working of forex market

8/13/2019 working of forex market

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FOREIGN EXCHANGE MARKET

Chapter 1: INTRODUCTION

Foreign Exchange Market Overview

Globally, operatio! i the "orei# e$%ha#e &ar'et !tarte( i a &a)or *ay a"ter the brea'(o*

o" the +retto oo(! !y!te& i 1-.1, *hi%h al!o &ar'e( the be#ii# o" "loati# e$%ha#e ratere#i&e! i !e/eral %o0trie! O/er the year!, the "orei# e$%ha#e &ar'et ha! e&er#e( a! thelar#e!t &ar'et i the *orl( The (e%a(e o" the 1--2! *ite!!e( a per%eptible poli%y !hi"t i &aye&er#i# &ar'et! to*ar(! reorietatio o" their "ia%ial &ar'et! i ter&! o" e* pro(0%t! a(i!tr0&et!, (e/elop&et o" i!tit0tioal a( &ar'et i"ra!tr0%t0re a( reali#&et o" re#0latory!tr0%t0re %o!i!tet *ith the liberali3e( operatioal "ra&e*or' The %ha#i# %oto0r! *ere&irrore( i a rapi( e$pa!io o" "orei# e$%ha#e &ar'et i ter&! o" parti%ipat!, tra!a%tio/ol0&e!, (e%lie i tra!a%tio %o!t! a( &ore e""i%iet &e%hai!&! o" ri!' tra!"er

The ori#i o" the "orei# e$%ha#e &ar'et i I(ia %o0l( be tra%e( to the year 1-.4 *he ba'!i I(ia *ere per&itte( to 0(erta'e itra5(ay tra(e i "orei# e$%ha#e Ho*e/er, it *a! i the

1--2! that the I(ia "orei# e$%ha#e &ar'et *ite!!e( "ar rea%hi# %ha#e! alo# *ith the!hi"t! i the %0rre%y re#i&e i I(ia The e$%ha#e rate o" the r0pee, that *a! pe##e( earlier*a! "loate( partially i Mar%h 1--6 a( "0lly i Mar%h 1--7 "ollo*i# the re%o&&e(atio! o"the Report o" the Hi#h 8e/el Co&&ittee o +ala%e o" 9ay&et! Chair&a: DrC Ra#ara)a;The 0i"i%atio o" the e$%ha#e rate *a! i!tr0&etal i (e/elopi# a &ar'et5(eter&ie(e$%ha#e rate o" the r0pee a( a i&portat !tep i the pro#re!! to*ar(! %0rret a%%o0t%o/ertibility, *hi%h *a! a%hie/e( i A0#0!t 1--


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aother %o0try, the re!i(et! o" t*o %o0trie! ha/e to e$%ha#e %0rre%ie! =o *e %a i&a#iethat i" all %o0trie! ha/e the !a&e %0rre%y the there i! o ee( "or "orei# e$%ha#e

Need for Foreign Exchange:Co!i(er a %a!e, I(ia %o&pay e$port! %otto "abri%! to U=A a( i/oi%e! the #oo(! i U=(ollar The A&eri%a i&porter *ill pay the a&o0t i U= (ollar, a! the !a&e i! hi! ho&e

%0rre%y Ho*e/er the I(ia e$porter re@0ire! r0pee! &ea! hi! ho&e %0rre%y "or pro%0ri#ra* &aterial! a( "or pay&et to the labor %har#e! et% Th0! he *o0l( ee( e$%ha#i# U=(ollar "or r0pee I" the I(ia e$porter! i/oi%e their #oo(! i r0pee!, the i&porter i U=A *ill#et hi! (ollar %o/erte( i r0pee a( pay the e$porter Fro& the abo/e e$a&ple *e %a i"er thati %a!e #oo(! are bo0#ht or !ol( o0t!i(e the %o0try, e$%ha#e o" %0rre%y i! e%e!!ary=o&eti&e! it al!o happe! that the tra!a%tio! bet*ee t*o %o0trie! *ill be !ettle( i the%0rre%y o" thir( %o0try

