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Foreign Exchange Market

Foreign Exchange Market

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Published by: Karishma Marfatia on Aug 16, 2011
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Foreign Exchange Market
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, gover nments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market. They may only participate indirectly through brokers or banks and may be targets of forex scams.

Market size and liquidity
The foreign exchange market is unique because of: ‡ its trading volume, ‡ the extreme liquidity of the market, ‡ the large number of, and variety of, traders in the market, ‡ its geographical dispersion, ‡ its long trading hours - 24 hours a day (except on weekends). ‡ the variety of factors that affect exchange rates, Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study Triennial Central Bank Survey 2004 ‡ $600 billion spot ‡ $1,300 billion in derivatives, ie ‡ $200 billion in outright forwards ‡ $1,000 billion in forex swaps ‡ $100 billion in FX options. Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, but only accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).


Market participants
According to the BIS study Triennial Central Bank Survey 2010 ‡ 53% of transactions were strictly interdealer (ie interbank); ‡ 33% involved a dealer (ie a bank) and a fund manager or some other non bank financial institution; ‡ and only 14% were between a dealer and a non -financial company.

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems, such as EBS, Reuters Dealing 3000 Matching (D2), the Chicago Mercantile Exchange, Bloomberg and TradeBook(R). The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trad ing rooms, but turnover is noticeably smaller than just a few years ago.

Commercial Companies
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long -term direction of a currency's exchange rate. Some m ultinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central Banks
National central banks play an important role in the foreign exchange marke ts. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves, to stabilize the market.


Since the forex transactions are secondary to the actual investment decision.that is.) use the Foreign exchange market to facilitate transactions in foreign securities. The combined resources of the market can easily overwhelm any central bank. The mere expectation or rumor of central bank intervention might be enough to stabilize a currency. an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. they are not seen as speculative or aimed at profit-maximisation. endowments etc. which manage clients' currency exposures with the aim of generating profits as well as limiting risk. 3 . For example. Several scenarios of this nature were seen in the 1992-93 ERM collapse. and to sell when the rate is too high . and thus may overwhelm intervention by central banks to support almost any currency. Some investment management firms also have more speculative specialist currency overlay units. like other traders would. however. but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Hedge Funds Hedge funds.Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low. They control billions of dol lars of equity and may borrow billions more. Central banks do not always achieve their objectives. and in more recent times in South East Asia. Nevertheless. their large assets under management (AUM) can lead to large trades. to trade for a profit. if the economic fundamentals are in the hedge funds' favor. such as George Soros's Quantum fund have gained a reputation for aggressive currency speculation since 1990. and there is no convincing evidence that they do make a profit trading. The number of this type of specialist is quite small. central banks do not go bankrupt if they make large losses . Investment Management Firms Investment Management firms (who typically manage large accounts on behalf of customers such as pension funds.

but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades. are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Arbitrage opportunities may exist. the dealing desk model can be far more profitable. Interbank exchange rates.g. e. as a large portion of retail traders' losses are directly turned into market maker profits. In the retail forex industry market makers often have two separate trading desks. which is about 2% of the whole market. But most do not because of the limited number of clearing banks willing to process small orders. after buying from the client. CNN also quotes an official of the National Futures Association "Retail forex trading has increased dramatically over the past few years. Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is. one retail broker estimates retail volume at $25-50 billion daily. with other larger market makers). The dealing desk operates much like the curren cy exchange counter at a bank. More importantly. Prices shown by the market maker do not neccesarily reflect interbank market rates. A limited number of retail forex brokers offer consumers direct access to the interbank forex market.one that actually trades foreign exchange (which determines the firm's own net position in the market. the amount of forex fraud has also increased dramatically. Offsetting does occur. the large majority of retail currency speculators are n ovices and who lose money. but only when the market maker judges its clients' net position as being very risky. Unfortunately. they sell to a bank. which are displayed at the dealing desk. serving as both a proprietary trading desk and a means of offsetting client trades on the interbank market) and one used for off exchange trading with retail customers (called the "dealing desk" or "trading desk"). so that the market makers would be giving up large profits by offsetting. 4 .Retail Forex Brokers Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN. Nevertheless." All firms offering foreign exchange trading online are either market makers or facilitate the placing of trades with market makers.

