
Settlement of Transactions
CHIPS :
Clearing House Interbank Payment System- an electronic payment system owned by 12 private commercial banks constituting New York Clearing House Association
CHAPS : Clearing House Automated Payment System - London
Settlement of Transactions
The foreign exchange market has two segments
Spot Market Forward Market
The rate at which one currency is traded foranother is called exchange rate
Foreign Exchange Market
Spot Market
The exchange rate for immediate delivery is called Spot Exchange Rate and is denoted by S (.) e.g. S (Rs./$) = Rs.46.85/$
Here immediate delivery means delivery after two business days
The market where the purchase and sale of currencies is contracted for spot delivery is called the Spot Market
Quotations at the FX Market
The quotes are usually made in the form of ‘buy’ and ‘sell’ or ‘bid’ and ‘ask’ rates
Sometimes ‘ask’ is also referred as ‘offer’ price
Buy/ Bid Sell/ Ask
Exchange dealer is ready to buy Exchange dealer is ready to sell
In case of ‘direct’ quotes, a unit of foreign currency is quoted in terms of domestic currency
For example:At Mumbai foreign exchange market , the US dollar is quoted as:
USD 1 = Rs. 45.1525/1650
Spot (bid) = Rs. 45.1525/$Spot (ask) = Rs. 45.1650/$
Direct & Indirect Quotes
Rule : “ Buy low: Sell high”
In case of ‘indirect’ quotes, a unit of domestic currency is quoted in terms of foreign currency
For example:At Mumbai foreign exchange market , the quotation are made as:
Rs. 100 = USD 2.0762/0767
Spot (bid) = $ 2.0767/Rs.100Spot (ask) = $ 2.0762/ Rs.100
Direct & Indirect Quotes
Rule : “ Buy high: Sell low”
Sometimes the quotes are made against 100
units of a currency instead of a unit of the
currency
European quotes are indirect quotes
Indian quotes are direct quotes
Direct & Indirect Quotes
When a bank quotes for a currency, it simultaneously offers another currency in lieu i.e. if it buys dollars for rupees, it is simultaneously offering rupees for dollars
Thus, there are two sides of all quotes
S (x/bid y) = 1/ S (y/ask x) and S (x/ask y) = 1/ (y/bid x)
Where:x and y are currencies of two countries
Relationship between Bid/ Ask prices
Ask and bid differential is called the spread When quotes are direct :
Spread = Ask – Bid When quotes are indirect :
Spread = Bid – AskSpread represents cost of transactionIt is represented by the percentage of spread
and isgiven by:1.[( Ask- Bid)/ Ask] x 100 when quotes are
direct2. [(Bid – Ask)/ Bid] x 100 when quotes are
indirect
Spread
Let ‘c’ be one side average cost of transaction and‘M’ be the mid rate, then the bid and ask rates aregiven as:
S (bid) = M x ( 1-c) andS (ask) = M x (1+c)
The mid rate is issued by the central banks of thecountries if convertibility conditions existSpread equals twice the one side average cost oftransaction
How ‘ BID’ and ‘ASK’ rates are formed
Determinants of Spread
The currency being traded The volume of currency being traded The nature of organisation making
quotes Overall perception of the Dealer about
the conditions of the economy and forex market
Usually these spreads are regulated by foreign exchange dealers associations such as FEDAI
Factors Determining Spot Exchange Rates
Balance of Payments Inflation Interest Rates Money Supply National Income Resource Discoveries Capital Movements Political Factors Psychological Factors and Speculation Technical and Market Factors
Forward Market
Forward contracts are bought and sold at forward exchange rates
Hedging and speculation are the main activities which pertain to forward markets
The exchange rates for delivery and payment at specified future dates are called Forward Exchange Rates and is denoted by F(.)
For example, 60 days F (Rs./$) : forward rate between rupees and dollar is the rate at which the foreign exchange dealer can arrange a transaction between rupees and dollar 60 days hence
Forward Exchange Rate
Forward Exchange Rate
Forward exchange rates are determined by forward demand and forward supply of various currencies
A foreign currency is said to be at a forward premium if its future value exceeds its present value in terms of domestic currency and it is said to be at discount if the converse is true
For example : S (Rs./$) = Rs. 45.70 F3 (Rs./$) = Rs. 46.60
These rates are also quoted in the form of ‘bid’ and ‘ask’ rates and the spread also depend on approximately the same factors as spot rates plus:
Rate of Interest Demand and Supply Speculation about Spot Rates and Exchange Regulations
Quotations of Forward Rates
Realised Rate
(Rs.)
Contracted Rate (Rs.)
Unanticipated Change
Profit/Loss
(Rs.)
46.5500 46.3500 -0.200 - 20,000.00
46.4500 46.3500 -0.100 - 10,000.00
46.3500 46.3500 0.000 0.00
46.2500 46.3500 0.100 10,000.00
46.1500 46.3500 0.200 20,000.00
Payoffs in the case of a forward contract
Quotations of Forward Rates
Traders Arbitrageurs Hedgers Speculators Banks Governments
Participants in the Forward Market
The exchange rate which is obtained by crossproduct of two exchange rates is called Cross Rate
Spot rate at Mumbai :S(Rs./$) = 31.2022/$ Spot rate at Frankfurt : S(Rs./DM) = 15.87 / DM
Then Cross Rate = S(DM/$) = DM 2.0983/$
This is the rate a Mumbai broker may expect theFrankfurt price of dollar in terms of DM
Cross Rates
In Indian forex market, not all currencies are
bought or sold
For non-traded currencies, the banks use London, New York or Singapore markets
Exchange Market Segments:
1. RBI and ADs( Commercial Banks)
2. Interbank market3. Retail segment – ADs with
corporate clients and other retail customers
Indian Forex Market
The rates quoted by authorised dealers (ADs) are merchant rates at which trading can take place in the Retail segment
Merchant rates are different than inter-bank rates and contain administrative cost, cover for exchange fluctuation and some profit on the transaction for the Bank
Indian Forex Market
Four types of rates are quoted:
1. TT( Telegraphic Transfer) rate2. Bill rate3. Currency notes4. Travellers cheque rate
Types of Exchange Rates
Transactions where TT rate is applied:
Issue/ Payment of demand drafts, mail transfers, telegraphic transfers etc.
Foreign bill collected and amount received in nostro account
Cancellation of foreign exchange sold/ purchased earlier
TT ( Telegraphic Transfer) rate
Rate applied for a foreign bill purchased or payment
against import bill
Bill Buying rate: Basic rate (+ or -) Forward Premium ( Discount) for
transit period plus usance period – Exchange margin
Bill selling rate = TT selling rate + service margin
Bill Rate
In India, the official rate is determined by the
RBI on the basis of the multi-currency basket
The official buying and selling rates are announced
FEDAI announces indicative free market rate on
every business day
The RBI has the discretion to enter the market
so as to stabilise the exchange rate
Indian Forex Market
FEDAI Indicative Rates
USD GBP
45.9350/9450 75.7150/7450
JPY EUR
59.8500/9025 65.9900/66.0225
11.30 am 22nd August 2011
