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PRIYANKA VIJAY YADAV ROLL NO : 53 (T.Y.

BBI) SUBJECT : FOREIGEN EXCHANG RISK & ITS IMPACT ON INDIAN CAPITAL MARKET

CHAPTER PAGE NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 24 25 26 27 28 29 30 31 32 32 33 33 34 35 36 37 3 4 5 6,7 8 9 10,11 12,13 14,15 16 17 18 19 20 21,22 23 24 25 26 27 28 29 30 31 32 33 34,35 36 41 42 43,44 45 46 47 48 53,54 55 56

NAME INTRODUCTION OF FOREX MARKET HISTORY OF FOREIGN EXCHANGE MARKET THE 8 & size of foreign exchange market INTERBANK FOREIGN EXCHANGE MARKET FEATURES OF FOREIGN EXCHANGE MARKET CHARACTERSTICS OF FOREIGN EXCHANGE MARKET NEED FOR FOREIGN EXCHANGE MARKET STRUCTURE OF FOREIGN EXCHANGE MARKET ADVANTAGES OF FOREIGN EXCHANGE MARKET DISADVANTAGES OF FOREIGN EXCHANGE MARKET NUMBER OF WAYS TO INVEST IN FOREIGN EXCHANGE MARKET STRATERGIES IN FOREIGN EXCHANGE MARKET INDIAN SCENARIO ABOUT FOREIGN EXCHANGE MARKET HOW FOREIGN EXCANGE MARKET IN INDIA WORKS WHERE DOES INDIA STAND IN GLOBAL FOREX MARKET DIFFERENT TYPES OF FOREIGN EXCHANGE INSTRUMENTS FOREIGN EXCHANGE RATE & CONCEPT OF FOREIGN EXCHANGE RATE TYPES OF FOREIGN EXCHANGE RATE FACTORS AFFECTING EXCHANGE RATE FLUCTUATION IN EXCHANGE RATE METHODS OF QUOTING FOREIGN EXCHANGE RATE DEFINATION OF CURRENCY ROLE OF CURRENCY IN FOREIGN EXCHANGE MARKET METHODS OF CURRENCY TRANSLATION INDIAN CURRENCY AGAINST ANOTHER CURRENCY TABEL CURRENCY FLUCTUATION WHAT CAN AFFECT CURRENCY FLUCTUATION CURRENCY TRENDS WITH TABLE FACTORS AFFECTING INDIAN Rs. CHANGE FOREIGN EXCHANGE RISK TYPES OF EXPOSURE RISK IN FOREX TRADING FOREIGN EXCHANGE RISK MAMAGMENT HOW TO MANAGE FOREIGN EXCHANGE RISK CASE STUDY INDIAN FOREIGN EXCHANGE CONTROLS RECENT NEWS BY RESERVE BANK OF INDIA ABOUT FOREX MARKET HOW CAN WE TRADE IN FOREIGN EXCHANGE MARKET

37,38,39,40 SUPPLY & DEMAND IN CURRENCY MARKET

49,50,51,52 FOREIGN EXCHANGE RISK & ITS IMPACT ON INDIAN CAPITAL MARKET

INTRODUCTION
DEFINATION OF FOREIGN EXCHANGE
The exchange of one currency for another, or the conversion of one currency in to another currency. In other words, it is the risk that relates to the gains/ losses that arises due to fluctuation in the exchange rate. an appreciation or depreciation in the exchange rate will lead to a change in the value of all those assets & liabilities that are denominated in foreign currency. To manage Forex risk banks can adopt techniques of setting levels of exposures to sustain the risk, that might arise due to exchange rate fluctuations and adopting hedging.

History of Foreign Exchange


The foreign exchange market (fx or forex) as we know it today originated in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders who exchanged coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish. From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity. After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. From 1931 until 1973, the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times.

Size of foreign exchange market


One of the largest financial markets in the world $4.0 trillion average daily turnover, equivalent to:

1. More than 12 times the average daily turnover of global equity markets. 2. More than 50 times the average daily turnover of the NYSE. 3. An annual turnover more than 10 times world GDP.

The 8 Major Currencies:


Whereas there are thousands of securities on the stock market, in the FOREX market most trading takes place in only a few currencies; the 1. U.S. Dollar ($), 2. European Currency Unit (), 3. Japanese Yen (), 4. British Pound Sterling (), 5. Swiss Franc (Sf), 6. Canadian Dollar (Can$) and to a lesser extent, the Australian and New Zealand Dollars. These major currencies are most often traded because they represent countries with esteemed central banks, stable governments, and relatively low inflation rates.

TIMELINE OF FOREIGN EXCHANGE


1944 Bretton Woods Accord is established to help stabilize the global economy after World War II. 1971 Smithsonian Agreement established to allow for greater fluctuation band for currencies. 1972 European Joint Float established as the European community tried to move away from its dependency on the U.S. dollar. 1973 Smithsonian Agreement and European Joint Float failed and signified the official switch to a free-floating system. 1978 The European Monetary System was introduced so other countries could try to gain independence from the U.S. dollar. 1978 Free-floating system officially mandated by the IMF. 1993 European Monetary System fails making way for a world-wide free-floating system.

Interbank foreign exchange market


The interbank market is the top-level foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly, or through electronic brokering platforms. The Electronic Broking Services (EBS) and Thomson Reuters Dealing are the two competitors in the electronic brokering platform business and together connect over 1000 banks. The currencies of most developed countries have floating exchange rates. These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies. The interbank market is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled. It is mainly used for trading among bankers. The three main constituents of the interbank market are

Spot market Forward market SWIFT (Society for World-Wide Interbank Financial Telecommunications)

The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However, foreign currency options are regulated in the United States and trade on the Philadelphia Stock Exchange. Further, in the U.S., the Federal Reserve Bank publishes closing spot prices on a daily basis.

1.

Spot markets:

Also known as the organized or OTC (over the counter) market. This is made up of cash market is known as the publish financial markets where financial tradable instruments and/or commodities are traded for immediate delivery. The spot market prices are individually agreed between the parties and therefore the prices are usually not published. The spot markets entails a two day delivery period in order to move cash from one bank to the other. The online forex trading markets is usually comprised of the spot markets as trading is purely speculative driven and transactions are done on the spot.

2.

Forward markets:

The forward markets is over the counter financial markets that dealins in the CFDs or contracts for differences for future delivery. Forward markets are also known as forward contracts and are personalized between the buyer and seller which includes the delivery time and amount which is usually determined at the time of the transaction.

3.

SWIFT:

SWIFT is an acronymn for Society for Worldwide Interbank FInancial Telecommunications. SWIFT is used to send payment orders that are usually settled via the correspondent accounts which the banks have with each other. Central banks also play a role in setting currency exchange rates by altering interest rates. By increasing interest rates they stimulate traders to buy their currency as it provides a high return on investment and this drives the value of the corresponding central bank's currency higher with comparison to other currencies.

Features of the Forex Market 1. 24-Hour Market :


Other than the weekends when it is closed, the forex market is open 24 hours a day. There is no need to wait for the market to open and you can trade anytime you like. This flexibility has enabled many working professionals to take on forex trading as a side job. They can trade in the morning, afternoon, night or whenever they are free. The best thing is that this also means that no one can monopolize the market! The forex market is so huge that no single entity, be it an organization, a group, a central bank or even the government can control the market trend.

2.

Leverage :

In forex trading, only a small margin is needed to purchase a contract of a much higher value. Leverage enables you to earn high returns while minimizing capital risks. However, leverage can be a double-edged sword. Without proper risk management, such high leverage trading may result in huge losses or profits.

3.

High liquidity :

In view of the huge trading volume in the forex market, under normal conditions, you can buy or sell currency at your desired price in a mere matter of seconds with just a simple click of the mouse. You can even setup an online trading platform to buy and sell (place order) at the right price so that you can control your profit margin and cut losses. The trading platform will execute everything for you automatically. It is fast and simple.

4.

Free service :

In addition to free simulation accounts, many trading platforms also provide news, charts and analyses free of charge. Market movements in a simulation account are the same as those in the actual forex market. Use a simulation account to build up your trading experience and confidence and find your way to success.

5.

Tools needed:

You will only need a computer with Internet access. It is that simple! There is no need for you to spend thousands of dollars in training and courses that cannot guarantee you success. We believe that you can find your pathway to wealth creation by using the free resources available in our trade simulation system!

CHARACTERISTICS OF FOREIGN EXCHANGE MARKET


The foreign exchange market is unique because of the following characteristics:

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 variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

Need for Foreign Exchange


1. Foreign exchange is the monetary mechanism by which transactions in two or more currencies are affected. The development of foreign exchange practices and procedures is similar to that of internal monetary systems.

2. In the beginning, trade took place on a barter basis. That had an obvious disadvantage: each of the parties in a transaction had to have something the other wanted. The basis of the alternative, a monetary exchange system, is a material that has an intrinsic value that is relatively stable and so is wanted by both parties in a transaction.

3. The most common examples of such a material--- the medium of exchange--- are gold and silver. When both buyer and seller accept a medium of exchange, it becomes possible to dispose of goods or services.