About foreign exchange market:9arti%0larly "or "orei# e$%ha#e &ar'et there i! o &ar'et pla%e %alle( the "orei# e$%ha#e&ar'et It i! &e%hai!& thro0#h *hi%h oe %o0tryB! %0rre%y %a be e$%ha#e ie bo0#ht or

!ol( "or the %0rre%y o" aother %o0try The "orei# e$%ha#e &ar'et (oe! ot ha/e ay#eo#raphi% lo%atio Forei# e$%ha#e &ar'et i! (e!%ribe( a! a OTC o/er the %o0ter; &ar'eta! there i! o phy!i%al pla%e *here the parti%ipat &eet! to e$e%0te the (eal!, a! *e !ee i the%a!e o" !to%' e$%ha#e The lar#e!t "orei# e$%ha#e &ar'et i! i 8o(o, "ollo*e( by the Ne*or', To'yo, 0ri%h a( Fra'"0rt The &ar'et! are !it0ate( thro0#ho0t the (i""eret ti&e 3oeo" the #lobe i !0%h a *ay that oe &ar'et i! %lo!i# the other i! be#ii# it! operatioThere"ore it i! !tate( that "orei# e$%ha#e &ar'et i! "0%tioi# thro0#ho0t 6< ho0r! a (ay I&o!t &ar'et U= (ollar i! the /ehi%le %0rre%y, /i3, the %0rre%y !0e( to (o&iate iteratioaltra!a%tio I I(ia, "orei# e$%ha#e ha! bee #i/e a !tat0tory (e"iitio =e%tio 6 b; o""orei# e$%ha#e re#0latio ACT, 1-.7 !tate!: Forei# e$%ha#e &ea! "orei# %0rre%y a(i%l0(e!:

All deposits, credits and balance payable in any foreign currency and any draft, travelerscheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payablein any foreign currency.

Ay i!tr0&et payable, at the optio o" (ra*ee or hol(er thereo" or ay other party thereto,either i I(ia %0rre%y or i "orei# %0rre%y or partly i oe a( partly i the other I or(erto pro/i(e "a%ilitie! to &e&ber! o" the p0bli% a( "orei#er! /i!iti# I(ia, "or e$%ha#e o""orei# %0rre%y ito I(ia %0rre%y a( /i%e5/er!a R+I ha! #rate( to /ario0! "ir&! a(i(i/i(0al!, li%e!e to 0(erta'e &oey5%ha#i# b0!ie!! at !ea!airport a( to0ri!& pla%e o"to0ri!t itere!t i I(ia +e!i(e! %ertai a0thori3e( (ealer! i "orei# e$%ha#e ba'!; ha/e al!obee per&itte( to ope e$%ha#e b0rea0! Follo*i# are the &a)or bi"0r%atio!:

Full fledge moneychangers they are the "ir&! a( i(i/i(0al! *ho ha/e bee a0thori3e( tota'e both, p0r%ha!e a( !ale tra!a%tio *ith the p0bli%Restricted moneychanger they are !hop!, e&poria a( hotel! et% that ha/e bee a0thori3e(oly to p0r%ha!e "orei# %0rre%y to*ar(! %o!t o" #oo(! !0pplie( or !er/i%e! re(ere( by the&or "or %o/er!io ito r0pee!Authoried dealers they are oe *ho %a 0(erta'e all type! o" "orei# e$%ha#e tra!a%tio+a'! are oly the a0thori3e( (ealer! The oly e$%eptio! are Tho&a! %oo', *e!ter 0io,

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UAE e$%ha#e *hi%h tho0#h, a( ot a ba' i! a AD E/e a&o# the ba'! R+I ha!%ate#ori3e( the& a! "ollo*!:

+ra%h A They are the bra%he! that ha/e No!tro a( o!tro a%%o0t+ra%h + The bra%h that %a (eal i all other tra!a%tio b0t (o ot &aitai No!tro a(

o!tro a%B! "all 0(er thi! %ate#ory For I(ia *e %a %o%l0(e that "orei# e$%ha#e re"er! to"orei# &oey, *hi%h i%l0(e! ote!, %he@0e!, bill! o" e$%ha#e, ba' bala%e a( (epo!it! i"orei# %0rre%ie!