000 to $100.000. if the speculator's trade is not offset. Retail forex brokers are much less regulated than stock brokers and there is no protection similar to that from the Securities Investor Protection Corporation. force small traders to take imprudently large positions using extremely high leverage. The rules of the game in trading FX are highly disadvantageous for retail speculators.' says Drew Niv. According to the Wall Street Journal ( Currency Markets Draw Speculation.While the income of a marketmaker that offsets trades or a broker that facilitates transactions is limited to transaction fees (commissions).S. are most often registered with the CFTC as "futures commission merchants" (FCMs) and are members of the National Futures Association (NFA). The CFTC has noted an increase in forex scams . without disclosing that this is highly unusual for currency traders. Professional forex traders rarely use more than 10:1 leverage.' " In the US. Large minimum position sizes. is pure profit for the market maker). Most retail speculators in FX lack tradi ng experience and and capital (account minimums at some firms are as low as 250 -500 USD). Potential clients can check the broker's FCM status at the NFA. Fraud July 26. 5 . yet many retail Forex firms default client accounts to 100:1 or even 200:1. 'If 15% of day traders are profitable. 'I'd be surprised. which on most retail platforms ranges from $10. This drastically increases the risk of a margin call (which. chief executive of FXCM. dealing desk brokers can generate income in a variety of ways b ecause they not only control the trading process. they also control pricing which they can skew at any time to maximize profits. 2005) "Even people running the trading shops warn clients against trying to time the market. "it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity" according to the Commodity Futures Trading Commission. Legitimate retail brokers serving traders in the U.

according to this view. many economists (e. Joseph Stiglitz) however.Speculation Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. It is simp ly gambling. Gregory Millman reports on an opposing view. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. currency speculation does not. 6 . Milton Friedman) argue that speculators perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it.g. currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 150% per annum. Nevertheless. comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit. Currency speculation is considered a highly suspec t activity in many countries. A relatively quick collapse might even be preferable to continued economic mishandling.Large hedge funds and other well capitalized "position traders" are the main professional speculators. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital. For example. that often interferes with economic policy.In this view. countries may develop unsustainable financial bubbles or otherwise mishandle their national economies. and later to devalue the krona. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. may consider this argument to be based more on politics and a free market philosophy than on economics. in 1992.g. and forex speculators only made the inevitable collapse happen sooner. to those who do. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators. Other economists (e.

the Indian government passed the Foreign Exchange Regulation Act. Indian authorities are able to manage the exchange rate easily. FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. These industries were designated with high priority. Before this act was introduced. such as emigration. the foreign exchange market in India was regulated by the reserve bank of India through the Exchange Control Department. the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee. this act became famous as FEMA. 1999 or FEMA regulates the whole foreign exchange market in India. After independence. The Foreign Exchange Management Act. From 1975 to 1992 the rupee was coupled to a trade-weighted basket of currencies. by the FERA or Foreign Exchange Regulation Act. In February 1992. transfer of capital abroad by Indian nationals is only allowed in particular circumstances. However.Foreign Exchange Market in India Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in foreign exchange. but in May 1992 this requirement of foreign exchange in India was lifted. 1947. only because foreign exchange transactions in India are so securely controlled. and in March 1993 a single floating exchange rate in the market of foreign exchange in India was implemented. The Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange in India. In 1994 foreign and nonresident Indian investors were permitted to repatriate not only their profits but also their capital for foreign exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they find it suitable. 1973 and gradually. Until 1992 all foreign investments in India and the repatriation of foreign capital required previous approval of the government. the Indian government started to make the rupee convertible. a new foreign investment policy announced in July 1991. However. 7 . The foreign exchange market in India is regulated by the reserve bank of India through the Exchange Control Department. with an exception to low-priority sectors. Initially the government required that a company`s routine approval must rely on identical exports and dividend repatriation. Foreign exchange in India is automatically made accessible for imports for which import licenses are widely issued. declared automatic approval for foreign exchange in India for thirty-four industries. But with the economic and industrial development. up to an equivalent limit of 51 percent.

Since the onset of liberalization. the brokers usually do not have any role to play. since the annual turnover of the market is more than $400 billion. RBI released these transactions. The foreign exchange market India is growing very rapidly. all the foreign exchange markets of India work collectively and in much easier process. The average monthly turnover in the merchant segment was $40. With the development of technologies. as stated by experts. There are several other centers for foreign exchange transactions in India including the major cities of Kolkata. Rs 31. travel agents.81 was worth US$1. Bangalore. and Rs17. in practice the rupee is one of most resourceful trackers of the US dollar. The main center of foreign exchange in India is Mumbai. market mediators and the monetary authority of India.2 for the same period. New Delhi. The rupee`s deviations from Covered Interest Parity as compared to the dollar) display relatively long-lived swings. The average total monthly turnover in the sector of foreign exchange in India was about $174. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks.7 billion for the same period. certain hotels and government shops. The transactions are made on spot and also on forward basis. the commercial capital of the country. the government is considering to use part of these reserves to sponsor infrastructure investments in the country. Rs 12.In July 1995. Predictions of capital flow-driven currency crisis have held India back from capital account convertibility. The Indian foreign exchange market is made up of the buyers. The Authorized Dealers and the attributed brokers are qualified to participate in the foreign Exchange markets of India. This foreign exchange transaction in India does not include the inter-bank transactions. In an unparalleled move. as compared to Rs 7. there are some others who are provided with the limited rights to accept the foreign currency or travelers` cheque. 8 . Pondicherry and Cochin.50 in 1990. An inevitable side effect of the foreign exchange rate policy in India has been the ballooning of foreign exchange reserves to over a hundred billion dollars. The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the central government in order to strengthen the foundation. The importance of the exchange rate of foreign exchange in India for the Indian economy has also been far greater than ever before. sellers. Chennai. The IDBI and Exim bank are also permitted at specific times to hold foreign currency. Foreign Exchange Dealers Association is a voluntary association that also provides some help in regulating the market. While the Indian government has clearly adopted a flexible exchange rate regime.5 billion in 2003-04 and the inter-bank transaction was $134. According to the record of foreign exchange in India. foreign exchange markets in India have witnessed explosive growth in trading capacity. Besides the Authorized Dealers and brokers. which include currency swaps and interest rate swaps. they are the authorized moneychangers.37 in 1985.86 in 1980.

