Introduction to Currency Exchange

Chapter 1
Introduction to the Study

1. Concepts
Introduction
Currency exchange rate is the value of a foreign currency relative to domestic currency. T he
exchange of currencies is done in the foreign exchange market, which is one of the biggest
financial markets. The participants of the market are banks, corporations, exporters, importers
etc. A foreign exchange contract typically states the currency pair, the amount of the contract,the
agreed rate of exchange etc.
CHART 1
Exchange Rate
A Currency exchange deal is always done in currency pairs, for example, US Dollar – Indian
Rupee contract (USD – INR); British Pound – INR (GBP - INR), Japanese Yen – U.S. Dollar
(JPYUSD),U.S. Dollar – Swiss Franc (USD-CHF) etc. Some of the liquid currencies in the world
are USD, JPY, EURO, GBP, and CHF and some of the liquid currency contracts are on USD-
JPY,USD-EURO, EURO-JPY, USD-GBP, and USD-CHF.
Currency Table
Date: 28 June 2011
USD JPY EUR INR GBP
USD 1.000 95.318 0.711 48.053 0.606
JPY 0.010 1.000 0.007 0.504 0.006
EUR 1.406 134.033 1.000 67.719 0.852
INR 0.021 1.984 0.015 1 .000 0.013 TABLE 1
In a currency pair, the first currency is referred to as the base currency and the second currency is
referred to as the ‘counter/terms/quote’ currency. The exchange rate tells the worth of the base
currency in terms of the terms currency, i.e. for a buyer, how much of the terms currenc y must
be paid to obtain one unit of the base currency. For example, a USD-INR rate of
Rs. 48.0530 implies that Rs. 48.0530 must be paid to obtain one US Dollar. Foreign exchange
prices are highly volatile and fluctuate on a real time basis. In foreign exchange contracts, the
price fluctuation is expressed as appreciation/depreciation or the strengthening/weakening of a
currency relative to the other. A change of USD-INR rate from Rs. 48 to Rs. 48.50 implies that
USD has strengthened/ appreciated and the INR has weakened/depreciated, since a buyer of
USD will now have to pay more INR to buy 1 USD than before.
The primary purpose of the foreign exchange is to assist international trade and investment, by
allowing businesses to convert one currency to another currency.
The Currency exchange market is unique because of
 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.
1.2.2 MARKET SIZE & LIQUIDITY
The Currency exchange market is the most liquid financial market in the world. Traders include
large banks, central banks, institutional investors, currency speculators, corporations,
governments, other financial institutions, and retail investors. The average daily turnover in the
global foreign exchange and related markets is continuously growing. According to the 2010
Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average
daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98
trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in
outright forwards, FX swaps and other currency derivatives.
CHART 2
Main foreign exchange market turnover, 1988–2007, measured in billions of USD
Top 10 currency traders

% of overall volume, May 2011
Rank ,Name& Market share
1. Deutsche Bank :15.64% 2. Barclays Capital :10.75%
3. UBS AG :10.59% 4. Citi: 8.88%
5. JPMorgan: 6.43% 6. HSBC :6.26%

7. Royal Bank of Scotland :6.20% 8. Credit Suisse :4.80%
9. Goldman Sachs: 4.13% 10. Morgan Stanley :3.64%
TABLE 2
MARKET PARTICIPANTS
 Banks
The interbank market caters for both the majority of commercial turnover and large amounts of
speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this
trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which
are trading desks for the bank's own account. Until recently, foreign exchange brokers did large
amounts of business, facilitating interbank trading and matching anonymous counterparts for
large fees. Today, however, much of this business has moved on to more efficient electronic
systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard
in most trading rooms, but turnover is noticeably smaller than just a few years ago.
 Commercial companies
An important part of this market comes from the financial activities of companies seeking
foreign exchange to pay for goods or services. Commercial companies often trade fairly small
amounts compared to those of banks or speculators, and their trades often have little short term
impact on market rates. Nevertheless, trade flows are an important factor in the long-term
direction of a currency's exchange rate. Some multinational companies can have an unpredictable
impact when very large positions are covered due to exposures that are not widely known by
other market participants.
 Central banks
National central banks play an important role in the foreign exchange markets. They try to
control the money supply, inflation, and/or interest rates and often have official or unofficial
target rates for their currencies. They can use their often substantial foreign exchange reserves to
stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is
doubtful because central banks do not go bankrupt if they make large losses, like other traders
would, and there is no convincing evidence that they do make a profit tra
 Forex Fixing
Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The
idea is that central banks use the fixing time and exchange rate to evaluate behavior of their
currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks,
dealers and online foreign exchange traders use fixing rates as a trend indicator.
 Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words, the
person or institution that bought or sold the currency has no plan to actually take delivery of the
currency in the end; rather, they were solely speculating on the movement of that particular
currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996.
They control billions of dollars of equity and may borrow billions more, and thus may
overwhelm intervention by central banks to support almost any currency, if the economic
fundamentals are in the hedge funds' favor.
 Investment management firms
Investment management firms (who typically manage large accounts on behalf of customers
such as pension funds and endowments) use the foreign exchange market to facilitate
transactions in foreign securities. For example, an investment manager bearing an international
equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign
securities purchases.
 Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market with the advent
of retail forex platforms, both in size and importance. Currently, they participate indirectly
through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by
the CFTC and NFA have in the past been subjected to periodic foreign exchange scams.[11][12] To
deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements,
particularly in relation to the amount of Net Capitalization required of its members
 Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international payments to
private individuals and companies. These are also known as foreign exchange brokers but are
distinct in that they do not offer speculative trading but rather currency exchange with payments
(i.e., there is usually a physical delivery of currency to a bank account).
 Money transfer/remittance companies and bureau de changes
Money transfer companies/remittance companies perform high-volume low-value transfers

generally by economic migrants back to their home country. In 2007, the Aite Group estimated
that there were $369 billion of remittances (an increase of 8% on the previous year). The four
largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and
best known provider is Western Union with 345,000 agents globally followed by UAE
Exchange.Bureau de change or currency transfer companies provide low value foreign exchange
services for travelers. These are typically located at airports and stations or at tourist locations
and allow physical notes to be exchanged from one currency to another. They access the foreign
exchange markets via banks or non bank foreign exchange companies.
TRADING CHARACTERSTICS
There is no unified or centrally cleared market for the majority of FX trades, and there is very
little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets,
there are rather a number of interconnected marketplaces, where different currencies instruments
are traded. This implies that there is not a single exchange rate but rather a number of different
rates (prices), depending on what bank or market maker is trading, and where it is. In practice the
rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due
to London's dominance in the market, a particular currency's quoted price is usually the London
market price.
Types of Traders in Derivative Markets
 Hedgers
Hedgers trade with an objective to minimize the risk in trading or holding the underlying
securities. Hedgers willingly bear some costs in order to achieve protection against unfavorable
price changes.
 Speculators
Speculators use derivatives to bet on the future direction of the markets. They take calculated
risks but the objective is to gain when the prices move as per their expectation. Based on the
duration for which speculators hold a position they are further be classified as scalpers (very
short time, may be defined in minutes), day traders (one trading day) and position traders (for a
long period may be a week, a month or a year).
 Arbitrageurs
Arbitrageurs try to make risk-less profit by simultaneously entering into transactions in two or
more markets or two or more contracts. They profit from market inefficiencies by making
simultaneous trades that offset each other thereby making their positions risk-free. For example,
they try to benefit from difference in currency rates in two different markets.
ISO 4217 code
Currency
% daily (Symbol)
share
United States
84.9% USD ($)
dollar
39.1% Euro EUR (€)
19.0% Japanese yen JPY (¥)
12.9% Pound sterling GBP (£)
7.6% Australian
AUD ($)
dollar
6.4% Swiss franc CHF (Fr)
5.3% Canadian dollar CAD ($)
2.4% Hong Kong