4. With the development of nations, each with its own monetary system, and international trade, a foreign exchange mechanism became necessary and was developed. By means of foreign exchange, goods produced in one country can be purchased in another country.

5. Regardless of its direction, such an international transaction must be denominated in a currency other than that of either the seller or buyer; that is, one party to the transaction must either buy or sell a foreign currency.

6. It does so through the international banking system, and the result is a foreign exchange transaction. The problem that then arises is convertibility, or the relative values of two different currencies.

7. Methods and procedures that have been developed by central banks and internal banking systems are the means of effecting actual foreign exchanges. Commercial transactions, in turn, are effected through the banking system. Both are international monetary system and the commercial banking constraints of each country must be thoroughly understood before the flow of financial transactions on a multinational scale to be optimized.

8. Despite the existence of an international monetary system, changes in the value of one currency in relation to another are common, and they make the management of international business more complex. Changes in monetary values are of two kinds: those that reflect supply and demand in the day-to-day market, and those that reflect an imbalance between the economies of countries.

9. This is where the Bretton Woods agreement was intended to limit fluctuations to the day-today market variety and give special consideration to the handling of imbalances between countries.

STRUCTURE OF FOREIGN EXCHANGE MARKET


1. The major participants in the foreign exchange markets are commercial banks foreign exchange brokers and other authorized dealers, and the monetary authorities.

2. It is necessary to understand that the commercial banks operate at retail level for individual exporters and corporations as well as at wholesale levels in the inter bank market.

3. The foreign exchange brokers involve either individual brokers or corporations. Bank dealers often use brokers to stay anonymous since the identity of banks can influence short term quotes.

4. The monetary authorities mainly involve the central banks of various countries, which intervene in order to maintain or influence the exchange rate of their currencies within a certain range and also to execute the orders of the government.

5. It is important to recognize that, although the participants themselves may be based within the individual countries, and countries may have their own trading centers, the market itself is world wide.

6. The trading centers are in close and continuous contact with one another, and participants will deal in more than one market.

7. Primarily, exchange markets function through telephone and telex. Also, it is important to note that currencies with limited convertibility play a minor role in the exchange market.

8. Besides this, only a small number of countries have established their full convertibility of their currencies for full transactions.

9. The foreign exchange market in India consists of 3 segments or tires. The first consists of transactions between the RBI and the authorized dealers.

10. The latter are mostly commercial banks. The second segment is the interbank market in which the ADs deal with each other. And the third segment consists of transactions between ADs and their corporate customers.

11. The retail market in currency notes and travelers cheques caters to tourists. In the retail segment in addition to the ADs there are moneychangers, who are allowed to deal in foreign currencies.

12. The Indian market started acquiring some depth and features of well functioning market e.g. active market makers prepared to quote two-way rates only around 1985. Even then 2 - way forward quotes were generally not available.

13. In the interbank market, forward quotes were even in the form of near term swaps mainly for ADs to adjust their positions in various currencies.

14. Apart from the ADs currency brokers engage in the business of matching sellers with buyers. In the interbank market collecting a commission from both.

Advantages of Forex markets:

1.

Minimum or no commissions :

There are no clearing fees, no exchange fees, no government fees and no brokerage fees.

2.

Easy access :

If you compare the money you need on the market in comparison with the amount needed for entering the stock, options or futures market, its a huge difference. The amount of capital is very low and it allows numerous types of people to easily enter the foreign exchange market.

3.

No middlemen :

Spot currency trading is decentralized and eliminates middlemen, allowing you to trade directly.

4.

Lots of free courses and demo possibilities :

On the internet you can find huge opportunities for learning how the Forex market works and what you need to become a good trader. Also, most online Forex brokers offer demo accounts to practice trading and build your skills, using real-time charts and news feeds. They are more valuable than you could even imagine and, before starting your real money on the market, try to see if you are built and ready for it by practicing with these types of software.

5.

Time and location flexibility :

The market is open 24 hours each day, so you dont have to match your schedule with the one of the market. It doesnt require a full-time engagement and you can choose the hours that suit your best. Also, you can operate from any corner of the world, as long as you have an Internet connection.

6.

Low transaction costs :

The transaction cost, determined by the bid/ask spread, is usually less thanand it can go even lower in the case of large dealers.

7.

A high liquidity market :

The market is huge, so is extremely liquid. Around 4 trillion dollars are exchanged every day, according to the latest figures released by the Bank of International Settlements (BIS). That becomes an advantage, as you dont have to struggle so much until you will find someone who wants to buy your currency or sell you one. You cant get stuck and, by using features like stop lose, you will close your position automatically, while not even being in front of the computer.

8.

Leverage :

With a little investment you can move large amounts of money. Leverage gives the trader the ability to make nice profits and keep risk capital to a minimum.

9.

No forced deadlines :

No one and no rule is forcing you to close a position. You can stay open as long as you consider necessary.

10. No fixed lot size requirements :


Your contract size its your decision and you are the only one who determines your own lot.

11. Transparency :
Due to multi-day market movement, its size and the high number of participants, it is virtually impossible to market manipulation.

Disadvantages of Forex markets:


1. Differences between retail and wholesale pricing :
Around two-thirds of the trades are made between dealers and large organizations such as hedge funds and banks. They trade at wholesale prices, while the investor trades at a retail price. Like this it can become a challenge to compete against bigger organization that start with a lower entry point and sell more profitably.

2. Risk of choosing an inexperienced broker :


You can find on the internet many people who are targeting fraud so be careful when choosing the broker.

3. Where there is a winner, there is also a looser :


Dont expect necessarily to win lots of money. Remember that for someone to get rich, another has to lose money on the Forex market.

4. Requires knowledge and time :


Without completely knowing the markets rules and without having patience, your investment might very well soon vanish. When you enter Forex market, you have to be fully aware of its advantages, but also disadvantages. Dont count only on the benefits of this investment to think that you will succeed. Study, practice, improve your skills, keep an eye on all the news and factors that influence the market, and always stick to your established system.

There are a number of ways to invest in the foreign exchange market, including:
1. Forex :
The Forex market is a 24-hour cash (spot) market where currency pairs, such as the Euro/US dollar (EUR/USD) pair, are traded. Because currencies are traded in pairs, investors and traders are essentially betting that one currency will go up and the other will go down. The currencies are bought and sold according to the current price or exchange rate.

2. Foreign currency futures :


These are futures contracts on currencies, which are bought and sold based on a standard size and settlement date. The CME Group is the largest foreign currency futures market in the United States, and offers futures contracts on G10 currency pairs as well as emerging market currency pairs and e-micro products.

3. Foreign currency options :


Where futures contracts represent an obligation to either buy or sell a currency at a future date, foreign currency options give the option holder the right - but not the obligation - to buy or sell a fixed amount of a foreign currency at a specified price on or before a specified date in the future.

4. Exchange-traded funds (ETFs) & exchange-traded notes (ETNs) :


A number of foreign currency exchange-traded products that provide exposure to foreign exchange markets are available. Some ETFs are single-currency, while others buy and manage a group of currencies.

5. Certificates of Deposit (CDs) :


Foreign currency CDs are available on individual currencies or baskets of currencies and allow investors to earn interest at foreign rates. Everbank's "World Energy" basket CD, for example, offers exposure to four currencies from non-Middle Eastern energy-producing countries (Australian dollar, British pound, Canadian dollar and Norwegian krone).

6. Foreign Bond Funds :


These are mutual funds that invest in the bonds of foreign governments. Foreign bonds are typically denominated in the currency of the country of sale. If the value of the foreign currency rises relative to the investor's local currency, the earned interest will increase when it is converted.

Market Strategies In Foreign Exchange


The market strategies in foreign exchange to be followed take a great deal to learn about the types of market existing in the forex world. Depending upon the trend that follows in market and the types of traders and investors that participate in the market, it has been categorized as follows: Trending market Directionless market Volatile market With development of the different types of market, took place the development of different foreign exchange strategies to trade in these markets. The different features of different markets brought about the different rules of trading. And also the traders/investors are grouped as per their dealing in the market.

1. Trending market :
As the name suggest the trend following strategies follows the trends of the markets and are changed according to the trends as well. These market strategies in foreign exchange online are designed to take any kinds of big or small trend moves that may occur. The main feature for designing a trend following strategy is to make sure that no single big move in the market is ever missed. And this factor can be accomplished by always being present in the market.

2. Directionless market :
The support and resistance (S/R) market strategies in foreign exchange take advantage of the directionless market. The main focus in support and resistance strategy is to make profit from the price fluctuations in the directionless market. The price movements opposite to those used in trend following strategies are acquired or used under this strategy of S/R taking the fact into consideration that markets are directionless 85% of the time.

3. Strategies for volatile market :


Strategies designed for volatile types of market are volatility expansion strategies. The trades generated by this type of strategy in foreign exchange strategies is usually of short term and the trader will be out of he market in an small amount of time. This kind of strategies produces winning trades. One feature of a volatile market is gaps. Gaps refer to places in a bar chart where there is no continuity or projection of price.

