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INDEX
 INTRODUCTION

 CHARACTERISTIC

 HISTORY

 DIFFERENCE BETWEEN FOREX AND FUTURES

 FAMOUS FOREX QUOTES

 FOREIGN MARKET EXCHANGE

 FOREX CHARTS

 FOREX TRADING

 FOREGIN EXCHANGE MARKET IN INDIAN

 CONCLUSION

 REFERRENCE
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INTRODUCTION

Being the main force driving the global economic market, currency is no
doubt an essential element for a country. However, in order for all the countries
with different currencies to trade with one another, a system of exchange rate
between their currencies is needed; this system is formally known as foreign
exchange or currency exchange.

In the early days, the system of currency exchange is supported solely by the
gold amount held in the vault of a country. However, this system is no longer
appropriate now due to inflation and hence, the value of one’s currency nowadays
is determined through the market forces alone. In order to determine the value of a
currency’s exchange rate, two main types of system is used which is floating
currency and pegged currency.

For floating exchange rate, its value is determined by the supply and demand
of the global market where the supply and demand is bound by all these factors
such as foreign investment, inflation and ratios of import and export. Normally,
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this system is adopted by most of the advance countries like for example UK, US
and Canada. All of these countries have a similarity where their market is well
developed and stable in economic terms. These countries choose to practice this
system due to the reason where floating exchange rate is proven to be much more
efficient compared to the pegged exchange rate. The reason behind this is because
for floating exchange rate, the market itself will re-adjust the exchange rate real-
time in order to portray the actual inflation and other economic forces. However,
every system has its own flaw and so does the floating exchange rate system. For
instance, if a country suffers from economic instability due to various reasons such
as political issues, a floating exchange rate system will certainly discourage
investment due to the high risk of suffering from inflationary disaster or sudden
slump in exchange rate.Another form of exchange rate is known as pegged
exchange rate. This is a system where the value of the exchange rate is fixed by the
government of a country and not the supply and demand of the market. This
system is called pegged exchange rate because the value of a country’s currency is
fixed to another country’s currency. As a result, the value of the pegged currency
will not fluctuate unlike the floating currency. The working principle behind this
system is slightly complicated where the government of a country will fixed the
exchange rate of their currency and when there is a demand for a certain currency
resulting a rise in the exchange rate, the government will have to release enough of
that currency into the market in order to meet that demand. However, there is a
fatal flaw in this system where if the pegged exchange rate is not controlled
properly, panics may arise within the country and as a result of that, people will be
rushing to exchange their money into a more stable currency. When that happens,
the sudden overflow of that country’s currency into the market will decrease the
value of their exchange rate and in the end, their currency will be worthless. Due to
this reason, only those under-developed or developing countries will practice this
method as a form to control the inflation rate.However, the truth is, most of the
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countries do not fully practice the floating exchange rate or the pegged exchange
rate method in reality. Instead, they use a hybrid system known as floating peg.
Floating peg is the combination of the two main systems where one country will
normally fixed their exchange rate to the US Dollars and after that; they will
constantly review their peg rate in order to stay in line with the actual market
value.

The Foreign exchange market, or commonly known as FOREX, is the

largest and most prolific financial market because each day, more than 1 trillion
worth of currency exchange takes place between investors, speculators and
countries. From this, we can deduce that the actual mechanism behind the world of
foreign exchange is far more complicated than what we may already know, and
that, the information mentioned earlier is just the tip of an iceberg.