HKD ($)
dollar
2.2% Swedish krona SEK (kr)
New Zealand
1.6% NZD ($)
dollar
1.5% South Korean

KRW
won
1.4% Singapore
SGD ($)
dollar
0.9% Indian rupee INR (₹)
TABLE 3
1.2.5DETERMINANTS OF FOREIGN EXCHANGE RATES

 Economic factors
These include: (a)economic policy, disseminated by government agencies and central banks,
(b)economic conditions, generally revealed through economic reports, and other economic
indicators.
 Economic policy: comprises government fiscal policy (budget/spending practices) and

monetary policy (the means by which a government's central bank influences the supply and
"cost" of money, which is reflected by the level of interest rates).
 Government budget deficits or surpluses: The market usually reacts negatively to

widening government budget deficits, and positively to narrowing budget deficits. The
impact is reflected in the value of a country's currency.
 Balance of trade levels and trends: The trade flow between countries illustrates the demand
for goods and services, which in turn indicates demand for a country's currency to conduct
trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a
nation's economy. For example, trade deficits may have a negative impact on a nation's
currency.
 Inflation levels and trends: Typically a currency will lose value if there is a high level of
inflation in the country or if inflation levels are perceived to be rising. This is because
inflation erodes purchasing power, thus demand, for that particular currency. However, a
currency may sometimes strengthen when inflation rises because of expectations that the
central bank will raise short-term interest rates to combat rising inflation.
 Economic growth and health: Reports such as GDP, employment levels, retail sales,
capacity utilization and others, detail the levels of a country's economic growth and health.
Generally, the more healthy and robust a country's economy, the better its currency will
perform, and the more demand for it there will be.
 Productivity of an economy: Increasing productivity in an economy should positively

influence the value of its currency. Its effects are more prominent if the increase is in the
traded sector.
 Political conditions
Internal, regional, and international political conditions and events can have a profound effect on
currency markets. All exchange rates are susceptible to political instability and anticipations
about the new ruling party. Political upheaval and instability can have a negative impact on a
nation's economy. For example, destabilization of coalition governments in Pakistan and
Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing
financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can
have the opposite effect. Also, events in one country in a region may spur positive/negative
interest in a neighboring country and, in the process, affect its currency.
 Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of
ways:
 Flights to quality: Unsettling international events can lead to a "flight to quality", a type of
capital flight whereby investors move their assets to a perceived "safe haven". There will be
a greater demand, thus a higher price, for currencies perceived as stronger over their
relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional
safe havens during times of political or economic uncertainty.
 Long-term trends: Currency markets often move in visible long-term trends. Although
currencies do not have an annual growing season like physical commodities, business cycles
do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from
economic or political trends.
 "Buy the rumor, sell the fact": This market truism can apply to many currency situations.
It is the tendency for the price of a currency to reflect the impact of a particular action
before it occurs and, when the anticipated event comes to pass, react in exactly the opposite
direction. This may also be referred to as a market being "oversold" or "overbought".
 Economic numbers: While economic numbers can certainly reflect economic policy, some
reports and numbers take on a talisman-like effect: the number itself becomes important to
market psychology and may have an immediate impact on short-term market moves. "What
to watch" can change over time. In recent years, for example, money supply, employment,
trade balance figures and inflation numbers have all taken turns in the spotlight.
FINANCIAL INSTRUMENTS
 Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US
Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business
day), as opposed to the futures contracts, which are usually three months. This trade represents a
“direct exchange” between two currencies, has the shortest time frame, involves cash rather than
a contract; and interest is not included in the agreed-upon transaction.
 Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this
transaction, money does not actually change hands until some agreed upon future date. 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.
 Swap
The most common type of forward transaction is the FX swap. In an FX swap, two parties
exchange currencies for a certain length of time and agree to reverse the transaction at a later
date. These are not standardized contracts and are not traded through an exchange.
 Future
Futures are standardized and are usually traded on an exchange created for this purpose. The
average contract length is roughly 3 months. Futures contracts are usually inclusive of any
interest amounts.
 Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the
owner has the right but not the obligation to exchange money denominated in one currency into
another currency at a pre-agreed exchange rate.
Speculation
Futures contracts can also be used by speculators who anticipate that the spot price in the future
will be different from the prevailing futures price. For speculators, who anticipate a
strengthening of the base currency will hold a long position in the currency contracts, in order to
profit when the exchange rates move up as per the expectation. A speculator who anticipates a
weakening of the base currency in terms of the terms currency, will hold a short position in the
futures contract so that he can make a profit when the exchange rate moves down.
Controversy about currency speculators and their effect on currency devaluations and national
economies recurs regularly. Nevertheless, economists including Milton Friedman have argued
that speculators ultimately are a stabilizing influence on the market and perform the important
function of providing a market for hedgers and transferring risk from those people who don't
wish to bear it, to those who do. Other economists such as Joseph Stiglitz consider this argument
to be based more on politics and a free market philosophy than on economics.Large hedge funds
and other well capitalized "position traders" are the main professional
speculators. According to some economists, individual traders could act as "noise traders"and
have a more destabilizing role than larger and better informed actors.
Currency speculation is considered a highly suspect activity in many countries. While investment
in traditional financial instruments like bonds or stocks often is considered to contribute
positively to economic growth by providing capital, currency speculation does not;according to
this view, it is simply gambling that often interferes with economic policy
Risk Aversion in FOREX
Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market
when a potentially adverse event happens which may affect market conditions. This behavior is
caused when risk averse traders liquidate their positions in risky assets and shift the funds to less
risky assets due to uncertainty.[
In the context of the forex market, traders liquidate their positions in various currencies to take
up positions in safe-haven currencies, such as the US Dollar. Sometimes, the choice of a safe
haven currency is more of a choice based on prevailing sentiments rather than one of economic
statistics.
Impact of Currency Exchange in India

GDP & GNP
The Gross Domestic Product (GDP) in India expanded 7.8 percent in the first quarter of 2011
over the same quarter, previous year. From 2004 until 2010, India's average quarterly GDP
Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a
record low of 5.50 percent in December of 2004. India's diverse economy encompasses
traditional village farming, modern agriculture, handicrafts, a wide range of modern industries,
and a multitude of services.
India's economy rose 7.8 percent in the three months ended March 31 from a year earlier, after a
revised 8.3 percent gain in the previous quarter, the Central Statistical Office said in a statement
in New Delhi on May 31. That’s the slowest pace in five quarters.
Manufacturing rose 5.5 percent in the three months through March from a year earlier, compared
with a 6 percent gain in the previous quarter. Finance and insurance services grew 9 percent after
a 10.8 percent jump in the previous quarter. Farm output rose 7.5 percent while mining advanced
1.7 percent, according to the report.The sectors which registered significant growth rates are
agriculture, forestry and fishing at 7.5 percent, electricity, gas and water supply at 7.8 percent,
construction at 8.2 percent, trade,hotels, transport and communication at 9.3 percent, and
financing, insurance, real estate and business services at 9.0 percent.
Particulars Latest Chg - last quarter Estimated / Last Last Update

GDP (%) 7.8 May 2011
GNP (%)
NNP (%)
IIP (%) 10.8 Oct 6.4 4.4 Sep Dec 2010
WPI (%) -
CPI (%) 10.4 Sep -0.9 11.3 July Dec 2010
BOP
Inflation 7.48 Nov -1.10 8.58 Oct Dec
TABLE 4
Types of Exchanges in India

 MCX-SX
MCX-SX initiated trading on Oct 7, 2008.MCX Stock Exchange (MCX-SX), and India’s new
stock exchange, under the regulatory framework of Securities & Exchange Board of India
(SEBI). The exchange received approval from SEBI and Reserve Bank of India (RBI) to launch
a nationwide electronic platform for trading in currency derivatives.
Currently MCX-SX offers currency futures contracts in US Dollar-Indian Rupee (USDINR),