INDIAN SCENARIO ABOUT FOREIGN EXCHANGE MARKET


Primary objective of regulations of banks in india is the benchmark of the banking system with best international standards with country specific calibration/adaptation . Accordingly, banks in india are required to adopt the standardized Approach (SA) for credit risk and basic indicator approach (BIA) for operational risk for computing their capital requirements under the basel II norms. Taking into account the level of preparedness of Indian banks , it has been decided that foreign banks operating in india and Indians banks having operational presence outside india should adopt the revised frame work from 31 st march 2008. All other commercial banks are encouraged to migrate to these norms in alignment with them within 31st march 2009. In the Indian scenario the basic indicator approach has been prescribed for operational risk capital charges , which is a coarse calculation, based upon a straight percentage (15 per cent) of gross income even the SA is a similar calculation based on a percentage of gross income using distribution factors across SA is similar calculation based on a percentage of gross income using distribution factors across eight business lines defined in a basel documents. The BIA is expected to increase the capital requirement of banks, which is reinforced by the findings of the quantitative impact studies 5 (QIS 5), in which india participated .

How foreign exchange market works in india


Foreign Exchange Market in India works under the central government in India and executes wide powers to control transactions in foreign exchange. indiaforex.com The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange market in India. Before this act was introduced, the foreign exchange market in India was regulated by the reserve bank of India through the Exchange Control Department, by the FERA or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a temporary measure to regulate the inflow of the foreign capital. But with the economic and industrial development, the need for conservation of foreign currency was urgently felt and on the recommendation of the Public Accounts Committee, the Indian government passed the Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA. The major players in the foreign exchange arena are commercial banks ,investment banks, central banks, trading institutions ,hedge funds, corporations, high net worth individuals and individual investor . Commercial and investment banks are the natural players in foreign exchange. Foreign exchange has the perfect characteristics for banks. It is profitable, the spot market provides limited credit exposure ,the forward market.

Where does India stand in global Forex market?


The daily turnover of the Global Forex market is presently estimated at US$ 3 trillion. Presently the Indian Forex market is the 16th largest Forex market in the world in terms of daily turnover as the BIS Triennial Survey report. As per this report the daily turnover of the Indian Forex market is US$ 34 billion in the year 2007. Besides the OTC derivative segment of the Indian Forex market has also increased significantly since its commencement in the year 2007. During the year 2007-08 the daily turnover of the derivative segment in the Indian Forex market stands at US$ 48 billion. The growth of the Indian Forex market owes to the tremendous growth of the Indian economy in the last few years. Today India holds a significant position in the Global economic scenario and it is considered to be one of the emerging economies in the World. The steady growth of the Indian economy and diversification of the industrial sectors in India has contributed significantly to the rapid growth of the Indian Forex market. Let us take a watch on the Indian Forex trading scenario since the early days. The Forex trading history of India dates back to 1978, when Reserve Bank of India took a step towards allowing the banks to undertake intra-day trading in Foreign exchange. It is during the period of 1975-1992 when Reserve Bank of India, officially determined the exchange rate of rupee according to the weighed basket of currencies with the significant business partners of India. But it needs to be mentioned that there are too many restrictions on these banks during this period for trading in the Forex market. The introduction of the open market policy in the year 1991 and implementation of the new economic policy by the Govt. of India brought a comprehensive change in the Forex market of India. It is during the month of July 1991, that the rupee undergone a two fold downward adjustment and this was in line with inflation differential to ensure competitiveness in exports. Then as per the recommendation of a high level committee set up to review the Balance of Payment position, the Liberalized Exchange Rate Management System or the LERMS was introduced in 1992. The method of dual exchange rate mechanism that was part of the LERMS also came into effect 1993. It is during this time that uniform exchange rate came into effect and that started demand and supply controlled exchange rate regime in Indian. This ultimately progressed towards the current account convertibility that was a part of the Articles of Agreement with the International Monetary Fund. It was the report and recommendations of the Expert Group on Foreign Exchange, formed to judge the Forex market in India that actually helped to widen the Forex trading practices in the country. As per the recommendations of the expert committee, Reserve bank of India and the Government took so many significant steps that ultimately gave freedom to the banks in many ways. Apart from the banks corporate bodies were also given certain relaxation that also played an instrumental role in spread of Forex trading in India. It is during the year 2008 that Indian Forex market has seen a great advancement that took the Indian Forex trading at par with the global Forex markets. It is the introduction of future derivative segment in Forex trading through the largest stock exchange in country National Stock Exchange or NSE. This step not only increased the Indian Forex market volume too

many folds also gave the individual and retail investor a chance to trade at the Forex market, that was till this time remained a forte of the banks and large corporate. Indian Forex market got yet another boost recently when the SEBI and Reserve Bank of India permitted the trade of derivative contract at the leading stock exchanges NSE and MCX for three new currency pairs. In its recent circulars Reserve Bank of India accepting the proposal of SEBI, permitted the trade of INRGBP (Indian Rupee and Great Britain Pound), INREUR (Indian Rupee and Euro) and INRYEN (Indian Rupee and Japanese Yen). This was in addition with the existing pair of currencies that is US$ and INR. From inclusion of these three currency pairs in the Indian Forex circuit the Indian Forex scene is expected to boost even further as these are some of the most widely traded currency pairs in the world.

Different types of Foreign Exchange Instruments: 1. Foreign exchange forwards :


A forward foreign exchange contract is a deal to exchange currencies - to buy or sell a particular currency - at an agreed date in the future, at a rate, i.e. a price, agreed now. This rate is called the forward rate. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties.

2. Currency features :
A currency future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a future exchange rate. A futures contract is similar to a forward contract, with some exceptions. Futures contracts are traded on exchange markets, whereas forward contracts typically trade on over-the-counter markets (OTC). Also, futures contracts are settled daily on marked-to-market (M2M) basis, whereas forwards are settled only at expiration. Most contracts have physical delivery, so for those held till the last trading day, actual payments are made in respective currencies. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date. Investors enter into currency futures contract for hedging and speculation purpose.

3. Currency swap :
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps A foreign currency swap is an "exchange of borrowings", where the principal and interest payments in one currency are exchanged for principal and interest payments in another currency. Mostly corporates with long-term foreign liability enters into currency swaps to get cheaper debt and to hedge against exchange rate fluctuations. The best example of swap transaction is paying fixed rupee interest and receiving floating foreign currency interest.

4. Currency option :
like futures or forwards, which confer obligations on both parties, an option contract confers a right on one party and an obligation on the other. The seller of the option grants the buyer of the option the right to purchase from, or sell to, the seller a designated instrument (currency) at specified price within a specified period of time. If the option buyer exercises that right, the option seller is obligated. Investors can hedge against foreign currency risk by purchasing a currency option put or call. For example, assume that an investor believes that the USD/INR rate is going to increase from 45.00 to 46.00, implies that it will become more expensive for an Indian investor to buy U.S dollars.

Foreign exchange rate


In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX rate or Agio) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one countrys currency in terms of another currency. Exchange rates are determined in the foreign exchange market,which is open to a wide range of different types of buyers and sellers where currency trading is continuous: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Concept of Foreign Exchange Rate


When you are in Germany and you buy rice from a shop, you will naturally pay in Euros, and of course, the shop will be willing to accept Euros. This trade can be conducted in Euros. Trading of goods within a country is relatively simple. However, things get complicated if you want to buy a US-made computer. You might have paid in Euros at the shop. However, through transactions in banks and financial institutions, the final payment will be made in US dollars and not Euros. Similarly, when Americans want to buy German products, they will have to eventually pay in Euros. Foreign exchange rate is the value at which a countrys currency unit is exchanged for another countrys currency unit. For example, the current foreign excha nge rate for Euros is: 100 EUR = USD 130.

TYPES OF FOREIGN EXCHANGE RATE. 1. Floating Rates :


Floating rates are the main type of foreign exchange rates and the primary reason for currency fluctuations in foreign exchange markets. All major economies from developed countries allow the value of their currencies to float freely under market forces. Floating rates are preferable if a country's economy is strong enough to withstand the constant change in the value of its currency. For example, a country's currency may lose value in the foreign exchange market iftrade deficit is causing weak demand for the currency and strong demand for foreign currencies. As a lower currency value is making imports more expensive and exports cheaper, both local and foreign buyers may switch their demand to the country's domestic goods and services. An economy that has the resources and means to meet the shifting demand can automatically adjust both foreign trade and domestic economic activities. Eventually the value of its currency can bounce back up.

2. Fixed Rates :
The smaller economies of developing countries use fixed foreign exchange rates to promote trade and attract foreign investments. For example, by fixing its currency against the currencies of other countries, a country keeps export prices affordable to foreign buyers and accumulates trade surplus over time. Fixed currency rates also allow a country to assure foreign investors of the stable value of their investments in the country. However, under fixed rates, a country's monetary policies can become ineffective, especially when trying to stimulate domestic economic activities by consumers at home. Injecting more money into the economy would normally reduce a country's currency value against foreign currencies under floating rates. As imports become more expensive, consumers would gradually focus their demand on domestic products, potentially lifting up the economy. With fixed rates, however, the exchange value of domestic currency does not move and more money means more buying power for imports. Such an outcome does not achieve policy makers' intention to increase domestic demand.