HISTORY

Foreign exchange development history - exchange market evolution foreign

exchange development history - exchange market evolution gold remittance system
and Bretton woods agreement In 1967, a Chicago bank rejected to provide pound
loan to a professor named Milton Friedman, because his purposed was to use this
fund to sell short the British pound. Mr. Friedman realized excessively that the
price ratio from the British pound to US dollar at that time was high, he wanted
first to sell the British pound; after the British pound fell he buys back the British
pound to repay the bank again. This family bank rejects the loan offer based on the
"Bretton woods Agreement" which was established 20 years ago. This agreement
has fixed the various countries' currency to US dollar exchange rate, and the price
ratio between the U.S dollar and the gold is also fixed to 35 US dollars to each
ounce of gold.
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The Bretton Woods Agreement was signed in 1944, the purposed was to
prevent the currency to escape between countries, and also to limit the international
speculation, thus to stabilize the international currency. Before this agreement was
signed, the gold remittance standard system which was widely used since 1876 -
was leading the international economy system until the First World War. In the
gold remittance system, the currency was at the stable level under the support of
the gold price. The gold remittance system has abolished the old time king and the
ruler which depreciates the currency value unlawfully, which will lead to
inflation.But, the gold remittance standard system is certainly imperfect. Along
with a country economic potentiality enhancement, it can import massive products
from overseas, until it exhausts the gold reserve of certain country. It resulted the
supply of the currency reduces, the interest rate raises, the economic activity will
start to decline until it reaches the recession limit. Finally, the commodity price
falls to the valley, gradually attracts other countries to stream in, massively rushes
to purchase this country commodity. This will pour gold into this country, this will
increase this country currency supplies quantity, and it will reduce the interest rate,
and will create the wealth. This is so called the "the prosperity - decline” pattern
and is the circulation of the gold remittance standard system, until the trade
circulation and the gold freedom was broken by the First World War.After several
catastrophes wars, the Bretton Woods agreement has appeared. The countries
which signed the treaty agreed to maintain the domestic currency to US dollar
exchange rate, as well as the necessity of the corresponding ratio of the gold, and
only allow a small fluctuation. Countries are prohibited to depreciate the currency
value for the gain trade benefit, only allows the country to depreciate not more than
10%. Enters the 50's, the continuous growth of the international trade causes the
fund large-scale shift which produces because of the postwar reconstruction, this
causes Bretton Woods system which establishes the foreign exchange rate to lose
stability.
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This agreement was finally abolished in 1971; US dollar no longer could

convert to gold. Until 1973, each major industrialized nation currency exchange
rate fluctuation has been more freely, mainly regulates by the foreign exchange
market through the currency supplies and demand quantity. The business volume,
the transaction speed as well as the price variability, have achieved a
comprehensive growth in the 1970's, come along with the emerge of price ratio
fluctuation, the brand-new financial tool, then only the market liberalization and
the trade liberalization could be achieved.

In the 1980s, along with the published of the computer and correlation technology,
the international capital has flow rapidly and strongly related the Asia, Europe and
America market Foreign exchange business volume from 80's rises daily from 70
billion US dollars to 150 billion US dollars after 20 years.

European market inflation

One of the reasons why the foreign exchange developed rapidly was the
rapid development of the Euro dollar market. In a Euro dollar market, US dollar is
stored beyond the border of America banks. Similarly, the European market is
refers to property depositing outside the currency rightful owner country market. A
Euro dollar market was formed at first in the 50's, at that time Russia deposited its
petroleum income beyond the US border, avoid being freeze by the US
government. This has formed a large offshore US dollar national treasury which is
beyond the control of the US government. The American government has
formulated a law to prohibited US dollar from lending money for the foreigner.
Because the degree of freedom of the Euro dollar market is bigger and the rate of
return is bigger, therefore it has large attraction. Starting from the 80's, the
American company starts to borrow loan from the offshore market, they
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discovered that the European market is a wealth center which consists of large
amount of floating capital which could provide short-term loan.

London once was (until now still is) one of the main offshore market. In the
80's, the Bank of England in order to maintain its global finance industry center
dominant position, using US dollar as England pound substitution to make loan,
thus to become a Euro dollar market center. London's convenient geographical
position (is situated between Asian and Americas market) also helps to maintain
the European market as the dominant position.