Euro-Indian Rupee (EURINR), Pound Sterling-Indian Rupee (GBPINR) and Japanese Yen-
Indian Rupee (JPYINR). Clearing and Settlement is conducted through the MCX-SX Clearing
Corporation Ltd (MCX-SX CCL).
Within a year of its launch, MCX-SX has achieved a stupendous growth in average daily
turnover and open interest. The average daily turnover increased from Rs 355.66 crores during in
the first month of its operations (Oct 7, 2008 till Nov 6, 2008) to Rs 14617.24 crores for the
month of January 2010.
MCX-SX witnesses participation from over 480 cities and towns across India and has a strong
member base of over 600. Among hosts of benefits this state-of-the-art transparent national
trading platform offers to a wide range of financial market participants -- hedgers (i.e. exporters,
importers, corporate and banks), investors and arbitrageurs -- price discovery and price risk
management are of foremost importance.
 TURNOVER AND VOLUME OF MCX-SX
 Total Turnover - Rs. 43,571.98 crores
 Total number of contracts traded - 8,876,100
 Recorded highest turnover - Rs. 1593.04 crores on Jan 22, 2009
 Highest number of contracts traded - 324,885 on Jan 22, 2009
 Average Daily Volume - 158,501 contracts
 Average Daily Turnover - Rs. 778.07 crores
 Garnered over 50 % market share in two months of operations

 Growth of 187% by clocking an average daily turnover of Rs.1003.38 crore at the end of
2nd month over average daily turnover of Rs. 349.38 crore for the 1st month
As on December 31, 2008 since inception Total Volumes – Currency Futures volume traded on
the Indian Exchanges
 CONTRACT SPECIFICATION
 USD - INR
Symbol USDINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 USD)
Underlying USD
Quotation/Price
Rs. per USD
Quote
Tick size 0.25 paise or INR 0.0025

Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading
12 month trading cycle.
cycle
Two working days prior to the last business day of the expiry month at
Last trading day
12:15pm.
Last working day (excluding Saturdays) of the expiry month.

Final settlement
The last working day will be the same as that for Interbank Settlements in
day
Mumbai.
Theoretical price on the 1st day of the contract. On all other days, DSP of the
Base price
contract.
Price operating
Tenure upto 6 months Tenure greater than 6 months
range
+/-3 % of base price +/- 5% of base price
Clients Trading Members Banks

Position limits Higher of 6% of total Higher of 15% of the total Higher of 15% of the
open interest or USD open interest or USD 50 total open interest or
10 million million USD 100 million
Minimum initial
1.75% on first day & 1% thereafter.
margin
Extreme loss
1% of MTM value of gross open position.
margin
Calendar Rs. 400/- for a spread of 1 month, Rs. 500/- for a spread of 2 months, Rs.
spreads 800/- for a spread of 3 months & Rs. 1000/- for a spread of 4 months or more
Daily settlement : T + 1
Settlement
Final settlement : T + 2
Mode of
Cash settled in Indian Rupees
settlement
DSP shall be calculated on the basis of the last half an hour weighted average
Daily settlement
price of such contract or such other price as may be decided by the relevant
price (DSP)
authority from time to time.
Final settlement
RBI reference rate
price (FSP)
 EURINR
Symbol EURINR
Instrument
FUTCUR
Type
Unit of trading 1 (1 unit denotes 1000 EURO)
Underlying EURO
Quotation/Price
Rs. per EUR
Quote

Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract
trading cycle
Settlement
RBI Reference Rate on the date of expiry
price
Last trading Two working days prior to the last business day of the expiry month at
day 12:15pm.

Final
settlement day
Mumbai.
Theoretical price on the 1st day of the contract. On all other days, DSP of the
Base price
contract
Price operating Tenure upto 6 months Tenure greater than 6 months

range +/-3 % of base price +/- 5% of base price
Position limits
Calendar Rs.700/- for a spread of 1 month, 1000/- for a spread of 2 months, Rs.1500/-
spreads for a spread of 3 months or more
Settlement
Mode of
Cash settled in Indian Rupees
settlement
 GBPINR
Symbol GBPINR
Unit of trading 1 (1 unit denotes 1000 POUND STERLING)
Underlying POUND STERLING
Quotation/Price
Rs. per GBP
Quote
Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading
cycle
Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned
RBI Reference Rate for US$ and Euro.
Two working days prior to the last business day of the expiry month at
Last trading day
12:15pm.
Final settlement
day
Mumbai.
Theoretical price on the 1st day of the contract. On all other days, DSP of
Base price
the contract
open interest or GBP open interest or GBP 25 total open interest or
5 million million GBP 50 million
Minimum initial
3.2% on first day & 2% thereafter
margin
Extreme loss
0.5% of MTM value of gross open positions.
margin
Rs.1500/- for a spread of 1 month, 1800/- for a spread of 2 months,
Calendar spreads
Rs.2000/- for a spread of 3 months or more
Settlement
Mode of settlement Cash settled in Indian Rupees
Daily settlement DSP shall be calculated on the basis of the last half an hour weighted
price (DSP) average price of such contract or such other price as may be decided by the
relevant authority from time to time.
Final settlement Exchange rate published by the Reserve Bank in its Press Release captioned
price (FSP) RBI Reference Rate for US$ and Euro.
 JPYINR
Symbol JPYINR
Unit of trading 1 (1 unit denotes 100000 YEN)
Underlying JPY
Quotation/Price
Rs per 100 YEN
Quote
Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading
cycle
Exchange rate published by the Reserve Bank in its Press Release captioned
Settlement price
RBI Reference Rate for US$ and Euro.
Last trading day Two working days prior to the last business day of the expiry month at
12:15pm.
Final settlement
day
Mumbai.
Theoretical price on the 1st day of the contract. On all other days, DSP of
Base price
the contract
open interest or JPY open interest or JPY 1000 total open interest or
200 million million JPY 2000 million
Minimum initial
4.50% on first day & 2.30% thereafter
margin
Extreme loss
0.7% of MTM value of gross open positions.
margin
Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs
Calendar spreads
1500 for a spread of 3 months or more
Settlement
Daily settlement DSP shall be calculated on the basis of the last half an hour weighted
price (DSP) average price of such contract or such other price as may be decided by the
relevant authority from time to time.
Final settlement Exchange rate published by the Reserve Bank in its Press Release captioned
price (FSP) RBI Reference Rate for US$ and Euro.
 NSE
The National Stock Exchange of India was promoted by leading Financial institutions at the
behest of the Government of India, and was incorporated in November 1992 as a tax-paying
company. In April 1993, it was recognized as a stock exchange under the Securities Contracts
(Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations
in November 1994, while operations in the Derivatives segment commenced in June 2000.
The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading
in Capital Market, Derivatives Market and Currency Derivatives segments including equities,
equities based derivatives, Currency futures and options, equity based ETFs, Gold ETF and
Retail Government Securities. Today NSE network stretches to more than 1,500 locations in the
country and supports more than 2, 30,000 terminals.
With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen the
securities industry and provides several new products like Mini Nifty, Long Dated Options and
Mutual Fund Service System. Responding to market needs, NSE has introduced services like
DMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of
the market and various categories of market participants.
NSE has made its global presence felt with cross-listing arrangements, including license
agreements covering benchmark indexes for U.S. and Indian equities with CME Group and has
also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to
cooperate in the development of a market for India-linked products and services to be listed on
SGX. The two exchanges also will look into a bilateral securities trading link to enable investors
in one country to seamlessly trade on the other country’s exchange.
 CONTRACT SPECIFICATION
Symbol USDINR EURINR GBPINR JPYINR
Market Type N N N N
Instrument Type FUTCUR FUTCUR FUTCUR FUTCUR
1 - 1 unit
1 - 1 unit 1 - 1 unit 1 - 1 unit
denotes 1000
Unit of trading denotes 1000 denotes 1000 denotes 100000
POUND
USD. EURO. JAPANESE YEN.
STERLING.
The exchange The exchange The exchange The exchange

Underlying / Order rate in Indian rate in Indian rate in Indian rate in Indian
Quotation Rupees for US Rupees for Rupees for Rupees for 100
Dollars Euro. Pound Sterling. Japanese Yen.
Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Two working days prior to the last business day of the expiry month
Last trading day
at 12 noon.