3. Pegged Rates :
Pegged foreign exchange rates are a compromise between floating rates and fixed rates. Under pegged rates, a country allows its currency to fluctuate within a fixed band around a periodically adjusted central value. Pegged rates are more appropriate for a transitioning, developing economy. They allow both stability and a certain degree of market adjustments. While no artificial exchange rates, fixed or pegged, can fix economic problems single-handed, they do provide an opportunity for growth. Countries hope that economic improvements can bring in the foreign currency reserves required to keep the stated rates. When an economy fails to produce the expected results, such a system cannot maintain the fixed value for long, according to Brigham Young University in "Fixed Exchange Rates vs. Floating Exchange Rates."

Factors Affecting Exchange Rate


All forex trading involves the exchange of one currency with another. At any one time, the actual exchange rate is determined by the supply and demand of the corresponding currencies. Keep in mind that the demand of a certain currency is directly linked to the supply of another. Likewise, when you supply a certain currency, it would mean that you have the demand for another currency. The following factors affect the supply and demand of currencies and would therefore influence their exchange rates.

1. Monetary Policy :
When a central bank believes that intervention in the forex market is effective and the results would be consistent with the governments monetary policy, it will participate in forex trading and influence the exchange rates. A central bank generally participates by buying or selling the domestic currency so as to stabilize it at a level that it deems realistic and ideal. Judgment on the possible impact of governments monetary policy and predictio n on future policy by other market players will affect the exchange rates as well.

2. Political Situation :
Due to political instability there can be possibility of delaying implementation of all policies and sanction of budget. So that will create also major impact on trade.

3. Balance of Payments :
Balance of payments of a country will cause the exchange rate of its domestic currency to fluctuate. The balance of payments is a summary of all economic and financial transactions between the country and the rest of the world. It reflects the countrys international economic standing and influences its macroeconomic and microeconomic operations. The balance of payments can affect the supply and demand for foreign currencies as well as their exchange rates. An economic transaction, such as export, or capital transaction, such as inflow of foreign investment, will result in foreign revenue. Since foreign currencies are normally not allowed to circulate in the domestic market, there is a need to exchange these currencies into the domestic currency before circulation. This in turn creates a supply of foreign currencies in the forex market. When the supply of a foreign currency increases but its demand remains constant, it will directly drive the price of that foreign currency down and increase the value of the domestic currency. On the other hand, when the demand for a foreign currency increases but its supply remains constant, it will drive the price of the foreign currency up and decrease the value of the domestic currency.

4. Interest Rates :
When a countrys key interest rate rises higher or fall s lower than that of another country, the currency of the nation with lower interest rate will be sold and the other currency will be bought so as to achieve higher returns. Given this increase in demand for the currency with higher interest rate, the value of that currency will rise against other currencies.

Fluctuations in exchange rates


A market-based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency can be due to either an increased transaction demand for money or an increased speculative demand for money. The transaction demand is highly correlated to a country's level of business activity, gross domestic product (GDP), and employment levels. The more people that are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. Speculative demand is much harder for central banks to accommodate, which they influence by adjusting interest rates. A speculator may buy a currency if the return (that is the interest rate) is high enough. In general, the higher a country's interest rates, the greater will be the demand for that currency. It has been argued that such speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency by shorting in order to force that central bank to buy their own currency to keep it stable. (When that happens, the speculator can buy the currency back after it depreciates, close out their position, and thereby take a profit.) For carrier companies shipping goods from one nation to another, exchange rates can often impact them severely. Therefore, most carriers have a CAF charge to account for these fluctuations.

Methods of Quoting Foreign Exchange Rates


Currently, domestic banks will determine their exchange rates based on international financial markets. There are two common ways to quote exchange rates, direct and indirect quotation. Direct quotation: This is also known as price quotation. The exchange rate of the domestic currency is expressed as equivalent to a certain number of units of a foreign currency. It is usually expressed as the amount of domestic currency that can be exchanged for 1 unit or 100 units of a foreign currency. The more valuable the domestic currency, the smaller the amount of domestic currency needed to exchange for a foreign currency unit and this gives a lower exchange rate. When the domestic currency becomes less valuable, a greater amount is needed to exchange for a foreign currency unit and the exchange rate becomes higher. Under the direct quotation, the variation of the exchange rates are inversely related to the changes in the value of the domestic currency. When the value of the domestic currency rises, the exchange rates fall; and when the value of the domestic currency falls, the exchange rates rise. Most countries uses direct quotation. Most of the exchange rates in the market such as USD/JPY, USD/HKD and USD/RMD are also quoted using direct quotation. Indirect quotation: This is also known as the quantity quotation. The exchange rate of a foreign currency is expressed as equivalent to a certain number of units of the domestic currency. This is usually expressed as the amount of foreign currency needed to exchange for 1 unit or 100 units of domestic currency. The more valuable the domestic currency, the greater the amount of foreign currency it can exchange for and the lower the exchange rate. When the domestic currency becomes less valuable, it can exchange for a smaller amount of foreign currency and the exchange rate drops. Under indirect quotation, the rise and fall of exchange rates are directly related to the changes in value of the domestic currency. When the value of the domestic currency rises, the exchange rates also rise; and when the value of the domestic currency falls, the exchange rates fall as well. Most Commonwealth countries such as the United Kingdom, Australia and New Zealand use indirect quotation. Exchange rates such as GBP/USD and AUD/USD are quoted indirectly. Direct Quotation Indirect Quotation USD/JPY = 134.56/61 EUR/USD = 0.8750/55 USD/HKD = 7.7940/50 GBP/USD = 1.4143/50 USD/CHF = 1.1580/90 AUD/USD = 0.5102/09 There are two implications for the above quotations: (1) Currency A/Currency B means the units of Currency B needed to exchange for 1 unit of Currency A. (2) Value A/Value B refers to the quoted buy price and sell price. Since the difference between the buy price and sell price is not large, only the last 2 digits of the sell price are shown. The two digits in front are the same as the buy price.

CURRENCY
A currency (from Middle English curraunt, meaning in circulation) in the most specific use of the word refers to money in any form when in actual use or circulation, as a medium of exchange, especially circulating paper money. This use is synonymous with banknotes, or (sometimes) with banknotes plus coins, meaning the physical tokens used for money by a government. A much more general use of the word currency is anything that is used in any circumstances, as a medium of exchange. In this use, "currency" is a synonym for the concept of money. A definition of intermediate generality is that a currency is a system of money (monetary units) in common use, especially in a nation. Under this definition, British pounds, U.S. dollars, and European euros are different types of currency, or currencies. Currencies in this definition need not be physical objects, but as stores of value are subject to trading between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in the sense used by foreign exchange markets, are defined by governments, and each type has limited boundaries of acceptance. The former definitions of the term "currency" are discussed in their respective synonymous articles banknote, coin, and money. The latter definition, pertaining to the currency systems of nations, is the topic of this article.

The Role of Currency In Foreign Exchange Markets


The role of currency is only as a tool or a means of exchanging goods. Its value is derived from the faith people have in the currency. For any currency to have a value, people must be able to accept it as a means which they will part or exchange other items for it. In itself, currency has no value. It is only how we perceive currency that gives it value. In todays world, currency is bought and sold in the international currency market or foreign exchange market for those not in the financial sector. National currencies are valued independently due to the nations central banking system which is independent from one another. However each currency in todays market, from the strongest to the weakest are all dependent and interconnected with each other for purposes of value and stability. The trading between national currencies is important in the overall value of a single countrys currency. How active the foreign exchange market also tells the story of what the financial community thinks of the global economy at that time. The foreign exchange is often the barometer for influences on the world economy as it is often the first market to react whenever there is a dip or boom in the global economy.

The foreign currency market is also always open. For instance, when the currency markets open in Europe, its counterpart in Asia will be winding down to a close. As the European market closes, the American market opens and soon and so forth. The players who are big in foreign exchange market are banks, large commercial entities hedge fund, investment firms and central banks of the nations. Hedge funds and central banks are the two biggest influences on the foreign exchange market. Although not all central banks do it, but some central banks do trade in the foreign exchange market. They do this for a multitude of reasons. Among the reasons include synchronizing the countrys interest rates in line with the other countries and to stabilize the currency of the country so that the import and export of goods can be completed in an orderly manner. Some central banks also use the foreign exchange market to control fiscal issues like inflation. On the other hand, hedge funds represent the purely commercial side of the foreign exchange market. Hedge funds trade in the market with the sole purpose of taking advantage of anomalies and market huge profits sometimes even at the expense of destabilizing a nations currency.

Methods for currency Translation:


There are Four methods for currency translation:

1. Current Rate Method


It is the simplest and the most popular method all over the world. Under this method, all balance sheet and income items are translated at the current rate of exchange, except for stockholders' equity. Income statement items, including depreciation and cost of goods sold, are translated at either the actual exchange rate on the dates the various revenues and expenses were incurred or at the weighted average exchange rate for the period. Dividends paid are translated at the exchange rate prevailing on the date the payment was made. The common stock account and paid-in-capital accounts are translated at historical rates.

