Foreignexchange Market (s&f)

8/13/2019 Foreignexchange Market (s&f)

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Foreign Exchange Market


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WHAT IS FOREIGN

EXCHANGEForeign exchange is the mechanism by which thecurrency of one country gets converted into the currencyof another country.

The conversion of currency is done by the banks who

deal in foreign exchange. These banks maintain stocks ofone currencies in the form of balances with banks


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It also refers to the stock of foreign currencies

and other foreign assets. The foreign exchangemanagement ACT 1999 defines Foreign

exchange means foreign currency and

includes

(a)Deposits credits and balances payable inany foreign currency.

(b)Draft travelers cheques, letter or credit or

bills of exchange expressed or drawn in Indian

currency but payable in any foreign currency.(c)Drafts travelers cheques, letter of credit or

bills of exchange drawn by banks, institution or

persons outside India, but payable in Indian

currency


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Nature of foreign exchangeVolatile, affected by hedger, arbitrager, speculator.Affected by demand and supply.

Affected by rate of interest.

Affected by balance of payment surplus and deficit.Affected inflation rate.

Spot and forward rates are different.

Affected by the economic stability of the country.

Affected by the fiscal policy of the government.

Affected by the political condition of the country.

It can be quoted directly or indirectly


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Operation of foreign exchange market:

Foreign exchange market operates either as:-

Spot Market: (Current Market)

Spot market for foreign exchange is that market which handles only

spot transaction or current transactions.

Principle characteristics:-

Spot Market is of daily nature. It does not trade in future deliveries.

Spot rate of exchange is that rate which happens to prevail at the

time when transactions are incurred.


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Participants by Market

1. Spot Market

a. commercial banksb. brokers

c. customers of commercial

and central banks


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THE SPOT MARKET

Percent Spread Formula (PS):

100x

Ask

BidAskPS


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Forward Market:

Forward Market for foreign exchange is that market which handles

such transaction of foreign exchange as are meant for future delivery.

Principles Characteristics:-

It only caters to forward transaction.

It determines forward exchange rate at which forward transaction are

to be honored.


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2. Forward Market

a. arbitrageurs

b. tradersc. hedgers

d. speculators


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THE FORWARD MARKET

2. Purpose of a Forward:

Hedging

the act of reducing exchangerate risk.


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THE FORWARD MARKET

B. Forward Rate Quotations

1. Two Methods:

a. Outright Rate: quoted tocommercial customers.

b. Swap Rate: quoted in the

interbank market as adiscount or premium.


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THE FORWARD MARKET

CALCULATING THE FORWARD PREMIUM OR DISCOUNT

= F-S x 12 x 100S n

where F = the forward rate of exchange

S = the spot rate of exchange

n = the number of months in the

forward contract


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THE FORWARD MARKET

C. Forward Contract Maturities

1. Contract Terms

a. 30-dayb. 90-day

c. 180-day

d. 360-day2. Longer-term Contracts


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Exchange RateFixed Exchange Rate SystemFixed rates provide greater certainty for exporters andimporters.

Flexible Exchange Rate System

Flexible exchange rate or floating exchange rates change freelyand are determined by trading in the forex market.


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History of Foreign exchangeForeign exchange history can be viewed as a series ofsolutions that allowed countries to issue their own currency andto conduct their own monetary policy while also allowinginternational trade to be conducted by providing a means ofexchanging one currency for another according to the exchange

rate between them, which was either agreed-upon or set by themarket.


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Characteristics of foreign exchange

Its huge trading volume representing the

largest asset class in the world leading to high

liquidity.

Its geographical dispersion;

Its continuous operation: 24 hours a day

except weekends, i.e., trading from 20:15 GMT

on Sunday until 22:00 GMT Friday.

The use of leverageto enhance profit and loss

margins and with respect to account size.
http://c/wiki/Liquidityhttp://c/wiki/GMThttp://c/wiki/Leverage_(finance)http://c/wiki/Leverage_(finance)http://c/wiki/GMThttp://c/wiki/Liquidity


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Retail Exchange Market

People may need to exchange currencies in

a number of situations.for EgFluctuations in exchange rates

A market based exchange rate will change

whenever the values of either of the two

component currencies change.

The higher a country's interest rates, the

greater will be the demand for that currency.


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Central banks participate in the foreign

exchange market to align currencies to their

economic needs.Commercial companies

. Commercial companies often trade fairly

small amounts compared to those of banks or

speculators, and their trades often have littleshort term impact on market rate.

Central bank

National central banks play an important role

in the foreign exchange markets. They try tocontrol the money supply, inflation, and/or

interest ratesand often have official or

unofficial target rates for their currencies.

M I i i d D l h F i E h
http://e/wiki/Money_supplyhttp://e/wiki/Inflationhttp://e/wiki/Interest_rateshttp://e/wiki/Interest_rateshttp://e/wiki/Inflationhttp://e/wiki/Money_supply


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Measures Initiated to Develop the Foreign Exchange

Market in India

Institutional Framework

Foreign Exchange Regulation Act (FERA),

1973 was replaced by the market friendly

Foreign Exchange Management Act (FEMA),1999.

Money and Securities Markets set up by the

Reserve Bank in 1999 was expanded in 2004 to

include foreign exchange markets


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Top 10 Currency Traders as on May 2012 are


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CURRENCY TRADING RULES

PLAN YOUR TRADE AND TRADE YOURPLAN.

THE TREND IS YOUR FRIEND.

FOCUS ON CAPITAL PRESERVATION.KNOW WHEN TO CUT LOSS.

TAKE PROFIT WHEN THE TRADE IS GOOD

BE EMOTIONLESS.

NOT TRADE BASED ON A TIP FROM AFRIEND OR BROKER.


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Foreignexchange Market (s&f)

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