because it gives him or her freedom to open or to close a position of any size whatever. a market participant need not wait to respond to any given event. Flexible regulation of the trade arrangement system: A position may be opened for a predetermined period of time in the FOREX market. Therefore whenever a country buys or sells goods and services from one country to another. bought or sold for the currency of another company.e. Features of the market Liquidity: The market operates the enormous money supply and gives absolute freedom in opening or closing a position in the current market quotation. which enables to plan the timing of ones future activity in advance. Every sovereign country in the world has a currency which is a legal tender in its territory & this currency does not act as money outside its boundaries. Forex markets acts as a facilitating mechanism through which one countrys currency can be exchanged i. 9 . Promptness: With a 24-hour work schedule. the residents of two countries have to exchange currencies. at the investor¶s discretion. Hence. High liquidity is a powerful magnet for any investor.Need for Foreign Exchange In today¶s world no country is self sufficient. Value: The Forex market has traditionally incurred no service charges. participants in the FOREX market need not wait to respond to any given event. consequently there is a need for exchange of goods & services amongst different countries. Availability: A possibility to trade round-the-clock. except for the natural bid/ask market spread between the supply and the demand price. as is the case in ma ny markets.

upon making a $1.000. which makes this market highly profitable but also highly risky. a customer can enter into transactions for an amount equivalent to $100.One-valued quotations: With high market liquidity. Market trend: Currency moves in a quite specific direction that can be tracked for rather a long period of time. thus enabling to avoid the instability problem existing with futures and other forex investments where limited quantities of currency only can be sold concurrently and at a specified price.000 pledge. which presents investment managers with the opportunities to manipulate in the FOREX market. 10 . That means that. most sales may be carried out at the uniform market price. Each particular currency demonstrates its own typical temporary changes. Margin: The credit leverage (margin) in the FOREX market is only determined by an agreement between a customer and the bank or the brokerage house that pushes it to the market and is normally equal to 1:100. It is such extensive credit leverages. in conjunction with highly variable currency quotations.

as well as data that will affect the basic supply and demand of forex market. A favorable balance of payment on current account indicates greater demand of goods & services of that country 11 . the quantity provided will fall. weaker will be the exchange rate because there will be outflow of domestic currency. as the price falls.Factors affecting Forex Rates There are various factors with affect the forex market and its exchange rate. Some of the major fundamental factors are: Factors responsible for exchange rate determination: Balance of payment: If the exports to other countries are more than import then the exchange rate will be stronger as there will be inflow of foreign currency. political. the quantity demanded will fall. The law of supply states. The law of demand states that as the price for an item rises. conversely. the quantity of the item that is supplied will increase. In the case of currency. Price determination: The law of supply and demand essentially governs the Forex market like any other market. Right from the government intervention to demand and supply to investors appetite. it is the demand and supply of both domestic and foreign currency that is considered for price determin ation. More relies on imports. As the price for an item falls. Broadly we can divide these factors in two categories: [A] FUNDAMENTAL FACTORS [B] TECHNICAL FACTORS A. the quantity demanded will rise. as prices rises for a given commodity or currency. It is the interaction of these basic forces that results in the movement of currency prices in the Forex market. environmental and other relevant factors. Fundamental Factor: Fundamental factor shows future price movements of a financial instrument based on economic. attitude and analysis all these factors plays an important role in deciding forex market operation and particularly on exchange rate determination.