Final settlement day The last working day will be the same as that for Interbank
Settlements in Mumbai.
Quantity Freeze 10,001 or greater
Theoretical Theoretical Theoretical price Theoretical price

Base price price on the price on the on the 1st day of on the 1st day of
1st day of the 1st day of the the contract. the contract.
contract. contract. On all other On all other
On all other On all other days, DSP of the days, DSP of the
days, DSP of days, DSP of contract. contract.
the contract. the contract.
Tenure upto 6
+/-3 % of base price.
Price months
operating
range Tenure greater
+/- 5% of base price.
than 6 months
higher of 6% higher of 6%
higher of 6% of higher of 6% of
of total open of total open
total open total open
Clients interest or interest or
interest or GBP 5 interest or JPY
USD 10 EURO 5
million 200 million
million million

of the total of the total
Position Trading the total open the total open
open interest open interest
limits Members interest or GBP interest or JPY
or USD 50 or EURO 25
25 million 1000 million
million million

of the total of the total
the total open the total open
Banks open interest open interest
interest or GBP interest or JPY
or USD 100 or EURO 50
50 million 2000 million
million million
Initial margin SPAN Based Margin
1% of MTM 0.3% of MTM 0.5% of MTM 0.7% of MTM

Extreme loss margin value of gross value of gross value of gross value of gross
open position open position open position open position
Calendar spreads Rs.400 for Rs.700 for Rs.1500 for Rs.600 for
spread of 1 spread of 1 spread of 1 spread of 1
month month month month
Rs.500 for Rs.1000 for Rs.1800 for Rs.1000 for
months months months months
Rs.800 for Rs.1500 for Rs.2000 for Rs.1500 for
months months and months and months and
Rs.1000 for more more more
spread of 4
months and
more
Settlement
Daily settlement price Calculated on the basis of the last half an hour weighted average
(DSP) price.
Exchange rate Exchange rate

published by RBI published by RBI
in its Press in its Press
Final settlement price RBI reference RBI reference
Release Release
(FSP) rate rate
captioned RBI captioned RBI
reference Rate reference Rate
for US$ and Euro for US$ and Euro
 VOLUME
No. Volume Rising Time Number of Stocks
1. 1 Day(Daily) 796
2. 2 Days 878
3. 3 Days 961
4. 4 Days 978
5. 1 Week 1029
8. 2 Weeks 1080
No. Volume Falling Time Number of Stocks
1. 1 Day(Daily) 742
2. 2 Days 667
3. 3 Days 575
4. 4 Days 564
5. 1 Week 514
8. 2 Weeks 464
TURNOVER
Jul 2011
No. of securities No of Traded quantity Traded Value

Date
traded trades (lakhs) (Rs.crore)
01-Jul-2011 1502 5510177 6356.17 11133.06
04-Jul-2011 1514 5125060 5682.75 9965.78
05-Jul-2011 1512 5026589 5770.26 10752.34
06-Jul-2011 1512 5105786 5486.13 9881.31
07-Jul-2011 1516 5779509 6127.02 12023.56
08-Jul-2011 1511 5916051 6667.36 12269.41
11-Jul-2011 1498 4403006 4534.06 8660.03
12-Jul-2011 1510 5528067 5459.35 10954.51
13-Jul-2011 1516 5005631 5153.7 9775.66
14-Jul-2011 1505 5612804 6302.67 11735.25
15-Jul-2011 1513 4810149 4720.01 8815.95
18-Jul-2011 1516 4354318 4217.17 8276.66
19-Jul-2011 1515 5415602 5214.73 9900.08
20-Jul-2011 1522 6228094 6307.79 11315.26
21-Jul-2011 1514 5317367 5293.23 10013.07
22-Jul-2011 1513 5804422 6058.17 11632.77

25-Jul-2011 1518 5892139 6114.43 11484.43
26-Jul-2011 1523 6186931 5951.11 12296.62
 LIVE TRADING
EXAMPLE:
Sold @ 64.5125
Bought @ 64.0800
Difference : 64.5125 – 64.0800 = 0.4325
Profit for 1 lot : 0.4325 * 1000 = 432 Rs
Profit for 100 lots : 0.4325 * 1000 * 100 = 43250 Rs.

Need For the Study
 Minimal or no commissions - There are no clearing fees, no exchange fees, no

government fees and no brokerage fees.
 Easy access – if we compare the money you need on the market in comparison with the
amount needed for entering the stock, options or futures market, it’s a huge difference.
The amount of capital is very low and it allows numerous types of people to easily enter
the foreign exchange market.
 No middlemen – spot currency trading is decentralized and eliminates middlemen,

allowing you to trade directly.
 Lots of free courses and demo possibilities – On the internet we can find huge
opportunities for learning how the Forex market works and what we need to become a
good trader. Also, most online Forex brokers offer demo accounts to practice trading and
build our skills, using real-time charts and news feeds. They are more valuable than we
could even imagine and, before starting your real money on the market, try to see if we
are built and ready for it by practicing with these types of software.
 Time and location flexibility – the market is open 24 hours each day, so we don’t have
to match our schedule with the one of the market. It doesn’t require a full-time
engagement and we can choose the hours that suit our best. Also, we can operate from
any corner of the world, as long as wehave an Internet connection.
 Low transaction costs – the transaction cost, determined by the bid/ask spread, is
usually less than 0.1%, and it can go even lower in the case of large dealers.
 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 we don’t have to struggle
so much until we will find someone who wants to buy our currency or sell we one. We
can’t get stuck and, by using features like stop lose, we will close your position
automatically, while not even being in front of the computer.
 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.
 No forced deadlines – no one and no rule is forcing we to close a position. we can stay
open as long as we consider necessary.
 Transparency - due to multi-day market movement, its size and the high number of
participants, it is virtually impossible to market manipulation.
Problem
 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.
 Zero Sum Game- don’t expect necessarily to win lots of money. Remember that for
someone to get rich, another has to loos money on the Forex market. On the web there are
many unscrupulous people who are dedicated to defraud honest people. It is important when
investing your money to have the support of a trusted broker; they usually must be properly
registered, including some requests that the brokerage firms have made at least 100
successful operations.
 Lack of complete knowledge & Skills – Without completely knowing the market’s rules
and without having patience, your investment might very well soon vanish.
 Leverage: As mentioned, you can take a leverage, which will allow you to enter the market
with a larger capital, if the operations are successful, and use good strategies you can obtain
better returns but if the opposite happens, you may lose a lot of your money. leverage is a
double edged sword.
 complex nature: the technical analysis techniques are complex as so is the implementation
of certain strategies requires much training and education. The currency exchange rates are
influenced by a variety of factors, which may fluctuate over time.
 Cannot keep track for 24 hours: It is quite impossible for an individual trader to keep track
of the forex market throughout the day.
 High volatility: High volatile forex markets can cause huge losses if you don’t know how to
deal with it. Therefore, it is advisable that you opt for a forex trading course that will help
you to know how to make profit in foreign exchange trading.
 Possibility of scams while trading in forex- In a quite common scam, investors are
promised significant amount of profit in exchange of an initial investment. However, the
investor’s money is not placed in the forex market; instead, the con artists simply run away
with the money. However, you can avoid being a victim if you gather a little knowledge
about forex trading before starting to trade on your own.
 Confined to only certain areas-currency market are confined to only certain areas i.e only
urban areas.Still in rural areas people are unaware of these markets.These areas do not have
even footprints of the currency markets.
 Theoretical data are taken from internet; possibilities of wrong data can take in the report.
 Respondent could provide wrong data.
 Shortage of time.
 May small sample size doesn’t cover the all population characteristics.
Objective
Primary Objective
 Study Impact of Currency market in Indian economy.
Secondary Objective
 To unite and revise all the laws that relate to currency exchange markets.
 To observe the orderly maintenance and development of the currency exchange market
in India.
 Recognize the basics of the currency exchange market
 Describe the characteristics of the forward market and the four types of forward
contracts namely: outright forwards, currency swaps, forwards-forwards, and option date
forwards.
 Illustrate the differences between and among currency futures, currency options, and
currency swaps
 Examine the risks in the currency market
 Determine the participants in the currency market and their respective roles.
 Appraise the effect of the currency market on money stock and money market liquidity.
 To study the on board aspects of corporate.
 To Study the various services provided by Broker house to their clients.
 To know investors experience in Forex market.