CHARACTERISTICS

In recent years, the foreign exchange market could favor more and more
people, it becomes a favorite for the international investors, and this is strongly
related to the characteristics of the Forex market. The main characteristics of the
foreign exchange market are:

1.IT CONSISTS MARKET BUT NO TRADING FIELD

The finance industry in the western countries consist two sets of systems,
namely the centralism business central operation and there is no fixed place for
such business network. Stock trading is being traded through stock exchange. Like
the New York Stock Exchange, the London stock market, the Tokyo stock market,
respectively is American, English, the Japanese stock main transaction place, it is a
centralism business financial commodity, its quoted price, the transaction time and
hand over to the procedure all consist of unification the stipulation, and has
established the same business association, it has formulated the same business
rules. The investor could buy and sells the commodity through the broker
company; this is known as "consist of trading market and trading field".But foreign
exchange business is done without any unification operation market and business
network, it has no centralism unified place like the stock transaction. But, the
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foreign currency trading network actually is globally, and it has formed a

organization which has no formal organization, the market is relied through an
approval way and the advanced information system, Forex traders do not consist
any membership qualification for any organization, but must obtain colleague’s
trust and approval. This kind of Forex market which has no trading field is known
as "consist of market but no trading field". Each day, the trading volume in the
global Forex market involves billions of U.S dollars, the so huge large amount
fund, is being control under both the non-centralism place and non-central
governance system, plus it is settle based on non-government governance.

2.CIRCULATION WORK

Due to the different geographical position of the various financial centre, the
Asian market, the European market, the Americas market because of the time
difference relations, it has become an entire day 24 hour continued operation whole
world foreign exchange market.

Early morning 0830 (New York time) New York market opens, 0930
Chicago market opens, 1830 Sydney opens, 1930 Tokyo opens, 2030 Hong Kong,
Singapore open, before dawn 1430 Frankfurt opens, 1530 o'clock London market
opens. So 24 hours uninterrupted movements, the foreign exchange market
becomes a day and night market, only on Saturday, Sunday as well as the various
countries' significant holiday, the foreign exchange market only then can close.

This kind of continued operation, provided no time and spatial barrier ideal
outlet for investors, the Forex trader may seek the best opportunity to carry on the
transaction. For instance, Forex trader buys up the Japanese Yen in the morning at
the New York market, in the evening Hong Kong market opens the Japanese Yen
rises, the Forex trader sells in the Hong Kong market, no matter Forex trader in
where, he all may participate in any market, any time business. Therefore, the
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foreign exchange market may say is does not have the time and the spatial barrier
market.

3.ZERO AND GAME

In the stock market, the rise or the drop of stock market could influence the value
of the stock whether to rise or drop, for example the Japanese new date iron stock
price falls from 800 Japanese Yen to 400 Japanese Yen, the value of this stock has
been reduced to half. However, in the foreign exchange market, the value of a
stock and a currency is being calculated differently, this is because the exchange
rate is refers to the exchange ratio both countries currency, the exchange rate
change will influence one kind of monetary value to reduce and at the same time
another kind of monetary value increase. For instance in 22 years ago, 1 US dollar
exchanges 360 Japanese Yen, at present, 1 US dollar exchanges 110 Japanese Yen,
this explains the Japanese Yen currency value rise, but US dollar currency value
drops, in the end the value will not reduce or increase. Therefore, some people
described the foreign currency trading is "zero and the game", exactly said is the
wealth shift.In recent years, investment foreign exchange market fund has
continuously increased, the exchange rate fluctuation expands day by day, urges
the wealth shift to be larger, the daily trading volume of the global foreign
exchange involves 150 billion US dollars, the rise or falls 1%, means that the 150
billion funds has been shifted. Although the foreign exchange rate change is very
big, but, any kind of currency will not become waste paper, even if some kind of
currency unceasingly falls, however, but generally it represents certain value, only
if such currency has been abolished.
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Functions of Foreign Exchange Markets

The foreign exchange market performs mainly three functions

 Transferring the purchasing power: - The most important function is the transfer
of purchasing power from one country to another and from one national
currency to another. The purchasing power is transferred through the use of
credit instruments. The main credit instrument is used for the transferring the
purchasing power is the telegraphic transfer (TT) of the cabled order by one
bank (in country A) to its correspondent abroad (in country B) to pay B funds
out of its deposit account to its designated account or order. The telegraphic
transfer is simply a sort of cheque, which is wired or radioed rather than sent by
post. Purchasing power may also be transferred through bank drafts.