Stock Market: Stock market has direct relationship with forex market. As due to export the supply of fo reign currency is greater than the demand of foreign currency at home. If it can't borrow from its own citizens. investments will flow out leading to decreased supply of foreign currency. as investors will be less worried about their investments and foreign investor will also be attracted. We can foresee the situation that if market becomes fully open on capital account issue then lots of inflow and outflow will take place on account of capital assets. which may have gre at impact of exchange rate determination.abroad. so the home currency is likely to appreciate with respect to foreign currency. FDI and increased borrowings. So. Monetary policy & fiscal policy: If a government runs into deficit. Convertibility of capital account means freedom to convert local financial assets to foreign financial assets and vice versa. On the other hand. Capital account liberalization: Till now convertibility of capital account is not fully permitted by government. In the surging market the foreign investor wants to invest in the stock and get the 12 . That means selling more of its currency. central bank directly or indirectly affects the forex market operation. it must borrow from foreign investors. Exchange rate policy and regime : Fixing an exchange rate is policy matter but in India it is largely dismantled as market force determines the exchange rates with certain exchange control regulations (in capital account). due to higher inflation rate country¶s currency depre ciates (as it purchasing power decreases) till the differential of the other base currency. increasing the supply and thus driving the prices down. Interest rate differentials: If there are higher interest rates in home country then it will attract investments from abroad in the form of FII. Domestic Financial Market: Strong domestic financial markets will also lead to the strengthening of domestic currency. Inflation differentials: If inflation rates are high in one country then the other then the country which is having low inflation rate will be in position to maintain the price level of commodity in such a manner that will lead to improve the demand of its goods and hence its currency. if the interest rates are higher in the other country. it has to Borrow money (by selling bonds). This will lead to increased supply of foreign currency. Central bank intervention in Forex market : By open market operation or by increasing / decreasing key rates or by purchasing and sell ing the forex.

Productivity. In situation of crisis the interest rates may go down which results in devaluation of that particular currency. economic data such as labor reports (payrolls. unemployment rate and average hourly earnings). Business Environment: Positive indications (in terms of government policy. Also the phase of business cycle plays an important role as different phase of business have different feature. ultimately leading to strengthening o f domestic currency. as more and more enterprises want to invest there. also affect fluctuations in currency exchange rates.) increase the demand for currency. Consumer Confidence etc. the price of dollar comes down and ultimately rupee appreciates. subprime loan default and lowering interest rate USD keep dwindling (depreciating) against all the major currencies the market became so volatile that no market maker was ready to give competitive quotes. And if there were weaker domestic economy it would lead to outflow of funds from a country.Gross Domestic Product (GDP). which ultimately results in appreciating the home currency. So. International Trade. etc. So. If there is no financial crisis and economy is doing well then forex market is also suppose to do well as it s revealed from the forex triennial survey done by Bank of International settlement. competitive advantages. In this case they bring more foreign currency (Dollar) in Indian market and sell for investing in equity. Productivity differentials: Demand of goods produced in a country explains the demand of the particular currency. For maximum in flow of foreign fund the country¶s business cycle should be in growth phase. Industrial Production. As we have seen during 2007-2008 financial crisis that due to economic slowdown. Any positive indications abroad will lead to strengthening of foreign currency. GDP growth and phases of business cycle: If the domestic economy is strong then there will be lots of investments from abroad which will lead to increased supply of foreign currency. market size. As the price of the non-tradable goods goes up the inflation increase which have adverse impact on exchange rate and it continues to depreciates. Global economic situation and financial crisis : Global scenario of the world acts an indicator of the forex market. Prices of non-tradable goods relative to tradable goods : Price of nontradable good are having indirect impact in exchange rate determination as many of the tradable good are directly dependent on such non -tradable good and prices of that tradable good are having direct impact on the forex.benefit. 13 . Consumer Price Indices (CPI).

Since patterns have worked well in the past. 14 . Technical factor is built on three essential principles: 1. Market (price) action discounts everything: This means that the actual price is a reflection of everything that is known to the market that could affect it. If a country has got high rating that means the country is politically sound and is able to meets its foreign obligation with any difficulty. It tells the risk involved in a particular country based on the parameter like political and financial indicator. and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time. Any Favorable news will lead to strengthening of domestic currency and any negative rumor will lead to weakening of the currency. Indian forex market was under pressure because of the reversal of the capital flow as part of global de leveraging process. B. which ultimately put pressure on the rupee. Higher the rating of county more likely to appreciate the host country currency. Prices move in trends: used to identify patterns of market behavior. History repeats itself: Forex chart patterns have been recognized and categorized for over 100 years. All the market players get worried about the policies and may start unwinding their positions thereby affecting the demand and supply. Technical Factors: Technical factors predicts price movements and future market trends by studying what has occurred in the past using various charts. it is assumed that they will continue to work well into the future. Also corporate were converting the Rupee liability into Foreign currency liability to meet external obligations. 3. Rumors: Any rumor in the markets also leads to fluctuation in the values.USD was all time low for the EURO and GBP. 2. Sovereign risk rating: Sovereign is the country health indicator on various parameter. Political factors: All exchange rates are susceptible to political instability and anticipations about the new gover nment.