METHODOLOGY
RESEARCH DESIGN
A research design is a framework or blueprint for conducting the marketing research project.It
specifies the details of the procedures necessary for obtaining the information needed to structure
and solve marketing research problems.
 Exploratory Design:-
 In exploratory design first collect the information about research.

 Understand foreign exchange market
 About foreign exchange market in India
 About Indian economy
 Impact of currency market in Indian economy
 Collection of primary data from past research.
 Then collection secondary data from Books, Magazines, Internet etc.
 Then start qualitative research in this the interview.
1.6.2 THE SIX “W”
1. Who: who are respondent?

The accounts holder in SMC Global Securities and other people who are trading in Forex Market
2. What: what information should be obtained from the respondent?

A wide variety of information could be obtained, including:
a. What are income criteria?
b. In which financial instrument they invest in?
c. Factors they determine before investing.
3. When: when should the information is obtained from the respondent?

10.00a.m. to 4.00p.m.
4. Where: where should the respondent is contacted to obtain the required information?
The information was collected from the SMC Global Securities, pusa road,New Delhi.
5. Why: why are we obtaining information from the respondent?

It is the necessary step to determine the factors of currency market impact in Indian economy
because of the research project assigned.
6. Way: In what way are we going to obtain information from the respondent?
a. Personal interview with questioners
b. Expert opinion
1.6.3 SOURCES OF DATA COLLECTION

SECONDARY SOURCES OF DATA
Secondary data is data collected by someone other than the user. Common sources of secondary
data for social science include censuses, surveys, organizational records and data collected
through qualitative methodologies or qualitative research. Primary data, by contrast, are collected
by the investigator conducting the research.
 INTERNET
The Internet is a global system of interconnected computer networks that use the standard
Internet Protocol Suite (TCP/IP) to serve billions of users worldwide. It is a network of networks
that consists of millions of private, public, academic, business, and government networks, of
local to global scope, that are linked by a broad array of electronic, wireless and optical
networking technologies.internet is being used for collecting and taking out various information
on currency markets.
 CASE STUDY METHOD

A case study is a research design framework common in social science. It is based on an in-depth
investigation of a single individual, group, or event. Case studies may be descriptive or
explanatory. The latter type is used to explore causation in order to find underlying
principles.[1][2] They may be prospective, in which criteria are established and cases fitting the
criteria are included as they become available, or retrospective, in which criteria are established
for selecting cases from historical records for inclusion in the study.a case study of the
organization was obtained and based on that information was extracted.
 MAGAZINES, JOURNALS AND ARTICLES

Magazines, journals and articles are used as a source of information for carrying out research
work on currency market. Information has been extracted from these sources.
EXISTING SYSTEM
The global increase in trade and foreign investments has led to inter-connection of many national
economies. This and the resulting fluctuations in exchange rates, has created a huge international
market for Forex rendering investors another exciting avenue for trading. The Forex market
offers unmatched potential for profitable trading in any market condition or any stage of the
business cycle.
Indian Forex Market

In terms of daily turnover in 2010, India is the 16th largest market in the world. India’s market
share in World FX Market increased from 0.1 % in 1998 to 0.9% in 2010. As per Latest RBI
Data, Daily FX Indian Market volumes are $50 Billion in 2009.
Indian Currency Futures Market – Present Status

Currency Futures Trading was launched in India on 29th August, 2008 on NSE. NSE &
MCX’SX are the major 2 exchanges presently. “United Stock Exchange of India” is the
upcoming exchange promoted by Bank of India, Federal Bank, MMTC & Jaypee Capital along
with 9 other banks. The FX market in India is regulated by The Foreign Exchange Management
Act, 1999 or FEMA, Presently Daily Turnover on both exchanges averages Rs. 35000 crores.
Banks are active participants on the exchanges. NRIs & FIIs are not permitted to trade as of now.
Currency markets offer investors a step into the world of Forex. The global increase in trade and
foreign investments has led to inter-connection of many national economies. This and the
resulting fluctuations in exchange rates, has created a huge international market for Forex
rendering investors another exciting avenue for trading. The Forex market offers unmatched
potential for profitable trading in any market condition or any stage of the business cycle.
Currency Current Rate Short Term Trend Support Resistance

Dollar index 76.36 UP 76.20-75.80 76.75-77.25
EUR/USD 1.3931 Down 1.3900-1.3820 1.3985-1.4070
USD/JPY 79.72 Down 79.50-79 80.10-80.55
GBP/USD 1.5829 Down 1.5780-1.5700 1.5885-1.5925
USD/INR(JULY) 44.82 UP 44.75-44.50 44.95-45.20
EUR/INR(JULY) 62.41 Down 62.10-61.70 62.65-62.98
JPY/INR(JULY) 56.24 UP 55-55.80 56.56.35-56.65
GBP/INR(JULY) 70.94 Down 70.85-70.45 71.15-71.35

Note: The above levels are only for intraday trading
Currency Outlook for 13.07.2011
MAJOR MARKET UPDATES
 The Pound was trading close to a five-and-a-half-month low against the U.S. dollar on
Tuesday, as concerns over sovereign debt contagion saw investors shun riskier assets
while a report showing a decline in U.K.inflation weighed on interest rate expectations.
 The Canadian dollar weakened versus its US counterpart as the problems in Europe and
prospects of slower economic growth in China made the US currency more preferable to
the Canadian one.
 The Euro was hovering just above a five-month low against the U.S. dollar on Tuesday,
amid growing concernsthat the euro zone’s debt crisis was spreading to Italy as yields on
the country’s government bonds rose sharply.
 The New Zealand dollar tumbled to a two-week low against its U.S. counterpart on
Tuesday, as fears that the euro zone’s sovereign debt crisis could spread to Spain and
possibly Italy sparked a flight to safety.
 The U.S. dollar was broadly higher against its major counterparts on Tuesday, as risk
appetite crumbled after an emergency meeting of euro zone policymakers failed to stem
fears over the threat of sovereign debt contagion in the single currency bloc.
Dollar index 75.64 Down 75.30-74.70 75.95-76.35
EUR/USD 1.4072 UP 1.4000-1.3960 1.4120-1.4245
USD/JPY 79.29 Down 79-78.40 79.55-79.95
GBP/USD 1.5961 Down 1.5900-1.5780 1.5985-1.6070
USD/INR(JULY) 44.63 Down 44.55-44.40 44.85-45.20
EUR/INR(JULY) 62.74 UP 62.50-62.10 63-63.35
JPY/INR(JULY) 56.27 UP 56.10-55.70 56.35-56.90
GBP/INR(JULY) 71.18 UP 71.10-70.85 71.40-71.85