Foreign Exchange Market: An AssessmentThe %oti0o0! i&pro/e&et i &ar'et i"ra!tr0%t0re ha! ha( it! i&pa%t i ter&! o" eha%e((epth, li@0i(ity a( e""i%ie%y o" the "orei# e$%ha#e &ar'et The t0ro/er i the I(ia "orei#e$%ha#e &ar'et ha! #ro* !i#i"i%atly i both the !pot a( (eri/ati/e! !e#&et! i the re%etpa!t Alo# *ith the i%rea!e i o!hore t0ro/er, a%ti/ity i the o""!hore &ar'et ha! al!oa!!0&e( i&porta%e ith the #ra(0al opei# 0p o" the %apital a%%o0t, the pro%e!! o" pri%e(i!%o/ery i the I(ia "orei# e$%ha#e &ar'et ha! i&pro/e( a! re"le%te( i the bi(5a!' !prea(

a( "or*ar( pre&ia beha/ior

Foreign Exchange Market !urnoverA! per the Trieial Cetral +a' =0r/ey by the +a' "or Iteratioal =ettle&et! +I=; oForei# E$%ha#e a( Deri/ati/e! Mar'et A%ti/ityJ, #lobal "orei# e$%ha#e &ar'et a%ti/ityro!e &ar'e(ly bet*ee 6221 a( 622< The !tro# #ro*th i t0ro/er &ay be attrib0te( to t*orelate( "a%tor!

Fir!t, the pre!e%e o" %lear tre(! a( hi#her /olatility i "orei# e$%ha#e &ar'et!

bet*ee 6221 a( 622< le( to tra(i# &o&et0&, *here i/e!tor! too' lar#e po!itio! i%0rre%ie! that "ollo*e( per!i!tet appre%iati# tre(!

=e%o(, po!iti/e itere!t rate (i""eretial! e%o0ra#e( the !o5%alle( %arry tra(i#J, i.e.,

i/e!t&et! i hi#h itere!t rate %0rre%ie! "ia%e( by po!itio! i lo* itere!t rate%0rre%ie!

The #ro*th i o0tri#ht "or*ar(! bet*ee 6221 a( 622< re"le%t! hei#htee( itere!t i he(#i#ithi the EM %o0trie!, tra(itioal "orei# e$%ha#e tra(i# i A!ia %0rre%ie! #eerallyre%or(e( &0%h "a!ter #ro*th tha the #lobal total bet*ee 6221 a( 622


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T0ro/er i the "orei# e$%ha#e &ar'et *a! ti&e! o" the !i3e o" I(iaB! bala%e o"pay&et! (0ri# 622?52 a! %o&pare( *ith ?< ti&e! i 6222521 ith the (eepei# o" the"orei# e$%ha#e &ar'et a( i%rea!e( t0ro/er, i%o&e o" %o&&er%ial ba'! thro0#h trea!0ryoperatio! ha! i%rea!e( %o!i(erably 9ro"it "ro& "orei# e$%ha#e tra!a%tio! a%%o0te( "or&ore tha 62 per %et o" total pro"it! o" the !%he(0le( %o&&er%ial ba'! (0ri# 622


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Chapter 6: HI=TOR, +A=IC CONCE9T= AND TRADING 98ATFORM=

Forex Market: A "istorical #ers$ective

Early %tages: &'()*&'))The e/ol0tio o" I(iaB! "orei# e$%ha#e &ar'et &ay be /ie*e( i lie *ith the !hi"t! i I(iaB!e$%ha#e rate poli%ie! o/er the la!t "e* (e%a(e! "ro& a par /al0e !y!te& to a ba!'et5pe# a("0rther to a &aa#e( "loat e$%ha#e rate !y!te& D0ri# the perio( "ro& 1-