 Provision of credit for foreign trade:- The foreign exchange market also
provides credit for foreign trade. Like all the traders, international trade also
requires credit. It takes time to move the goods from seller to purchaser and
during this period, the transaction must be financed. When the exporter does not
need credit for the manufacture of export goods, credit is necessary for the
transit of goods. When the special credit facilities of the foreign exchange
market are used, the foreign exchange department of a bank or the bill market is
used; the foreign exchange department of the bank or the bill market of one
country or the other extends the credit facilities to finance the foreign trade.

 Furnishing facilities for hedging foreign exchange risks The foreign exchange
market by providing facilities of buying and selling at spot or forward
exchange, enables the exporters and importers to hedge their exchange risks
arising from change in the foreign exchange rate. The forward market in
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exchange also enables those banks, which are unlikely to run any considerable
exchange position to cover their commitments.

DIFFERENCE BETWEEN FOREX AND FUTURES

1.Forex trader could trade more transaction compared to the futures market (the
trading volume could be a times larger), and the risk will be strictly under control.
The trading volume of the Forex market is 46 times larger compared to the futures
market, moreover Forex traders could make more profit from the Forex market due
to the larger trading volume (the transaction volume is a few times larger), the
REFCO Switzerland rich transaction platform allowed transaction between 1-100
times to be carry on, moreover a Forex trader could decide his or her own
transaction amount, for example: Your account has $30,000, the basic transaction
unit is each $1,000 (which transaction amount in $1.00, million), namely, so the
proportion of the margin of each transaction unit is 100:1.

2. The risk of the Forex trader is under control, such margin call will not happen
compared to futures, through the Forex trading system, your risk will receive the
strict limit, even if your margin if lower then the deposit required, the Forex
trading system will automatically settle your position, this means even if a Forex
trader suffered losses, moreover if the market is suffering from a disaster
fluctuation, your loss could not surpass your account amount. In order to
understand the advantages, please apply for the demo account to carry on the
complete zero risk.

3.Forex trader will receive a large limitation of liquidation and a relatively fair
market because the trading volume of the Forex market is large and it is also the
largest liquidation market in the world. At present the trading volume in the Forex
market is 140 billion Dollars; such big market will completely digest your
transaction cash.
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4.Forex trader may do 24 hours transactions and other markets are different, the
Forex market is a 24 hour linkages market, it starts from every Sunday before
dawn Australian Sydney market, substandard collect the transaction center
Singapore, Tokyo, London, Frankfurt to New York continuously to open, such
linkage market enable you to do 24 hours transactions, also provide flexibility for
Forex trader to do transaction