 The Great Britain pound dropped against the euro today as the government report showed
that the unemployment claims increased in June, instead of decreasing as was predicted
by analysts.
 The currency gained versus The Japanese yen erased gains versus the US dollar and fell
against the euro today after the Chinese economy grew more than expected in the second
quarter of this year.
 The Euro rose today against the US dollar after yesterday’s decline as the US trade
balance posted bigger deficit than was anticipated and the minutes of the Federal Open
Market Committee showed that the US policymakers are divide on their opinion about
necessity of the quantitative easing
 The U.S. dollar remained broadly lower against its major counterparts on Wednesday, as
upbeat Chinese economic data boosted investor demand for higher yielding assets.
EUR/USD 1.4191 UP 1.4120-1.4050 1.4285-1.4245
USD/JPY 79 Down 78.70-78.40 79255-79.55
GBP/USD 1.6121 Down 1.6080-1.6000 1.6255-1.6350
USD/INR(JULY) 44.59 Down 44.45-44.20 44.75-45.20
EUR/INR(JULY) 63.20 UP 62.80-62.50 63.50-63.85
JPY/INR(JULY) 56.37 UP 56.10-55.70 56.45-56.60
GBP/INR(JULY) 71.88 UP 71.85-71.50 72.10-72.75


 The U.S. dollar trimmed losses against its major counterparts on Thursday, as the euro
came under pressure following an Italian debt auction, while markets awaited a flurry of
key U.S. economic data.
 The Pound pulled back from a three-week high against the U.S. dollar on Thursday,
trimming gains made after ratings agency Moody’s warned that the U.S. may lose its top-
notch credit rating.
 The U.S. dollar regained ground against the yen on Thursday, bouncing off a four-month
low after Japan’s Finance Minister said the yen’s strength did not reflect economic
fundamentals, fanning speculation that Japan would intervene to stem the currency’s
gains.
The Australian dollar was down against its U.S. counterpart on Thursday, retreating from a nine-
week high after the U.S.’s credit rating was put under review for a downgrade, dampening
demand for riskier assets
EUR/USD 1.4150 UP 1.4050-1.3980 1.4285-1.4245
USD/JPY 79.11 Down 78.70-78.40 79.35-79.65
GBP/USD 1.6134 Down 1.6080-1.6000 1.6255-1.6350
USD/INR(JULY) 44.61 Down 44.45-44.20 44.75-45.20
EUR/INR(JULY) 63.10 UP 62.80-62.50 63.50-63.85
JPY/INR(JULY) 56.30 UP 56-55.70 56.40-56.60
GBP/INR(JULY) 71.90 UP 71.80-71.50 72.10-72.75


 The US dollar erased its gains today and posted the biggest weekly decline in three
months after Standard & Poor’s warned that it may cut the US credit rating as the US
lawmakers can’t agree on the nation’s debt ceiling.
 The Euro has borne up relatively well against the dollar due to parallel concerns over the
United States' own debt troubles and hints further monetary easing could yet be on the
cards there, potentially flooding global markets with dollars.
 The Canadian dollar advanced today against all 16 most-traded currencies after eight
banks in the European Union failed the stress tests, increasing concerns about the EU
financial system.
 The Australian dollar fell today, heading for the second weekly loss against the US dollar
and the Japanese yen, as stocks and commodities declined on concerns that problem in
the US and Europe will have negative impact on the global growth.
Dollar index 75.13 UP 74.70-74.55 75.55-75.75
EUR/USD 1.4052 Down 1.3980-1.3870 1.4150-1.4285
USD/JPY 79.06 Down 78.70-78.40 79.35-79.65
GBP/USD 1.6080 UP 1.6050-1.5980 1.6140-1.6230
USD/INR(JULY) 44.65 UP 44.45-44.20 44.75-45.20
EUR/INR(JULY) 62.70 Down 62.50-62.10 62.98-63.25
JPY/INR(JULY) 56.41 UP 56.30-56 56.60-56.85
GBP/INR(JULY) 71.80 Down 71.70-71.50 72.10-72.35


 The U.S. dollar advanced against most of its major counterparts on Monday, while the
euro came under broad selling pressure after Spanish and Italian bond yields surged to
fresh euro-lifetime highs, adding to fears over the region’s debt crisis.
 The Great Britain pound dropped against the Japanese yen and fluctuated against the US
dollar as the report showed today that UK house prices declined for the first time this
year.
 The Euro declined against the U.S. dollar on Monday, dropping to a three-day low as
concerns over the region’s debt crisis pressured the single currency lower
 The Swiss franc reached a new record versus the euro today on concerns that the
European leaders won’t be able to reach an agreement regarding necessary measures to
battle the sovereign-debt crisis.
Dollar index 75.13 UP 74.70-74.55 75.55-75.75
EUR/USD 1.4157 Down 1.4100-1.4000 1.4220-1.4285
USD/JPY 79.06 Down 78.70-78.40 79.35-79.65
GBP/USD 1.6123 UP 1.6050-1.5980 1.6170-1.6230
USD/INR(JULY) 44.52 UP 44.45-44.20 44.75-45.20
EUR/INR(JULY) 63 Down 62.80-62.50 63.15-63.38
JPY/INR(JULY) 56.24 UP 56-55.95 56.45-56.85
GBP/INR(JULY) 71.83 Down 71.70-71.50 72.10-72.35

CURRENCY OUTLOOK FOR 20.7.2011

 The euro extended gains against the U.S. dollar on Tuesday, but remained vulnerable
amid uncertainty ahead of an emergency summit of European Union leaders to discuss a
second bailout for Greece.
 US President Barack Obama accepted the deficit reduction plan of the bipartisan group of
senators, bringing hope for resolution of the deadlock in discussion an increase of the
debt ceiling. The US dollar rose against the Japanese yen and trimmed its losses versus
the euro.
 The Canadian dollar jumped yesterday after Canada’s central bank held interest rates and
signaled that it can resume its rates increases soon as economy improves.
 Greek Finance Minister Evangelos Venizelos suggested that agreement on measures to

resolve the European debt crisis at the coming European Union summit is “attainable”.
These words boosted the euro.
EUR/USD 1.4226 UP 1.4140-1.4040 1.4300-1.4345
USD/JPY 78.89 Down 78.70-78.40 79.35-79.65
GBP/USD 1.6136 UP 1.6050-1.5980 1.6170-1.6230
USD/INR(JULY) 44.52 Down 44.45-44.20 44.75-45.20
EUR/INR(JULY) 63.28 UP 63.10-62.80 63.50-63.78
JPY/INR(JULY) 56.39 UP 56-55.95 56.55-56.85
GBP/INR(JULY) 71.84 Down 71.55-71.35 72.10-72.35