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(0ri# thi! perio( *a! o""i%ially (eter&ie( by the Re!er/e +a' i ter&! o" a *ei#hte( ba!'eto" %0rre%ie! o" I(iaB! &a)or tra(i# parter! a( the e$%ha#e rate re#i&e *a! %hara%teri3e(by (aily ao0%e&et by the Re!er/e +a' o" it! b0yi# a( !elli# rate! to the A0thori3e(Dealer! AD!; "or 0(erta'i# &er%hat tra!a%tio! The !prea( bet*ee the b0yi# a( the!elli# rate! *a! 2? per %et a( the &ar'et be#a to tra(e a%ti/ely *ithi thi! ra#e AD! *ere

al!o per&itte( to tra(e i %ro!! %0rre%ie! oe %o/ertible "orei# %0rre%y /er!0! aother;Ho*e/er, o po!itioB i thi! re#ar( %o0l( ori#iate i o/er!ea! &ar'et!

A! opport0itie! to &a'e pro"it! be#a to e&er#e, &a)or ba'! i I(ia !tarte( @0oti# t*o *aypri%e! a#ai!t the r0pee a! *ell a! i %ro!! %0rre%ie! a(, #ra(0ally, tra(i# /ol0&e! be#a toi%rea!e Thi! le( to the a(optio o" *i(ely (i""eret pra%ti%e! !o&e o" the& bei# irre#0lar;a( the ee( *a! "elt "or a %o&prehe!i/e !et o" #0i(elie! "or operatio o" ba'! e#a#e( i"orei# e$%ha#e b0!ie!! A%%or(i#ly, the G0i(elie! "or Iteral Cotrol o/er Forei#E$%ha#e +0!ie!!B, *ere "ra&e( "or a(optio by the ba'! i 1-41 The "orei# e$%ha#e&ar'et i I(ia till the early 1--2!, ho*e/er, re&aie( hi#hly re#0late( *ith re!tri%tio! oe$teral tra!a%tio!, barrier! to etry, lo* li@0i(ity a( hi#h tra!a%tio %o!t! The e$%ha#e

rate (0ri# thi! perio( *a! &aa#e( &aily "or "a%ilitati# I(iaB! i&port! The !tri%t %otrol o"orei# e$%ha#e tra!a%tio! thro0#h the Forei# E$%ha#e Re#0latio! A%t FERA; ha(re!0lte( i oe o" the lar#e!t a( &o!t e""i%iet parallel &ar'et! "or "orei# e$%ha#e i the*orl(, i.e., the ha*ala 0o""i%ial; &ar'et

+y the late 1-42! a( the early 1--2!, it *a! re%o#i3e( that both &a%roe%oo&i% poli%y a(!tr0%t0ral "a%tor! ha( %otrib0te( to bala%e o" pay&et! (i""i%0ltie! De/al0atio! by I(iaB!%o&petitor! ha( a##ra/ate( the !it0atio Altho0#h e$port! ha( re%or(e( a hi#her #ro*th (0ri#the !e%o( hal" o" the 1-42! "ro& abo0t 0ly 1 a( 7, 1--1*a! re!orte( to %o0ter the &a!!i/e (ra*(o* i the "orei# e$%ha#e re!er/e!, to i!till%o"i(e%e a&o# i/e!tor! a( to i&pro/e (o&e!ti% %o&petiti/ee!! A t*o5!tep a()0!t&et o"e$%ha#e rate i >0ly 1--1 e""e%ti/ely bro0#ht to %lo!e the re#i&e o" a pe##e( e$%ha#e rate