2. The Monetary method


This method differentiates between monetary and non- monetary items. Monetary items are those that represent a claim to receive or an obligation to pay a fixed amount of foreign currency unit, e.g., cash, accounts receivable, current liabilities, accounts payable and long-term debt.

3. Non-monetary Method
Non-monetary items are those items that do not represent a claim to receive or an obligation to pay a fixed amount of foreign currency items, e.g., inventory, fixed assets, long-term investments. According to this method, current rate is used to translate all moneary items while historical rates Re used to translate non-monetary items the average exchange rate for the period is used to translate Income statement items, except for items such as depreciation and cost of goods sold that are directly associated with non-monetary assets or liabilities. These accounts are translated at their historical rates.

4. The Current/Non-current Method


It is perhaps the oldest approach. No longer allowable under generally accepted accounting practices in the United States, it was nevertheless widely used prior to the adoption of FAS #8 in 1975. Its popularity gradually waned as other methods were found to give more meaningful results. Under the current/non-current method, home currency at the current exchange rate are used to translate all current assets and current liabilities of foreign affiliates a while non-current assets and non-current liabilities In the balance sheet, net of current assets less current liabilities helps in determining exposure to gains or losses from fluctuating currency values. Gains or losses on long-term assets and liabilities are not shown currently. Items in the income statement are generally translated at the average exchange rate for the period covered.

Top 10 currency conversion against Indian Rs.


RATES TABLE1 Indian Rupee Rates table Indian Rupee Euro US Dollar British Pound Australian Dollar Canadian Dollar Emirati Dirham Swiss Franc Chinese Yuan Renminbi Malaysian Ringgit
Aug 15, 2013 06:49 UTC

1.00 INR 0.012279 0.016317 0.010508 0.017785 0.016825 0.059932 0.015220 0.099798 0.053495

inv. 1.00 INR 81.438003 61.285683 95.165256 56.227903 59.433657 16.685457 65.701324 10.020191 18.693212

Currency Fluctuations
A currency has value, or worth, in relation to other currencies, and those values change constantly. For example, if demand for a particular currency is high because investors want to invest in that country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets. While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average, of currencies.

What can affect currency fluctuation?


1. Expectation of data release as well as the release itself. Data can be understood as a publication of countries economic indicators, where the traded currency is national, news about interest rate changes, economic reviews and other important events influencing the currency market. Pre-event period and the event itself can strongly affect currency fluctuation. Sometimes it is hard to define what causes more effect waiting of the event or its coming, but serious occurrences always cause significant and often continuous fluctuations. 2. Time and date of the upcoming event is reported beforehand. The information about the most important events in a certain country is published in economic calendars. Before the event comes, predictions about its impact on a certain currency exchange rate are published in analytical forecasts. Therefore, anticipating an event the exchange rate starts moving in the predicted direction and often, after the forecast is confirmed, the exchange rate reverses into opposite direction. It happens because traders close positions opened in expectation period. 3. Fund activity (investment, resignation and insurance funds) has the biggest impact on long-term currency fluctuation. Fund activity includes investing in various currencies. Their substantial capital enables them to turn the exchange rate to a certain direction. Capital management is run by fund managers. They have their own methods, therefore, the position opened by a manager can be short-term, medium-term and long-term. Decisions of position opening are made after thorough analysis (fundamental, technical and other) of the market. When opening positions in time, in the right direction managers pursue a preemptive tactics and forecast the event consequences, indexes and news. Market analysis can never provide a 100% accurate result, but funds with their considerable capital and proven tactics are able to start, correct and intensify the strongest trends. 4. Import and export companies are straight Forex users whose activity affects currency fluctuation, as exporters are always interested in selling currencies and vice versa. Reliable export and import companies have analytics departments. They predict exchange rates for further profitable purchase or sale of the currency. Tracking trends is also very important for exporters and importers in the context of hedging against currency risks. Opening a deal opposite to the future one minimizes the risk. The influence of exporters and importers in the market is short-term and does not create global trends, as volumes of their operations are insignificant in a market size. 5. Statements made by politicians during meetings, press conferences, summits and reports can make a serious impact on currency fluctuation. Their influence can be compared to the one of economic indicators.

6. Government influences the market via central banks. Currency exchange operations being

carried out without any intervention of central bank will make national currency of a certain country become free floating. Nevertheless, this is very rare situation. Countries with such rate can sometimes try to influence it via currency operations. Countries interested in consumption growth and industry development regulate exchange rates. They mostly use direct and indirect regulation. Indirect regulation allows for inflation level, amount of money in turnover, etc. Direct one includes discount policy and currency intervention. 7. The latter is connected to sharp discharge and intake of big volumes of currency from international markets. Central banks do not reach the market directly - they use commercial banks. Volumes amount to millions of dollars; therefore, interventions severely affect currency fluctuation. Sometimes central banks of different countries run joint interventions in the currency market.

Currency Trends
Track the top traded currencies This table displays the change (trend) in currency exchange rates for the top most traded currencies.
Change Compared to: Currency Pair EUR/USD GBP/USD USD/JPY USD/CHF USD/CAD EUR/GBP EUR/JPY GBP/JPY EUR/CHF Current Rate 1.3284 1.5459 97.7363 0.9294 1.0324 0.8594 129.831 151.084 1.2346 Previous Day Last Week Last Month Last Year

-0.22 % -0.18 % 1.22 % 0.46 % 0.24 % -0.05 % 1.01 % 1.04 % 0.25 %

0.04 % 0.66 % -0.34 % 0.25 % -0.42 % -0.62 % -0.30 % 0.32 % 0.29 %

1.62 % 2.27 % -1.53 % -1.88 % -0.71 % -0.70 % 0.08 % 0.74 % -0.24 %

7.89 % -1.43 % 24.83 % -4.73 % 4.07 % 9.44 % 34.67 % 23.04 % 2.79 %

How to read this table: Each line shows the percentage change in the value of the currency exchange rate relative to the value of the day before, 7 days before, 30 days before, and 365 days before, respectively. Currency Rate shows the exchange rate for selling the currency pair. For example EUR/USD=0.972 means 1 EUR = 0.972 USD. Arrows indicate the direction of the change.

Supply And Demand In Currency Markets


The foreign exchange (or Forex) market, just like every other market in the world, is driven by supply and demand. In fact, understanding the concept of supply and demand is so important in the Forex Having a good grasp of supply and demand will make all of the difference in your Forex investing career because it will give you the ability to sift through the mountain of news that is produced every day and find those messages that are most important. So how do supply and demand affect the Forex market? Supply is the measure of how much of a particular commodity is available at any one time. The value of a commoditya currency in this caseis directly linked to its supply. As the supply of a currency increases, the currency becomes less valuable. Conversely, as the supply of a currency decreases, the currency becomes more valuable. Think about rocks and diamonds. Rocks arent very valuable because they are everywhere. You can take a walk down a country road and have your choice of hundreds or even thousands of different rocks. Diamonds, on the other hand, are expensive because there arent that many of them in circulation. There is a small supply of diamonds in the world, and you have to pay a premium if you want one. On the other side of the economic equation, we find demand. Demand is the measure of how much of a particular commodity people want at any one time. Demand for a currency has the opposite effect on the value of a currency than does supply. As the demand for a currency increases, the currency becomes more valuable. Conversely, as the demand for a currency decreases, the currency becomes less valuable. Special Offer: Emerging markets got a haircut in May, but several are clawing their way higher. Play the strength of Brazil, Russia, India and China. Click here for five new buys in the Forbes International Investment Report. To get a good idea of the effects demand can have on somethings value, you have to look no further than Tickle Me Elmo. When Tickle Me Elmo was first released, there was an insanely high demand for the toy. Mothers and fathers were trampling each other to grab and pay for Elmo before someone else could wrestle it from their arms so they could make sure they had everything on their kids holiday list. For those who werent fast or aggressive enough to get Tickle Me Elmo at the store, paying outrageously high prices on eBay was their last resort. Huge demand had made this red, giggling doll much more valuable than it would have been if nobodys child had wanted it. So the trick to being successful in the currency market is determining where there is increasing supply in the market and where there is increasing demand. If you can determine that, you are well on your way to making significant profit in this dynamic market.

One tool we recommend utilizing to give yourself a clear picture of what is happening across the currency-market landscape is the Seesaw of Supply and Demand. And the easiest place to start this is with the one currency that affects every currency pair you can trade: the U.S. dollar. The Seesaw Of Supply And Demand The Seesaw of Supply and Demand has two sides. The left side represents increasing demand and decreasing supply. The right side represents increasing supply and decreasing demand. (See Figure 1.)