CURRENCY OUTLOOK FOR 21.7.2011

 The U.S. dollar was trading close to a four-month low against the yen on Wednesday, as
concerns over sovereign debt levels in the euro zone and the U.S. bolstered safe haven
demand.
 The U.S. dollar slipped to a daily low against the Swiss franc on Wednesday, as concerns
over sovereign debt loads in the euro zone and the U.S. bolstered demand for the safe
haven franc
 The Euro inched higher against the U.S. dollar on Wednesday, but gains were limited
amid an air of caution ahead of a summit meeting of European Union leaders on
Thursday, to discuss a new aid deal for Greece.
 The Australian dollar edged higher against its U.S. counterpart on Wednesday, as market
sentiment received a lift after President Barack Obama supported a bi-partisan plan to
avoid a U.S.
debt default.
CHAPTER 1V
SUMMARY, CONCLUSION, SUGGESTIONS
4.1 SUMMARY OF THE SYSTEM
Forex, is definitely an exchange that allows investors to trade national currencies over the forex
trading. This is the worlds largest industry for currency, using the Dollar, ranging from 1 ? 2
TRILLION dollars are traded upon this market on a regular basis. This type of trade is often
performed online or around the telephone. By using benefit of the world wide web, you are
enabling yourself to you could make your investments in a very reliable, easy, safe and fast way.
Some investors are able to enjoy returns of about thirty percent monthly, this requires a good
deal of experience to find this sort of enormous roi. The foreign currency market does not have
one specific place of trade like lots of the other markets do, for this reason alone is why many of
the trade is conducted by internet, fax, or telephone. To start with for currency trade hasn’t been
all of that popular, we were holding bringing in only about seventy billion dollars each day,
together with the invention of Forex, that number grew massively.
.Certainly, the currencies tend not to only handle the American dollar, these currencies might be
translated to over 5,000 currency institutions world wide, that include, commercial companies,
large brokers, international banks, and government banks. Many major countries have forex
trading centers for instance, Frankfurt, London, New York, Paris, Hong Kong, Tokyo, and
Bombay to name a few.
When trading online there are several benefits for example, to be able to trade or track your
investments whenever day or night, from anywhere inside the world that gives a web connection.
Another added benefit, is always that some online exchange sites permit you to get started with a
little investment, termed as a mini account, some with as little as two-hundred dollars. With
internet trading, the trade is instant. After you trade offline you should deal with paperwork, with
internet trading there isn’t any paperwork involved.
The field of the online world, has allow us do lots of things with just a phone, where else is it
possible to bank, trade, talk to your friends, research your investments and earn income all
simultaneously? Make the internet work in your own interest by implementing stock trading
online for your portfolio. There?s a whole whole world of money awaiting you to earn along
with your online investments, and it?s all offered at the press of the mouse button button.
As the world looks up to, India for investing in many sectors the country is beginning to see
some good trading via Internet through forex.
Forex in India today is dependent on the reserves and how Reserve Bank of India deals with
currency fluctuations with respect to the rupee.
However, the history of forex in India shows that for the last twenty years there has been a
regular deficit. The total imports until today exceed the exports. With the industrialization and
liberalization the situation of forex in India has changed rather geometrically.
Being agricultural country earlier exports were confined to agricultural produces. It was with the
help of IMF that imports in India improved. Despite so much of infrastructure, improvement the
country constantly faces transport and power cut problems.Forex in India has been helped by
invisible trading services like shipping, insurances, banking various investments, perking of
tourism, IT etc. The cost of borrowing from international banks is very high.
To recap:
 The forex market represents the electronic over-the-counter markets where currencies
are traded worldwide 24 hours a day, five and a half days a week. The typical means
of trading forex are on the spot, futures and forwards markets.
 Currencies are "priced" in currency pairs and are quoted either directly or indirectly.
 Currencies typically have two prices: bid (the amount that the market will buy the
quote currency for in relation to the base currency); and ask (the amount the market
will sell one unit of the base currency for in relation to the quote currency). The bid
price is always smaller than the ask price.
 Unlike conventional equity and debt markets, forex investors have access to large
amounts of leverage, which allows substantial positions to be taken without making a
large initial investment.
 The adoption and elimination of several global currency systems over time led to the
formation of the present currency exchange system, in which most countries use some
measure of floating exchange rates.
 Governments, central banks, banks and other financial institutions, hedgers, and
speculators are the main players in the forex market.
 The main economic theories found in the foreign exchange deal with parity
conditions such as those involving interest rates and inflation.
Scope of The System
Forex market also known as foreign exchange or currency exchange is a new concept for India.
It is a place where various currencies are traded. Foreign exchange or forex means a market
place where one currency is traded for another. The major players of this market are banks,
financial institution, large companies, financial brokers and individuals. In the recent years forex
trading has gained tremendous popularity. These are unique by its large volume, extreme
liquidity, 24 hour trading availability and various types of options available.
Indian forex market is small when compared with other developed countries but with the
multinationals coming up and new government policies the path of expansion is on its new
heights. The Indian government has now open up new ways to trade and regulated this market as
well. India has shown great rise in its forex turnover in last three years. People now feel
comfortable to trade in and exit from the market.
Indias share in world forex market has shown growth of 0.9% last year and will grow further. It
is the fastest growth of any country. The growth rates of developed countries is much lower
compared with developing countries.UK and US have shown the lowest change in contribution
of foreign exchange. In India people are now more aware of the kinds of trading like derivative
markets, options, swapping, hedging etc. The most important characteristic of forex is the impact
on various currencies by the change in one currency rates. Any economic activity in world
affects the forex market immediately.
The factors which influence the forex market in India are government polices and rules, tax
structure, inflation rates, RBI rates and interest rates, foreign trade policies, world bank interest
rates and economic growth and health.
The three fold growth of forex trades in India has proved the upcoming power and will soon be
called as a investment hub. The scope of forex market is very huge in India as it is in its initial
stage. New developments are in row and very soon Indian market would emerge as a high
potential foreign exchange market place.
4.3 CONCLUSION
The survey I have carried out on Impact of currency market in India. The conclusion of the survey
is as follows.
The awareness of the forex market in India is very low in compare to other financial instruments.
Only fewer people know about the currency trading. As the gender wise male investors are more
investing than women investors. But the education level is as well a positive sign of women also
taking interest in forex market. The equity and commodity investors are as well investing in
currency. In India USD, EURO, GBP, and JPY are the currencies been traded most.USD and
EURO are the most preferred currency in response from the respondents. there is high volume in
this two currency pair in India. USD is on first position to trade in India, as per the data of MCX-
SX the volume of USD/INR of June contract 3588917 in lots as on 3 rd June 2011. The EURO is
on second to be traded in India. The data of MCX-SX volume in EURO/INR is 156556 in lots, as
on 3rd June 2011. GBP and JPY are been traded in India on 3rd and 4th position respectively.
The volume in GBP/INR was 58255 in lots and volume in JPY/INR was 23628 in lots as on 3rd
June 2011 respectively.In future 36% & 32% of respondent are relay on USD & EURO
respectively. But in future as per the report of Bank Of Japan Change in the total quantity of
domestic currency in circulation and current account deposits held at BOJ, It's positively
correlated with interest rates-early in the economic cycle an increasing supply of money leads to
additional spending and investment, and later in the cycle expanding money supply leads to
inflation. This release would be affect the JPY rate.
The earning in currency market is low in comparison of Equity or Commodity market. The
volatility in currency rates is very less. It doesn’t volatile as equity or commodity market. The risk
is also very less in the currency market. The main or primary object of investing in currency
market by investor is hedging. More number of respondents is connected in the business of
Import-Export. They use to hedge the currency market for future payment and earn the deference.
The impact of currency market in Indian economy can be measure from the Gross Domestic
product and Gross national product. The GDP of current year if 7.8%. It is a positive in compare
to last financial year; the second factor is foreign reserve. As on may 2011 India is having $ 3010
billion of foreign reserve as per the IMF data. Export of the country is as well increased as exports
surged by 37.5 per cent for the financial year ended March 31, 2011 to touch $245.9 billion
shooting well past the $200-billion target set for the year. Currency market in India is having a
wide scope for development in future.
4.4 SUGGESTIONS
 Know what moves currency markets. Like any asset class, there are a number of factors that
drive a currency's performance. A country’s macroeconomic situation can have a major
influence--economic data releases, policy decisions, and political events can change an
economist’s outlook on the country, and therefore its currency. There are also technical factors
such as interest rates, equity markets, and international trade, which may also have an impact.
Spend time getting to know these.
 Understand the strategies. Yes, there is a method to the madness. As a trader, you need to be
aware of three crucial trading strategies, which are often used by currency traders: the carry,
momentum, and value trade. Momentum tracks the direction of currency markets; the carry
strategy sees investors selling currencies with low interest rates and buying those with high rates;
and the valuation strategy takes a position based on the investor’s view of a currency’s value.
However, the strategies that you use are up to you.
 Decide on trading strategy. Are you macro-driven or a technician? In currency trading, as in