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A"ter the G0l" %ri!i! i 1--25-1, the broa( "ra&e*or' "or re"or&! i the e$teral !e%tor *a! lai(o0t i the Report o" the Hi#h 8e/el Co&&ittee o +ala%e o" 9ay&et! Chair&a: Dr CRa#ara)a; Follo*i# the re%o&&e(atio! o" the Co&&ittee to &o/e to*ar(! the &ar'et5(eter&ie( e$%ha#e rate, the 8iberali3e( E$%ha#e Rate Maa#e&et =y!te& 8ERM=; *a!p0t i pla%e i Mar%h 1--6 iitially i/ol/i# a (0al e$%ha#e rate !y!te& U(er the 8ERM=,

all "orei# e$%ha#e re%eipt! o %0rret a%%o0t tra!a%tio! e$port!, re&itta%e!, etc; *erere@0ire( to be !0rre(ere( to the A0thori3e( Dealer! AD!; i "0ll The rate o" e$%ha#e "or%o/er!io o" 2 per %et o" the pro%ee(! o" the!e tra!a%tio! *a! the &ar'et rate @0ote( by theAD!, *hile the re&aii#


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(ele#atio o" po*er! to AD! "or #rat o" per&i!!io to %orporate! to he(#e their e$po!0re to%o&&o(ity pri%e ri!' i the iteratioal %o&&o(ity e$%ha#e!&ar'et! a( e$te!io o" thetra(i# ho0r! o" the iter5ba' "orei# e$%ha#e &ar'et ha/e !i%e bee i&ple&ete(

Alo# *ith the!e !pe%i"i% &ea!0re! ai&e( at (e/elopi# the "orei# e$%ha#e &ar'et, &ea!0re!

to*ar(! liberali3i# the %apital a%%o0t *ere al!o i&ple&ete( (0ri# the la!t (e%a(e, #0i(e( toa lar#e e$tet !i%e 1--. by the Report o" the Co&&ittee o Capital A%%o0t Co/ertibilityChair&a: =hri == Tarapore; ario0! re"or& &ea!0re! !i%e the early 1--2! ha/e ha( apro"o0( e""e%t o the &ar'et !tr0%t0re, (epth, li@0i(ity a( e""i%ie%y o" the I(ia "orei#e$%ha#e &ar'et

-asic .once$ts in Forex !rading

-id and Ask Rate:The bi(a!' !prea( i! the (i""ere%e bet*ee the pri%e at *hi%h a ba' or &ar'et &a'er *ill !ella!', or o""er; a( the pri%e at *hi%h a &ar'et ta'er *ill b0y bi(; "ro& a *hole!ale or

retail %0!to&er The %0!to&er *ill b0y "ro& the &ar'et5&a'er at the hi#her a!' pri%e, a( *ill!ell at the lo*er bi( pri%e, th0! #i/i# 0p the !prea( a! the %o!t o" %o&pleti# the tra(e

Margin !rading:Forei# e$%ha#e i! or&ally tra(e( o &ar#i A relati/ely !&all (epo!it %a %otrol &0%hlar#er po!itio! i the &ar'et For tra(i# the &ai %0rre%ie!, =a$o +a' re@0ire! a 1 &ar#i(epo!it Thi! &ea! that i or(er to tra(e oe &illio (ollar!, yo0 ee( to pla%e )0!t U=D 12,222by *ay o" !e%0rityI other *or(!, yo0 *ill ha/e obtaie( a #eari# o" 0p to 122 ti&e! Thi! &ea! that a %ha#e o",!ay 6, i the 0(erlyi# /al0e o" yo0r tra(e *ill re!0lt i a 622 pro"it or lo!! o yo0r (epo!it