As you are analyzing the U.S. dollar to determine how strong or how weak you believe it will be in the future, you need to stack up all the fundamental factors on the seesaw. If a fundamental factor is going to increase demand or decrease supply, you stack it on the left side of the seesaw. If a fundamental factor is going to increase supply or decrease demand, you stack it on the right side of the seesaw. As you stack more and more fundamental factors on the seesaw, you will notice that it begins to tip up or down depending on how many fundamental factors are on each side. If there are more factors on the left side of the seesaw, the left side will drop down while the right side rises. When this happens, you know that, fundamentally speaking, the U.S. dollar should be increasing in value. An easy way to remember this is by looking at the slope of the seesaw. You can see that it is rising from left to right. This is a positive slope and indicates strength in the U.S. dollar. (See Figures 2 and 3.)

If there are more factors on the right side of the seesaw, the right side will drop down while the left side rises. When this happens, you know that, fundamentally speaking, the U.S. dollar should be decreasing in value. Again, an easy way to remember this is by looking at the slope of the seesaw. You can see that it is tipping down from left to right. This is a negative slope and indicates weakness in the U.S. dollar. (See Figures 4 and 5.)

Using the Seesaw of Supply and Demand can help you distill complex economic information into a more manageable form. For example, when you are analyzing the relative strength or weakness of the U.S. dollar, it is easy to get sidetracked and lost when you are trying to keep track of the various factors that affect the value of the U.S. dollar, such as the unemployment rate, the trade balance, interest rates and so on. However, if you look at each one of these

factors individually to determine how it would affect the value of the U.S. dollar in a vacuum, it is much easier to decide if each individual factor will have a positive or a negative impact. Once you have analyzed a factor, place it on the appropriate side of the seesaw and move on to the next factor. As you move through the various factors that are affecting the value of the U.S. dollar, you will begin to see which side of the seesaw is becoming overloaded, and you can form either a strong-dollar bias or a weak-dollar bias. This is a great way to get started in your fundamental analysis.

Factors affecting Indian rupee changes


The value of any currency in an economy is hard to bet, to be stable for a long period of time as there are number of factor influencing its appreciation and the depreciation. The currency value of an economy influences the growth rate of GDP in an economy. Several other factors that have a direct influence on the over or the undervaluation of a currency are listed below:

1. Global currency trends :


Like many other currencies Indian rupee have also tied its knot with some of the big economies of the world including the names of UK, US, Japan and Canada. The depreciation or appreciation in the currency any of these, especially in the US dollar, influences the valuation of the Indian currency in one way or the other.

2. RBI Intervention :
The valuation of the Indian currency highly depends on RBI that manages the 'balance of payments', slight modification in which can define the over or the under valuation of the Indian currency.

3. Oil factors :
India is a major importer of oil and the valuation of Indian money gets easily affected by the increase in the prices of the crude oil. It can further result in spreading inflation in an economy due to the over valuation of the Indian currency.

4. Political factors :
Several other factors that affect the currency stability are some political factors like change in the government set up, introduction of new export and import policies, tax rate and many more.

5. Remittances from abroad :


Conclusively, there are many factors that arise from the economic structure of Indian economy and affect the valuation of the Indian currency that in turn affects the economic growth rate of the economy of a country.

DEFINATION OF Foreign exchange risk


Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies. Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk which can have severe financial consequences if not managed appropriately. 1. The risk of an investment's value changing due to changes in currency exchange rates. 2. The risk that an investor will have to close out a long or short position in a foreign currency at a loss due to an adverse movement in exchange rates. Also known as "currency risk" or "exchange-rate risk". This risk usually affects businesses that export and/or import, but it can also affect investors making international investments. For example, if money must be converted to another currency to make a certain investment, then any changes in the currency exchange rate will cause that investment's value to either decrease or increase when the investment is sold and converted back into the original currency.

Types of exposure :
1. Transaction exposure :
A firm has transaction exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. To realize the domestic value of its foreigndenominated cash flows, the firm must exchange foreign currency for domestic currency. As firms negotiate contracts with set prices and delivery dates in the face of a volatile foreign exchange market with exchange rates constantly fluctuating, the firms face a risk of changes in the exchange rate between the foreign and domestic currency.

2. Economic exposure :
A firm has economic exposure (also known as operating exposure) to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's market share|position with regards to its competitors, the firm's future cash flows, and ultimately the firm's value. Economic exposure can affect the present value of future cash flows. Any transaction that exposes the firm to foreign exchange risk also exposes the firm economically, but economic exposure can be caused by other business activities and investments which may not be mere international transactions, such as future cash flows from fixed assets. A shift in exchange rates that influences the demand for a good in some country would also be an economic exposure for a firm that sells that good.

3. Translation exposure :
A firm's translation exposure is the extent to which its financial reporting is affected by exchange rate movements. As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign asset]s and liabilities or the financial statements of foreign subsidiary|subsidiaries from foreign to domestic currency.While translation exposure may not affect a firm's cash flows, it could have a significant impact on a firm's reported earnings and therefore its stock price.Translation exposure is distinguished from transaction risk as a result of income and losses from various types of risk having different accounting treatments.

4. Contingent exposure :
A firm has contingent exposure when bidding for foreign projects or negotiating other contracts or foreign direct investments. Such an exposure arises from the potential for a firm to suddenly face a transactional or economic foreign exchange risk, contingent on the

outcome of some contract or negotiation. For example, a firm could be waiting for a project bid to be accepted by a foreign business or government that if accepted would result in an immediate receivable. While waiting, the firm faces a contingent exposure from the uncertainty as to whether or not that receivable will happen. If the bid is accepted and a receivable is paid the firm then faces a transaction exposure, so a firm may prefer to manage contingent exposures.

Risks in Foreign Exchange Trading


Forex Currency trading is quite a lucrative option to gain huge profits but there are risks involved too, which a trader needs to understand well before jumping into forex trading. While trading in forex, investors come across various types of risks in foreign exchange trading. The four main types of risks involved in foreign exchange trading are defined below. Exchange Rate Risk Interest Rate Risk Credit Risk Country Risk

1. Exchange Rate Risk :


The exchange rate risks in forex trading arise due to the continuous ongoing supply and demand balance shift in the worldwide forex market. A position is a subject of all the price changes as long as it is outstanding. In order to cut short these exchange rate risks and to have profitable positions, the trading should be done within manageable limits

2. Interest Rate Risk:


The interest rate risks in foreign exchange trading are related to the currency swaps, futures, forward out rights and options in foreign currency exchange trading. The interest rate risks are those foreign exchange trading risks which refer to the profit and loss generated by both the fluctuations occurred in the forward spreads and by forward amount mismatches and maturity gaps among various transactions in the forex book. Then all the transactions are put into computerized systems to calculate the positions for all the delivery dates and the profit and loss. There is a continuous analysis of the interest rate environment necessary to forecast any changes that may affect the outstanding gaps.

3. Credit Risk:
Other kinds of risks involved in foreign exchange trading are credit risks. These are associated with the probability that an outstanding currency position might not be repaid as agreed upon because of a voluntary or involuntary action by the other party. In such a case, the forex trading occurs on regulated exchanges, where all trades are settled by the learning house. In these types of forex exchanges, the investors of all sizes can deal without any credit concern.

4. Country Risk:
The country risks in forex trading are arise in case of there are a party is unable to receive an expected amount of payment because of the government interference in the matters of insolvency of an individual bank or institution. The country foreign exchange trading risks are linked to the interference of government in forex markets. It falls under the joint responsibility of the treasurer and the credit department. The government control on foreign exchange activities is still present and implemented actively. For the investors, it is important to know or how to be able to anticipate any restrictive changes concerning the free flow of currencies.

Foreign Exchange Risk Management


foreign exchange (FX) is a risk factor that is often overlooked by small and mediumsized enterprises (SMEs) that wish to enter, grow, and succeed in the global market-place. Although most U.S. SME exporters prefer to sell in U.S. dollars, creditworthy foreign buyers today are increasingly demanding to pay in their local currencies. From the view point of a U.S. exporter who chooses to sell in foreign currencies, FX risk is the exposure to potential financial losses due to devaluation of the foreign currency against the U.S. dollar. Obviously, this exposure can be avoided by insisting on selling only in U.S. dollars. However, such an approach may result in losing export opportunities to competitors who are willing to accommodate their foreign buyers by selling in their local currencies. This approach could also result in the non-payment by a foreign buyer who may find it impossible to meet U.S. dollar-denominated payment obligations due to the devaluation of the local currency against the U.S. dollar. While coverage for non-payment could be covered by export credit insurance, such what-if protection is meaningless if export opportunities are lost in the first place because of the payment in U.S. dollars only policy. Selling in foreign currencies, if FX risk is successfully managed or hedged, can be a viable option for U.S. exporters who wish to enter and remain competitive in the global marketplace.

Key Points :
Most foreign buyers generall prefer to trade in their local currencies to avoid FX risk exposure. U.S. SME exporters who choose to trade in foreign currencies can minimize FX exposure by using one. of the widely-used FX risk management techniques available in the United States. The volatile nature of the FX market poses a great risk of sudden and drastic FX rate movements, which may cause significantly damaging financial losses from otherwise profitable export sales. The primary objective of FX risk management is to minimize potential currency losses, not to make a profit from FX rate movements, which are unpredictable and frequent.