any form of active investment, it is important to understand how you arrive at your investment
decisions. Are you someone who looks at the big picture (fundamental economic data such as
inflation, or central bank decisions) and makes a call on how that may affect a currency pair? If
so, then you’re macro-driven. If you are someone who looks at the changes to a currency pair
and then tries to understand what this may mean from a macro-perspective over the long term,
then you are a technical investor.
 Manage risk. As with any investment decision, you must decide how much risk you’re willing
to accept. Ask yourself, “how much am I prepared to lose on this position?” If you don’t have a
convincing or comfortable answer then you should rethink the trade. Do not risk more than you
can afford to lose. Think about how you can mitigate your downside risk; make use of trading
strategies such as stop losses or limit orders.
 Stick to what you know. There are 34 currency pairs that can be traded on dbFX, each of which
have their own characteristics and considerations to understand and analyze. If you’re
participating in the market on a part-time and non-professional basis, it is probably better to
concentrate on just a few pairs and commit to thorough and robust research on those, rather than
superficial research on the many. Some key things to consider when analyzing a currency pair
are its liquidity, transaction costs (the spread), and volatility. As a general rule, major currencies
usually have better liquidity, tighter spreads, and lower volatility, versus emerging-market
currencies, which have poor liquidity, wide spreads, and volatile movements.
 Plan your trade, and trade your plan. It’s one thing to have a plan, it’s quite another to
execute it. When trading currency, it's important not to get caught up in the moment--the markets
are fast moving and in the short-term can be unpredictable. Rather than trying to make a quick
profit, stick to your long-term plan based on your research. Good currency traders make money
in the long term by being disciplined, not necessarily by making short-term bets.
 Research, research, research. It’s important to stay current. All currencies move quickly, so
checking the price once a week is not going to help you make strong, long-term returns. It is
helpful to use an online provider that provides you with up-to-the-minute data and statistics.
Traders use data to constantly assess their trading positions
 Keep your emotions in check. Like many important decisions, it is vital to keep emotion out of
any trading decision you make. If you’re upset about missing out on an opportunity and want to
trade yourself into a better position, or want to stray from your trading strategy to make up for a
loss earlier in the day-- reconsider, because you’ve got the warning signs of someone about to
make an impetuous, irrational decision. If you do feel yourself getting emotionally involved in a
particular trade, take a deep breath, review your strategy, and establish how such a decision will
affect your overall approach before going anywhere near the "execute" button.
 Don’t expect to win on every trade. That may not sound like much of a sales pitch, but even
the most successful of traders don’t win on every trade. What they do have is a robust plan and
long-term strategy, which carefully considers the risks. So don’t necessarily be disheartened if a
trade doesn’t go your way; review why it went wrong and see if there is anything to learn from
the experience. But don’t think that currency trading is an option for those seeking quick money,
because like any investment, it only should be played by those with a long-term goal in mind.
 Don’t put all (nest) eggs in the currency basket. Foreign exchange is only one of the many
asset classes you should be considering as part of a balanced investment portfolio. Forex trading
is not suitable for every investor, so if you are committing all of your financial resources to forex
trading, be sure you are fully aware of the risks and rewards of doing so, because commitment to
one asset-class is not recommended. The same applies for currency trading itself. Risk
diversification allows you to mitigate your risk by spreading it out, that is, not placing all your
faith in a single trade. Diversification is key, no matter what asset class you’re investing with.
 BIBLIOGRAPHY
 Books:
1) Dales S. Beach, personnel, Macmillan, New York, 1985
2) P.F. Drucker, the Practice of Management, Allied, New Delhi 1970
3) Hull C John; Prentice hall, Introduction to Futures and Options Markets
4) Gupta S.P, Statistical Methods, 36 revised edition
5). V. A. Avadhani, Investment Management
 Newspaper & Magazines

1) The Economic Times
2) Business standard
3) Wise money(smc)
4) Securities Market Module: NCFM
5) Training kit provided by SMC
 Web sites
1) www.smcindiaonline.com
2) www.nseindia.com
3) www.bseindia.com
4) www.rbi.org
5) www.sebi.gov.in
6) www.mcxindia.com
7) www.ncdex.com
8) www.nmce.com
9) www.smctradeonline.com
10) www.bis.org
11) www.financewis .com

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Introduction to Currency Exchange

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Chapter 1

Introduction to the Study

USD 1.000 95.318 0.711 48.053 0.606

JPY 0.010 1.000 0.007 0.504 0.006

EUR 1.406 134.033 1.000 67.719 0.852

INR 0.021 1.984 0.015 1 .000 0.013 TABLE 1

The Currency exchange market is unique because of

1.2.2 MARKET SIZE & LIQUIDITY

Main foreign exchange market turnover, 1988–2007, measured in billions of USD

Top 10 currency traders

Rank ,Name& Market share

1. Deutsche Bank :15.64% 2. Barclays Capital :10.75%

3. UBS AG :10.59% 4. Citi: 8.88%

5. JPMorgan: 6.43% 6. HSBC :6.26%

9. Goldman Sachs: 4.13% 10. Morgan Stanley :3.64%

 Hedge funds as speculators

 Investment management firms

 Retail foreign exchange traders

 Non-bank foreign exchange companies

 Money transfer/remittance companies and bureau de changes

Money transfer companies/remittance companies perform high-volume low-value transfers

Types of Traders in Derivative Markets

39.1% Euro EUR (€)

19.0% Japanese yen JPY (¥)

12.9% Pound sterling GBP (£)

6.4% Swiss franc CHF (Fr)

5.3% Canadian dollar CAD ($)

2.4% Hong Kong

2.2% Swedish krona SEK (kr)

1.5% South Korean

0.9% Indian rupee INR (₹)

1.2.5DETERMINANTS OF FOREIGN EXCHANGE RATES

 Economic policy: comprises government fiscal policy (budget/spending practices) and

 Government budget deficits or surpluses: The market usually reacts negatively to

 Productivity of an economy: Increasing productivity in an economy should positively

Risk Aversion in FOREX

Impact of Currency Exchange in India

Particulars Latest Chg - last quarter Estimated / Last Last Update

Inflation 7.48 Nov -1.10 8.58 Oct Dec

Types of Exchanges in India

Currently MCX-SX offers currency futures contracts in US Dollar-Indian Rupee (USDINR),

 TURNOVER AND VOLUME OF MCX-SX

 Total Turnover - Rs. 43,571.98 crores

 Total number of contracts traded - 8,876,100

 Recorded highest turnover - Rs. 1593.04 crores on Jan 22, 2009

 Highest number of contracts traded - 324,885 on Jan 22, 2009

 Average Daily Volume - 158,501 contracts

 Average Daily Turnover - Rs. 778.07 crores

 Garnered over 50 % market share in two months of operations

Tick size 0.25 paise or INR 0.0025

Last working day (excluding Saturdays) of the expiry month.

Clients Trading Members Banks

Unit of trading 1 (1 unit denotes 1000 EURO)

Tick size 0.25 paise or INR 0.0025

Last working day (excluding Saturdays) of the expiry month.

Price operating Tenure upto 6 months Tenure greater than 6 months

Symbol USDINR EURINR GBPINR JPYINR

Instrument Type FUTCUR FUTCUR FUTCUR FUTCUR

The exchange The exchange The exchange The exchange

Tick size 0.25 paise or INR 0.0025

Contract trading cycle 12 month trading cycle.

Last working day (excluding Saturdays) of the expiry month.

Quantity Freeze 10,001 or greater