The rate (conversion of one currency to another) of one currency in terms of another is 15 .49% 7.58% 3.TOP 10 CURRENCY TRADERS (% OF OVERALL VOLUME ) RANK 1 2 3 4 5 6 7 8 9 10 NAME Deutsche Bank UBS AG Barclays Capital Citi Bank Royal Bank of Scotland J P Morgan HSBC Lehman Brothers** Goldman Sachs Morgan Stanley VOLUME 21. For international financial transactions most of the country involve in an exchange of ones currency to another.70% 15.10% 3.80% 9.47% 2.30% 4.19% 4.86% FOREX MARKET DEVELOPMENT IN INDIA Every nation has its own currency.12% 7.

In practice the rates are quoted by direct method. Each market has its own special characteristics that attract banks and financial institutions to trade 16 . the market witnessed major activities only after 1990s with the floating of the currency in March 1993. bond. In India the rates are quoted in US D/INR terms. FOREX V/S OTHER MARKETS Relationship between Forex Market and other markets: Forex versus Other Financial Markets The Forex (or currency) market is one of four financial markets. However.known as exchange rate. For getting the rates of other currency we use the cross currency method to determine their price. Average daily trading volume of Indian Forex market is nearly $34 billion as per Bank for International settlement survey. In India USD is used as intervention currency for quoting the rates. following the recommendations of Rangarajan committee. commodity. and currency markets. where USD is termed as base currency and INR is known as variable currency. These markets include the stock. The majority of all foreign exchange trades involve the US dollar against another currency due to the fact that the US economy is the largest in the world and being global leader it is used for benchmar king. The origin of the forex market development in India could be traced back to 1978 when banks were permitted to undertake intra-day trades.

Individuals have only recently been permitted to trade in the currency markets. The bond market is a decentralized market without a common exchange. Previously. The stock market has lower leverage and risk (2:1 vs 100:1 in Forex). Key differences from the Forex Market The stock market has lower liquidity. The commodities market has lower liquidity. ndividuals have been trading in the other financial markets for many years. The Bond Market The bond market is a loosely connected system in which buyers and sellers trade fixed income assets and securities. there are commodities markets around the world. Lets take a look at a few basic characteristics of the other markets and their major differences with the Forex market. 17 . The Commodities Market The commodities market is an exchange where raw goods or products are traded. The worldwide stock market is valued at $51 trillion. Key differences from Forex Market The bond market has the world s largest investment sector. The Stock Market The stock market is a system that permits the buying and selling (or trading) of a companys shares and derivatives. control. and governments. and remedies.its products. large financial institutions. There are stock markets around the world. 100:1 in Forex). Commodities from apples to zinc are sold in commodities exchanges. The commodities market tends to have longer trends. Bond and other fixed income assets are traded informally in the over-the-counter market. The bond market has limited trading hours. Key differences from Commodities Market The commodities market has lower leverage (10:1 vs. The worldwide bond market is valued at $45 trillion. The stock market has more regulation. the Forex market was traded primarily by banks. Like the stock market. The bond market has lower volatility and risk.

18 .The commodities market has limited trading hours.5. Capital. Each has its own advantages and challenges. GFT offers multiple order types. It is important to know that without appropriate use of risk management. This limits market open times. The commodities market has more errors and slippage (misquoted prices). Other markets Forex markets Available trading hours are dictated by the trading schedule of the exchange floor and the local time-zone." Traders are charged multiple fees.000 ² and high margin rates. or when many market participants limit their trading or move to markets that are more popular. eclipsing all others in comparison. which is built into the buy and sell prices ² although market makers like GFT are compensat ed by revenues from their activities as a currency dealer. These four markets are operating simultaneously. a high degree of leverage can lead to large losses as well as gains. Margin requirements can be as much as 50 percent of your capital in order to take a position. exchange activities are constant. Liquidity can be greatly diminished after market hours. GFT green accounts allow traders to begin with as little as $200 and 100:1 leverage. Forex is the most liquid market in the world. thus creating trading volume throughout the day and overnight. Because currency is the basis of all world commerce. No restrictions on short-selling (placing a sell order when you think the market will trend down). Many Forex traders will study how these markets work together. In fact. exchange fees and government fees as well as platform and charting fees. which is called Intermarket Analysis. such as commissions. Because of the decentralized clearing of trades and overlap of major financial markets throughout the world. the forex market remains open. which you can use even when short selling.5 days a week. because you are simultaneously buying one currency while NM selling another. All you pay is the spread. Restrictions on short selling and stop orders. Trading restricted by large minimum capital requirements ² sometimes as One consistent margin rate 24 hours a day allows forex traders to leverage their high as $50. The forex market is open 24 hours a day. Liquidity ² particularly in the majors ² often does not dry up during "slow times. including stop orders and trailing stop orders to help you manage your trading equity. clearing fees. as much as 100:1.