%to$*loss disci$line:There are !i#i"i%at opport0itie! a( ri!'! i "orei# e$%ha#e &ar'et! A##re!!i/e tra(er!&i#ht e$perie%e pro"itlo!! !*i#! o" 62572 (aily Thi! %all! "or !tri%t !top5lo!! poli%ie! ipo!itio! that are &o/i# a#ai!t yo0Fort0ately, there are o (aily li&it! o "orei# e$%ha#e tra(i# a( o re!tri%tio! o tra(i#ho0r! other tha the *ee'e( Thi! &ea! that there *ill early al*ay! be a opport0ity to rea%tto &o/e! i the &ai %0rre%y &ar'et! a( a lo* ri!' o" #etti# %a0#ht *itho0t the opport0ityo" #etti# o0t O" %o0r!e, the &ar'et %a &o/e /ery "a!t a( a !top5lo!! or(er i! by o &ea! a#0aratee o" #etti# o0t at the (e!ire( le/el For !pe%0lati/e tra(i#, it i! re%o&&e(e( to pla%eprote%ti/e !top5lo!! or(er!

%$ot and forward trading:he yo0 tra(e "orei# e$%ha#e yo0 are or&ally @0ote( a !pot pri%e Thi! &ea! that i" yo0ta'e o "0rther !tep!, yo0r tra(e *ill be !ettle( a"ter t*o b0!ie!! (ay! Thi! e!0re! that yo0rtra(e! are 0(erta'e !0b)e%t to !0per/i!io by re#0latory a0thoritie! "or yo0r o* prote%tioa( !e%0rity I" yo0 are a %o&&er%ial %0!to&er, yo0 &ay ee( to %o/ert the %0rre%ie! "oriteratioal pay&et! I" yo0 are a i/e!tor, yo0 *ill or&ally *at to !*ap yo0r tra(e"or*ar( to a later (ate Thi! %a be 0(erta'e o a (aily ba!i! or "or a lo#er perio( at a ti&e

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O"te i/e!tor! *ill !*ap their tra(e! "or*ar( ay*here "ro& a *ee' or t*o 0p to !e/eral&oth! (epe(i# o the ti&e "ra&e o" the i/e!t&etAltho0#h a "or*ar( tra(e i! "or a "0t0re (ate, the po!itio %a be %lo!e( o0t at ay ti&e 5 the%lo!i# part o" the po!itio i! the !*appe( "or*ar( to the !a&e "0t0re /al0e (ate

.urrency !raded Across /lobe 0 1ndia

!he FO2R ma3or currency $airs

EURU=D

U=D>9

U=DCHF

G+9U=D

.urrency .rosses

EURCHF

EUR>9

G+9>9

EURG+9

.urrencies traded in 1ndia:

U=DINR

EURINR

G+9INR

>9INR

.urrency Exchanges in 1ndia:

1 MCX =to%' E$%ha#e MCX =X;6 Natioal =to%' E$%ha#e N=E;7 Uite( =to%' E$%ha#e U=E;

The (aily t0ro/er o" N=E a( MCX =X to#ether i! aro0( 72,222 %r

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1ndian #ers$ectiveof !rading #latforms

!rade %tationIt i! the pre&ier bro'era#e tra(i# plat"or& "or r0le5ba!e( tra(i# A( *e ha/e the a*ar(! topro/e it hether yo0 tra(e !to%'!, optio!, "0t0re! or "ore$, Tra(e =tatio o""er! 0i@0elypo*er"0l !trate#y %reatio a( te!ti# tool!, %0!to&i3able aalyti%! a( "0lly a0to&ate( tra(i#te%holo#y i a !i#le tra(i# plat"or&

Features

1 Create a 0li&ite( 0&ber o" tra(i# !trate#ie!6 +a%' te!t a( opti&i3e the !trate#ie!7 Moitor &0ltiple &ar'et!

%ystematic

F0lly a0to&ate( port"olio !ol0tio

eb5ba!e( ea!y5to50!e tra(i#

8o* %o!t tra(i#

Tra!paret tra(e re!0lt!

Di/er!i"i%atio a( ri!' &aa#e&et optio!

Co&prehe!i/e olie /i(eo t0torial! a( FAP

Oe a%%o0t, t*o plat"or&! 5 *or'! i parallel *ith MetaTra(er

working of forex market

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