How to manage Foreign Exchange Risk


1. An asset or a liability or an expected future cash flow stream (whether certain or not) is said to be afflicted with currency risk when currency movement changes (for better or for worse) the home currency value. 2. There is always a possibility of the exchange rate changing between the home and foreign currencies, interest rate differentials widening and inflationary effects amounting, to an adverse reaction for the expected cash flows. 3. The concept of currency risk also emanates when an investor is planning to diversity his portfolio internationally to improve the risk- return trade off by taking advantage of the relative correlation among risks on assets of different countries. 4. This involves investing in a variety of currencies whose relative values may fluctuate, it involves taking currency risks. 5. The foreign exchange market is psychological in nature. A large number of transactions are speculative in nature which depends upon expectations of a large number of participants. For example, they might look at the money supply in the USA. The logic is that an increase in money supply will result in: An increase in inflation FEDERAL BANK squeezing money Interest rate rising Dollar becoming more attractive for holding. But this event of money supply could also lead to a different series of outcomes an shown by the following logic. According to fisherman equation, Nominal rate = Real rate + Inflation rate. An increase in inflation would mean the interest rates would be higher. Higher interest rates on bond and equity prices would make them less lucrative and thus lead to a bearish effect. There would be a selling pressure on the dollar and hence the exchange rates would tend to move against the dollar. Dealings in foreign exchange market is said to be around $ 1000 billion each day. Out of this sizeable chunk of more than 75% is on speculative basis. And this speculation has been pointed out as major cause of the south Asian turmoil. Since the mid 1970's a potent mix of fast-interlocking market and a revolution in information technology has increased the speed, frequency and magnitude of price changes in the financial markets, which, in turn have multiplied both opportunity and risk for the CFO. Not, surprisingly, in the developed markets, much innovative energy has been devoted to devising instruments and mechanisms that enable CFO to survive this turbulence. While creative financial engineering has opened the floodgates for a deluge of products, two broad classes of risk management have evolved.

CASE STUDY FAILURE OF FOREIGN EXCHANGE RISKS- CASES:


Daina Bank of japan incurred losses exceeding US dollar one billion in bond trading activities in new York. The trader was toshihide iguchi . Iguchi was perpetuating the fraud over an 11 year period . during which he was losing an average of US dollar 400000(about Rs. 1.8 crores) every working day. The massive scam continued for so long , the remain undetected with series of internal & external audits of Us and Japanese regulatory authorities inspections. Actually, iguchis misdeed came to light only when he himself wrote about them to the banks chairman in july 1995 when a change in duties made it increasingly difficult for him to hide the losses any longer. one incurs losses in trading of government bonds, as iguchi did, by misreading the directions of intrest rate and hence bond prices. Losses are intracent in proprietary trading, whether in currencies, bonds or derivatives. In the case of daina, they remained hidden for more than a decade and grew to such huge amounts, because iguchi was also receiving the custodians computerized statements of daina holding of bonds. A comparision of their value at their market prices, with the balance in the books of account, would have readily disclosed the losses. But iguchi was apparently substituting the genuine statement by one in order to hide the losses and this went on for 11 (eleven) years until the losses reached US $ one billion.

FOREIGN EXCHANGE RISKS & ITS IMPACT ON INDIA CAPITAL MARKET


Over the years, the foreign exchange market has emerged as the largest market in the world and the breakdown of the Bretton Woods system in 1971 marked the beginning of floating exchange rate regimes in several countries. The decade of the 1990s witnessed a perceptible policy shift in many emerging markets towards reorientation of their financial markets and these changing contours were mirrored in a rapid expansion of foreign exchange market in terms of participants, transaction volumes, decline in transaction costs and more efficient mechanisms of risk transfer. In India the foreign exchange market has originated in 1978 begeining with the banks to undertake intra-day trade in foreign exchange. Before the reform process the Indian foreign exchange system was in a critical juncture and in the 1990s the Indian foreign exchange market witnessed far reaching changes along with the shifts in the currency regime. Following the recommendations of Rangarajan Committee on Balance of Payments, the exchange rate of the rupee pegged earlier was floated partially in March 1992 and fully in March 1993. Thus, the unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and an effort towards current account convertibility. Further, following the recommendations O.P.Sodhani Expert Committee, since 1996, wide-ranging reforms have been undertaken for deepening and widening of the Indian foreign exchange market. An Internal Technical Group on the Foreign Exchange Market was constituted in 2005 to undertake a comprehensive review of the measures initiated by the Reserve Bank and identify areas for further liberalisation or relaxation of restrictions in a medium-term framework. These efforts have resulted in the momentous developments in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. Thus, the foreign exchange market in India has acquired depth (Reddy, 2005) and the conditions have also generally remained orderly (Reddy, 2006c). Although it is

not possible for any country to remain completely unaffected by developments in international markets, India was able to keep the spillover effect of the Asian crisis to a minimum through constant monitoring and timely action, including recourse to strong monetary measures, when necessary, to prevent emergence of self fulfilling speculative activities (Mohan, 2006a).

Cost and Benefit of Holding Foreign Exchange Reserves


Reserves management is mainly guided by how best to deploy foreign reserve assets, the portfolios considerations take into account inter alia, safety, liquidity and yields on reserves 3 as the principal objectives of reserve management. Over time, the need for maintaining foreign exchange reserves has increased with the acceleration in the pace of globalization and enlargement of cross border capital flows. The direct financial cost of holding reserves is the difference between interest paid on external debt and returns on external assets in reserves. Hence in any cost-benefit analysis of holding reserves, it is essential to keep in view the objectives of holding reserves, which , inter-alia, include: (i) maintaining confidence in monetary and exchange rate policies; (ii) enhancing the capacity to intervene in foreign exchange markets; (iii) limiting external vulnerability so as to absorb shocks during times of crisis; (iv) providing confidence to the markets that external obligations can always be met; and (v) reducing volatility in foreign exchange markets (Jalan, 2003a). Sharp exchange rate movements can be highly dis- equilibrating and costly for the economy during periods of uncertainty or adverse expectations, whether real or imaginary. Recent strengthening of the external position of many developing countries through building up of substantial foreign exchange reserves can be viewed from several perspectives (Reddy, 2003): Firstly, it is a reflection of the lack of confidence in the international financial architecture. International liquidity support through official channels is beset with problems relating to adequacy of volumes, timely availability, and reasonableness of costs and above all, limited extent of assurances. Secondly, it is also a reflection of efforts to contain risks from external shocks. Private capital flows which dominate capital movements tend to be

pro-cyclical even when fundamentals are strong. It is, therefore, necessary for developing countries to build cushions when times are favorable. High reserves provide some self insurance which is effective in building confidence including among the rating agencies and possibly in dealing with threat of cities. Thirdly, the reserve accumulation could also be seen in the context of the availability of abundant international liquidity following the easing of monetary policy in industrial countries, which enabled excess liquidity to flow into the emerging markets. In the event of hardening of interest rates in industrialized countries, this liquidity may dry up quickly; in that situation, emerging markets should have sufficient cushion to withstand such reserves flow of capital. Finally, and most important, the reserve build up could be the result of countries aiming at containing volatility in foreign exchange markets. It should be recognized that the self-corrective markets. It should be recognized that the self corrective mechanism in foreign exchange markets seen in developed countries is conspicuously absent among many emerging markets. The accumulation of reserves is also a reflection of imbalances in the current account of some countries and since the level of reserves held by any country is consequence of the exchange rate policy being pursued by the policy makers, for instance, capital flows have implications for the conduct of domestic monetary policy and exchange rate management. However, the manner in which such flows impact domestic monetary policy depends largely on the kind of exchange rate regime that the authorities follow. It is clear that, in a fixed exchange rate regime excess capital inflows would, perforce, need to be taken to foreign exchange reserves so as to maintain in desired exchange rate parity. On the other, in a fully floating exchange rate regime, the exchange rate would adjust itself according to the demand and supply conditions in the foreign exchange market, and as such there would be no need to take such inflows into the reserves.

Movements in Exchange Rate Regimes in Emerging Markets


Generally, to a large extent, the exchange rate regime followed in an economy is based on the regulatory framework governing the foreign exchange market and the operational freedom available to market participants. The experience of large capital flows in the1990s

has inflenced on the choice of the exchange rate regime in EMEs and the trend was in favour of intermediate regimes with country-specific features and with no fixed targets for the level of the exchange rate. The EMEs, in general, have been accumulating foreign exchange reserves as an insurance against shocks and the combination of these strategies which guide monetary authorities through the impossible trinity of a fixed exchange rate, open capital account and an independent monetary policy (Mohan, 2003). The appropriate policies on foreign exchange markets has converged around the views like, (i) exchange rates should be flexible and not fixed or pegged; (ii) there is continuing need for many emerging market economies to be able to intervene or manage exchange rates- to some degree - if movements are believed to be destabilizing in the short run; and (iii) reserves should at least be sufficient to take care of fluctuations in capital flows and liquidity at risk (Jalan, 2003). Broadly, the overall distribution of exchange rate regimes across the globe among main categories remained more or less stable during 2001-06, though there was a tendency for some countries to shift across and within exchange regimes which is evident in table.1. Thus, it is clear that managed floats are found in all parts of the globe, while conventional fixed pegs are mostly observed in the Middle East, the North Africa and parts of Asia. On the other hand, hard pegs are found primarily in Europe, Sub-Saharan Africa (the CFA zones) and small island economies (for instance, in the Eastern Caribbean). The substantial movement between soft 5 pegs and floating regimes suggests that floating is not necessarily a durable state, particularly for lower and middle-income countries, whereas there appears to be a greater state of flux between managed floating and pegged arrangements in high-income economies.