India gets only about 25% of the FDI in China. FDI has helped the Indian economy grow tremendously.FOREIGN DIRECT INVESTMENT With strong governmental support. Foreign direct investment ( FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability. 19 . But with $34 billion in FDI in 2007. growth and development.

Why does India. and address the various problems that continue to challenge the country. the Indian national government announced a number of reforms designed to encourage and promote a favorable business environment for investors. distribution and transmission.500 crores. and in joint ventures. While many of the issues that plague India in the aspects of telecommunications. but significantly less than the $134 billion that flowed into China. Although the Chinese approval process is complex. lag so far behind China in FDI amounts? Physical infrastructure is the biggest hurdle that India currently faces. as well as the development of roads and highways. China continues to outshine India as a choice destination for foreign investors. through private equity or preferential allotments. FDIs are permitted through financial collaborations. A number of projects have been implemented in areas such as electricity generation. the slow development and improvement of railways. by way of capital markets through euro issues. but with a limit on foreign equity of INR 1. The Indian national government also granted permission for FDIs to provide up to 100% of the financing required for the const ruction of bridges and tunnels. although there is condition that these banks must be multilateral financial organizations. In 2007.5 million. Currently. a huge growth compared to the previous years. water and sanitation continue 20 . Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased. India has continually sought to attract FDI from the world¶s major investors. a country with resources and a skilled workforce. Foreign investors can buy up to 40% of the equity in private banks. These also include the non-banking financial services sector. including the growing credit card business. coal or mining industries. FDI is not permitted in the arms.This money has allowed India to focus on the areas that needed a boost and economic attention. In 1998 and 1999. FDI is allowed in financial services. India received $34 billion in FDI. to the extent that regional differences in infrastructure concentrates FDI to only a few specific regions. railway. highways and ports have been identified and remedied. with opportunities for foreign investors. approximately $352. nuclear.

FDI in flows into India reached a record US$19. especially in a paperwork system that is shrouded in red tape. Between April and September 2007. removed restrictions on expansion and facilitated easy access to foreign technology and FDI. India has strengths in information technology and other important areas such as auto components. A number of changes were approved on the FDI policy to remove the cap in most of the sectors. India's growth rate of 8% certainly owes a lot to foreign equity capital and foreign direct investment. industrial parks. but its rigid FDI policies were a significant hindrance in this context. jewellery and so on. construction development. Federal legislation is another perverse impediment for India. pharmaceuticals. According to the government's Secretariat for Industrial Assistance. chemicals. Industrial policy reforms have substantially reduced indust rial licensing requirements. Foreign investment is seen as a slow and inefficient way of doing business. and represents a powerful consumer market. Foreign direct investment in India As the third-largest economy in the world in PPP terms. 21 .8bn in the previous fiscal year.to deter major investors. India has positioned(projected) itself as one of the front -runners in Asia Pacific Region. credit -information services. The size of the middle-class population at 300 million exceeds the population of both the US and the EU. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas like insurance and retailing. India has a large pool of skilled managerial and technical expertise. Although India has always held promise for global investors. FDI inflows were US$8. Local authorities in India are not part of the approval process and the large bureaucratic structure of the central government is often perceived as a breeding ground for corruption. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. There is no doubt about the fact that there has been a worldwide stir about foreign direct investment in India. This was more than double the total of US$7.2bn. commodity exchanges.5bn in fiscal year 2006/07 (April -March). petroleum and natural gas. apparels. However. India is a preferred destination for foreign direct investments (FDI). as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment. India's recently liberalised FDI policy permits up to a 100% FDI stake in ventures. Restrictions will be relaxed in sectors as diverse as civil aviation. Mining and so on.

The GDP investments will likewise increase from current 5% to 35% by 2 010. No wonder India has tremendous potential to attract USD 50 billion FDI in the next 5 years.8% of GDP. Govt. has removed 10% voting limit in banks. Indian Government has a key role to play as far as investment laws are concerned. In this regard it is noteworthy to highlight some of the positive reforms that have brought a positive growth in the Indian economy in terms of GDP growth. compared to other nations of south -east Asia like Malaysia and Thailand with a FDI flow of 3% of GDP. of India has already allowed FDI up to 51% with prior government approval in the retail trade of "single brand" products. 3. Revisit foreign shareholding norms in telecom is welcome change. Higher ceiling in FDI in airport revamp ventures and real estate investment. 1. Hence with more liberalization and opening of other sectors of the economy like the latest relaxation in FDI policies in real estat e or direct foreign investment in real estate India etc.6% of GDP in the next 5 years. With so much of visibility of MNCs.7 billion * Total FDI earnings (outward) increase: 2000 -01: $757 million 2004-05: $2.4 billion In the backdrop of this flourishing Indian economy The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected India to double its GDP reaching a phenomenal USD 1100 billion from present USD 550 billion by 2010.Here are the highlights of the latest trend figures concerned with FDI in India: * Increase in total FDI: 46.8% * Rise in foreign equity: 36% * Reinvested foreign earnings and other capital: $3. Why do you think so? Well statistics also say that an average Indian will be growing richer as per capita income rises from USD 600 per annum to USD 1200 per annum by 2010. FDI will increase by at least 1. JVs. 2. 22 .2 billion * Total FDI earnings (inward) in Apr-Jan 2005-06: $5. 5. 4. Govt. Removal of unwarranted restrictions on hindrances to foreign investments has exceptionally increased FDI in India. foreign investors etc it is little contradictory to say that the current flow of foreign direct investment India has been only 0.

Forex or foreign currency. helping entrepreneurs to change one currency to another.THE IMPORTANCE OF FOREX IN INTERNATIONAL TRADE Trade has since ages. man has used this means of communication to improve their living and development of all humanity through out the world. 23 . the main role is to support investment and international trade.

Increment of exports is of 24 . market psychology and political conditions for a nation. non-professional investors and other financial institutions. The main reason that determine exchange rates. There are no fixed prices in forex trade as it could be exploited by companies or financial institutions. has lowered transaction costs that have led to an increase i n liquidity in the market. In forex helps to determine the value of the currency of a nation. demand and availability of a particular currency. large bank. trading activity among retailers has increased enormously and private investors have begun to play an important role in the financial market. a comprehensive approach needs to be taken through the Foreign Trade Policy of India . Particular forex transaction involves any party who purchases a considerable amount of one currency and pay as usual via a different currency. Governments. Forex market is unique because it has a large trade in volume. Forex market is experiencing an increase since the introduction of a number of reasons that growing the value of foreign currency which turns it into an asset. The most important factors that play an important role in this change are economic factors. to different parts of the world. With the new technology and its implementation on the market. Online trading has made it easier for retailers to carry out their transactions in other currencies on the Forex market.Financial centres all over the world play an important role as trade with anchors. which means that investors borrow currencies with a low value and invest in high value currencies. institutional investors. Forex is the largest and liquid based financial markets throughout the world. It is one of the major causes of increased currency value of a country and it boosts the economy of a country. It also provides support in trade. The whole world can be seen if observed closely to the constantly changing mixture of events around the world to keep moving and to a change of price in one currency to a nother. Foreign Trade Policy Of India Foreign Trade Policy of India To become a major player in world trade. so that different types of sell and buy transaction should take place. Commercial transactions involving corporate houses.

To act as an effective instrument of economic growth by giving a thrust to employment generation. especially through imports and thereby increasing 25 y y y y y . Generating additional employment opportunities. India will have to facilitate imports which. and developing a series of µInitiatives¶ for each of these sectors. Facilitating technological and infrastructural upgradation of all the sectors of the Indian economy. particularly in semi urban and rural areas. Objectives of the Foreign Trade Policy of India - Trade propels economic growth and national development. The primary purpose is not the mere earning of foreign exchange. Rationality and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. while incorporating the new Foreign Trade Policy of India. Simplification of levies and duties on inputs used in exp ort products. they are y y To double the percentage share of global merchandise trade within the next five years. are required for the growth Indian economy. trading and services.utmost importance. industrialization and trades. the past policies should also be integ rated to allow developmental scope of India¶s foreign trade. This is the main mantra of the Foreign Trade Policy of India. but the stimulation of greater economic activity. Facilitating development of India as a global hub for manufacturing. Simplification of commercial and legal procedures and bringing down transaction costs. Thus. The Foreign Trade Policy of India is based on two major objectives. Strategy of Foreign Trade Policy of India y Removing government controls and creating an atmosphere of trust and transparency to promote entrepreneurship.

while attaining global standards of quality. Upgradation of infrastructural network. Revitalizing the Board of Trade by redefining its role. giving it due recognition and inducting foreign trade experts while drafting Trade Policy. Involving Indian Embassies as an important member of export strategy and linking all commercial houses at international locations through an electronic platform for real time trade intelligence. business and industry as partners of Government in the achievement of its stated objectives and goals. A trade policy cannot be fully comprehensive in all its details it would naturally require modificatio n from time to time with changing dynamics of international trade . Road ahead of Indian foreign trade policy This Foreign Trade Policy of India is a stepping stone for the development of India¶s foreign trade. y Neutralizing inverted duty structures and ensuring that India's domestic sectors are not disadvantaged in the Free Trade Agreements / Regional Trade Agreements / Preferential Trade Agreements that India enters into in order to enhance exports. It contains the basic principles and points the direction in which it propose to go. 26 . y y y y Partnership Foreign Trade Policy of India foresees merchant exporters and manufacturer exporters. inquiry and information dissemination.value addition and productivity. to global standards. related to the entire Foreign Trade chain. both physical and virtual.