INDIAN FOREIGN EXCHANGE CONTROLS


Exchange Controls refer to the regulation, restrictions, guidelines that a country issues with respect to foreign exchange transactions. In the absence of any exchange control one would expect to do anything with the foreign exchange reserves that the company has-convert to any other currency, speculate, buy or sell option, freely export foreign exchange etc. etc. In India, forward contract is the single largest product which the companies employ as a tool to manage their foreign exchange risks, though the cost has changed over the period of time. Before LERMS (liberalised exchange rate management system) importers rushed to book forward contracts expecting a devaluation of Re against US$. The cost was as high as 18% in Feb.'92. The cost of the forward premium came down sharply reflecting a more stable foreign exchange markets. The Indian exchange market do not provide frequent quotations for ore than 6 months so for any long term forward cover rollover of the contract after every 6 months is needed. Rollover means cancellation of the old contract and re-booking of 6-month forward contract. Under this, care should be taken to cancel the old contract and re-book the next at the time when the cost of rebooking is least i.e. forward dollar is relatively cheap. Further, in December 1994, RBI has allowed the corporates to bet on the third currency movement even if one does not have an underlying transaction exposure in the third currency. This means that a corporate with an underlying exposure in Dollar-Re can bet on the Dm-Dollar rate and book a forward contract for Dm against Re and on the maturity may change Dm to Dollar at the spot rate. This has been allowed as Indian Re has been pegged with US$ and there has not been many fluctuations on which the companies could speculate. There can be other ways to take advantage of this RBI circular. Consider an importer with $ payable after 6 months. He may buy $ forward against Yen (third currency) and after 6 months may buy Yen against Rupee at the spot rate. This position may be taken if the company expects Yen to depreciate against the Dollar within these 6 months. Nevertheless the speculative attempts to earn profits may also backfire to give losses if the exchange rate moves in the opposite direction. RBI has also made it obligatory upon the banks, which extend the third currency cover, to maintain initial and variation margins before offering such a facility. This has been done to avoid any default risk. Another peculiar feature of The Indian Exchange Control is that the hedging can be put through in case of transaction and translation exposures only. Economic exposures cannot be hedged. Cross Currency option was introduced on 1st Jan. 1994, under which companies could enter option contract for hedging non-dollar exposure against dollar. As for now Rupee option does not exist in India. Essar Gujarat has been one of the innovative corporates who discovered this new concept and has benefited considerably by writing option in Dm- Dollar in Jan 1994. Indian Exchange controls do not allow cancellation of cross currency options in parts and once the option is cancelled it cannot be re-booked, unlike forwards. In the overseas markets minimum lot traded is $ 3m whereas Indian corporate by for lesser amount, this increases the

premium paid by them for the option. Recently, ANZ Grindlay has offered to arrange a loan of $ 50m to Ranbaxy by making effective use of call and put options to defend both the parties against unfavorable movements in exchange rates. Cross currency forward cover for importers who have taken $ loan for their imports but receive goods invoiced in say a Dm. They can enter forward cover for the delivery of Dm against the currency of loan i.e. -$. This is the cross currency forward cover. Some of the foreign Exchange controls are that export of foreign currency is not permitted, unless it has special RBI permission. Exchange controls also they list the permitted currency and a method of payment as approved by RBI for translation across the countries. It also contains guidelines relating to Foreign currency assets covering permission as for repatriation of capital profits dividends etc. Exchange controls also allow FC to be retained up 50% (in case of EOU EPZ units) and 25% (in case of ordinary exporters with banks in Indian and also abroad under EEFC a/c and FCA a/c. Exchange controls also state under-invoicing and over-invoicing of exports as a crime attracting penal provisions. Further, all sale proceeds in FC should come into the country within 180 days. RBI permission is required for any extension beyond 180 days. In case of failure to get RBI's nod, the tax and other export incentives are not provided to the exporters. Further, exchange controls give details and guidelines for different accounts for NRI and foreign investors such as Ordinary Non- Resident Rupee a/c, Non-Resident External; Rupee a/c FCNR (B) a/c etc. Introduction of complex hedging tools like futures, options is still a long way to go, Recently, the government lifted the ban on futures, option trading in equity (stocks) after 40 years, This could be regarded as a step ahead to come closer to introduction of more complex tools in the currency markets in India. In the near future Standard Chartered plans to introduce rupee-based derivatives in India subject to the clearance and approval by exchange controls, with many companies now making use of different tools effectively, the Indian foreign exchange markets are moving ahead towards more relaxations and towards making the foreign exchange markets more vibrant and versatile, IDBI is one of the most active user of financial derivatives in Indian market. It made considerable savings over the last two year by using the entire range of products available in Indian forex markets.

Recent news by reserve bank of india about forex market :


The Reserve Bank of india said liquidity tightening measures will be rolled back only after stability is restored in the forex market as volatility hurts growth. RBI takes necessary steps to recover falling Rupee We will roll back these (liquidity tightening) measures only after we determine that stability has been restored to the foreign exchange market," RBI Governor D Subbarao said. In order to rescue the declining rupee, Reserve Bank and market regulator Sebi had imposed various restrictions on the futures market by way of raising the margins and limiting the positions that market participants can take. RBI, Subbarao said, had also prohibited proprietary trading in forex market by banks to curb undue speculation in rupee which was resulting in the volatility of the exchange rate. In RBI's view, he said, "undue volatility of the exchange rate is harmful for growth and stability and such volatility should be curbed".

The rupee, which had touched life time low of 61.21 against a dollar on July 8, was trading around 60.80 today. In order to contain Current Account Deficit (CAD) and arrest value of declining rupee, the RBI last month had raised the cost of borrowing for banks and reduced availability of funds to curb speculation in the forexmarket. RBI did not roll back these measures in its first quarter monetary policy which was unveiled earlier in this week. Prime Minister Manmohan Singh and Finance Minister P Chidambaram had said that the measures announced by the RBI were not indicative of firming up of interest rates in the long-term and would be withdrawn once stability was achieved in the forex market. Subbarao said the arguments of critics, including those related to ownership structures of large corporates, were not trivial and the RBI has been sensitive to them. "That is the reason we have built several safeguards into the licensing regime by prescribing demanding criteria for the corporate structure, fit and proper criteria, corporate governance norms, exposure norms, and others," he said. The RBI hasn't indicated how many bank licences will be issued. Subbarao had earlier said not all those who are fit and proper will be given a licence because the expected number of eligible applicants will be larger than the meaningful number of licences to be given. The RBI had earlier clarified that entities getting new bank licences will have 18 months to open branches and promoters have to transfer their holdings to a non-operative financial holding company within a stipulated period. Applicants for bank licences include India Post, LIC HFL, Reliance Capital, Aditya Birla Nuvo and L&T Finance.

How we can trade in foreign exchange market


1. Choose a broker :
Making a decision on which broker to use is personal for each trader. Some brokers offer certain options that some traders will thrive on, while other traders will hate the broker for those same options. It is important to review and compare the options of each broker closely and choose the one that makes you feel most comfortable.

2. Open a Demo Account :


Once you have made your decision on which broker you like the best, it is time to open a demo account. Most brokers will offer at least a 30 day trial of their trading platform giving you a chance to trade on the platform using play money. Using a demo account is a good opportunity to make sure that you feel comfortable using the brokers trading tools. You would not want to trade real money without being fully comfortable with the trading platform. A demo account will not only help you get a grip on how to use the brokers trading platform, but also trading the market in real time .

3. Learn About Leverage :


Forex trading is typically carried out using leverage, or trading on margin. Margin is a useful tool, but it can be very dangerous if it is used correctly. Forex brokers typically offer anywhere from 50:1 leverage up to 400:1 leverage. The higher the number, the less money required to put on a large trade. The use of leverage is something that needs to be taken with a lot of care.

4. Choose a broker :
Making a decision on which broker to use is personal for each trader. Some brokers offer certain options that some traders will thrive on, while other traders will hate the broker for those same options. It is important to review and compare the options of each broker closely and choose the one that makes you feel most comfortable.

5. Open a Demo Account :


Once you have made your decision on which broker you like the best, it is time to open a demo account. Most brokers will offer at least a 30 day trial of their trading platform giving you a chance to trade on the platform using play money. Using a demo account is a good opportunity to make sure that you feel comfortable using the brokers trading tools. You would not want to trade real money without being fully comfortable with the trading platform. A demo account will not only help you get a grip on how to use the brokers trading platform, but also trading the market in real time.

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