the impact of the EMU and the opportunities and threats posed by emerging markets. specifically the reduction of settlement risk. The Future of the Foreign Exchange Markets discusses the new foreign exchange clearing bank. It reviews the emergence of Contracts for Differences (CFDs) which avoid the need for any settlement. The expected effects of EMU on the size and structure of the market are analysed.The Future of the Foreign Exchange Markets It provides a comprehensive study of the key issues affecting the market including the dramatic developments taking place in trading technology. the CLSS and considers its implications for the future structure of the global foreign exchange market. Structure and Scope The Future of the Foreign Exchange Markets addresses the critical issues including: 27 . with issues such as the likely size and distribution of activity in the euro being specifically addressed.

with particular reference to the new foreign exchange clearing bank. 28 .‡ Developments in the foreign exchange markets including the spot market.considering the growing proportion of forex trading devoted to emerging market currencies and whether this growth and development will continue in the face of the turmoil in Asia and Russia. ‡ Emerging Markets . ‡ Trading Technology .in particular the development of electronic matching systems and their new dominance of trading in the market. CLSS. ‡ Netting and Settlement systems. both during the first year of its implementation and once stage three of monetary union is completed. ‡ EMU .a discussion on the size and structure of the market. The rise of CFDs will also be considered. the forwards market and foreign exchange options and derivatives market.

These products not only brings transparency but also eliminate counter party risk. ‡ Identify how EMU is changing the foreign exchange market and eva luate how much impact it will ultimately have. 29 . ‡ Review forcasts on the future of emerging markets currency trading and assess which currencies are most likely to be extensively traded and why. brings mark to market concept and provides access to all type of market participants. ‡ Assess whether the proportion of trading conducted over electronic matching systems has a natural limit and whether it will prove as successful in the forward and options markets as it has in the spot markets. Exchange traded derivatives: As over the counter Forex market doesnt have much transparency and trading is not allowed we can expect more exchange traded product will be launched after the initial success of currency futures.CONCLUSION Key Benefits As a result of this report you will be able to: ‡ Assess where the the market is today and put into perspective where it is going tomorrow. In the near future the change in Forex market should revolve around following key areas: Capital account convertibility : We can expect lots of liberalization towards capital account during the next 3-5 years as the new stable government has formed which is committed to economic liberalization. ‡ Access the thoughts of prominent bank foreign exchange executives on the directions the market is taking and what they are doing to prepare. Due to lots of restriction on OTC derivatives in Indian market the entities outside finds it difficult to hedge their direct or indirect exposure in Indian rupee market and these exchange-traded derivatives may help in hedging. ‡ Evaluate the planned global foreign exchange clearing service. which was launched last year. Here government may take some cautious approach because once capital market is open it is very difficult to control the price of rupee due to large amount and volume involved. CLSS and assess how it will decrease worldwide settlement risk.

In such scenario we can expect more customized product as per the requirement of customer in the market.Role of Reserve Bank of India: Role of reserve Bank will be changed from regulatory. monitoring & controlling authority to regulatory & monitoring authority as it does not have to come frequently in market to sell or buy Forex to influence the rupee rate Customized and exotic product: We have recently seen that the many corporates has suffered huge loss on Forex derivatives exposure due depreciation of rupee on account of USD. These losses lead to credit risk for the banks who has offered the derivative product. 30 .

mapsofindia.com www.indiatimes. Through this project we have studied in detail about the FOREX MARKET and hence have expanded and applied our knowledge.com Moneycontrol.ACKNOWLEDGEMENT For this project we would sincerely like to thank teacher Suri Ma¶am for giving us this opportunity to do this project and understand THE ROLE OF FOREX IN TRADE AND DEVELOPMENT.yahoo.com www.com economictimes.forex.com business. Your invaluable contribution will truly help us grow in wisdom.scribd.biz www.com www.infibeam. BIBLIOGRAPHY            www.com www. Thank you.com www.google.netvert.com www.investopedia.wikipedia.com 31 .

I. TOPIC: THE ROLE OF FOREX IN TRADE AND DEVELOPMENT SUBJECT: INTERNATIONAL BANKING AND FINANCE GROUP NO.: 11 32 .DONE BY Paridhi Khaitan Karishma Marfatia Gaurangi Sambhoo Natasha Shail Rahul Singhania Dhaval Gala (22) (30) (47) (55) (56) (59) CLASS: T.B.B.Y.

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