FAMOUS FOREX QUOTES

1. “If you get in on Jones’ tip; get out on Jones’ tip”. If you are riding another
person’s idea, ride it all the way.
2. Run early or not at all. Don't be an eleven o'clock bull or a five o'clock bear.
3. Woodrow Wilson said, "Agovernment’s first priority is to organize the
common interest against special interests". Successful traders seek out market
opportunities capitalizing on the reality that government's first priority is
rarely achieved.
4. People who buy headlines eventually end up selling newspapers.
5. If you do not know who you are, the market is an expensive place to find out.
6. Never give advice-the smart don't need it and the stupid don't need it.
7. Disregard all prognostications. In the world of money, which is a world
shaped by human behavior; nobody has the foggiest notion of what will
happen in the future. Mark that word-nobody! Thus the successful trader bases
no moves on what supposedly will happen but reacts instead to what does
happen.
8. Worry is not a sickness but a sign of health. If you are not worried, you are
not risking enough.
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9. Except in unusual circumstances, get in the habit of taking your profit too
soon. Don't torment yourself if a trade continues winning without you.
Chances are it won't continue long. If it does console yourself by thinking of
all the times when liquidating early preserved gains you would otherwise have
lost.
10. When the ship starts to sink, don't pray-jump!
11.Life never happens in a straight line. Any adult knows this. But we can too
easily be hypnotized into forgetting it when contemplating a chart. Beware of
the chartist's illusion.
12. Optimism means expecting the best, but confidence means knowing how you
will handle the worst. Never make a move if you are merely optimistic.
13.Whatever you do, whether you bet with the herd or against, think it through
independently first.
14.Repeatedly reevaluate your open positions. Keep asking yourself: would I put
my money into this if it were presented to me for the first time today? Is this
trade progressing toward the ending position I envisioned?
15. It is a safe bet that the money lost by (short term) speculation is small
compared with the gigantic sums lost by those who let their investments
"ride". Long term investors are the biggest gamblers as after they make a trade
they often times stay with it and end up losing it all. The intelligent trader
will. By acting promptly-hold losses to a minimum.
16. As a rule of thumb good trend lines should touch at least three previous highs
or lows. The more points the line catches, the better the line.
17. Volume and open interest are as important to the technician as price.
18. The clearest and easiest way to determine a trend is from previous highs and
lows. Higher highs and higher lows mark an uptrend, lower highs and lower
lows mark a downtrend.
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19. Don't sell a quiet market after a fall because a low volume sell-off is actually
a very bullish situation.
20. Prices are made in the minds of men, not in the soybean field: fear and greed
can temporarily drive prices far beyond their so called real value.
21. When the market breaks through a weekly or monthly high, it is a buy signal.
When it breaks through the previous weekly or monthly low, it is a sell signal.
22. Every sunken ship has a chart.
23. Take a trading break. A break will give you a detached view of the market
and a fresh look at yourself and the way you want to trade for the next several
weeks.
24. Assimilate into your very bones a set of trading rules that works for you.
25. The final phase in a bull move is an accelerated runaway near the top. In this
phase, the market always makes you believe that you have underestimated the
potential bull market. The temptation to continue pyramiding your position is
strong as profits have now swelled to the point that you believe your account
can stand any setback. It is imperative at this juncture to take profits on your
pyramids and reduce the position back to base levels. The base position is then
liquidated when it becomes apparent that the move has ended
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FOREIGN MARKET EXCHANGE

Presently, there are various kinds of financial market, it is divided into:

Stock market, interest market (including bond, commercial bill and so on), gold
market (including gold, platinum, silver), futures market (including grain, cotton
and kapok, oil and so on), option market and foreign exchange market or forex
market and so on. The foreign exchange market is a place to trade foreign
exchange currency, or it is also a place for the transaction of all foreign currency.
The foreign exchange market therefore is existence, because of:

Trade and investment

Import and export business, people pays one kind of currency when doing
business, but when earns another kind of currency when receive the commodity.
This means that, when settling account, business people will pay and receive
different currencies. Therefore, they must convert the currencies that they received
into the currencies that they could buy commodities. With this similar, when
buying a foreign property a company must use the concerned country's currency to
make payment, therefore, it needs to convert the domestic currency is concerned
country’s currency.

Speculation
Currencies exchange rates could fluctuate according to the demand and supply
between two currencies. A Forex trader buys up one kind of currency in an
exchange rate, but up casts this currency in another more advantageous exchange
rate, he may gain. Speculation has occupied most of the Forex market.
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Hedging

Due to the fluctuation between two currencies,

those companies who owns foreign asset (for example factory), when these
companies convert these properties into cost country currencies, there consist of
certain risks. When the value of a foreign asset which is estimated based on foreign
currencies remained unchanged, if the exchange rate changes, when converting this
property value according to the domestic currency, there could be profit and loss.
The company may eliminate such hidden risk through hedging. This carries out a
foreign currency trading; its transaction result just counterbalances the foreign
currency property profit and loss which produces by the exchange rate change.

Forex Market Development

The history of the Forex market as an international capital speculation

market is much shorter compared the stock, the gold, the stock, the interest market,
but it is developing in an astonishing speed. Today, the foreign exchange market
daily trading volume has amounted to 150 billion US dollars, it’s scale has gone far
beyond the stock, the stock and other finance commodity markets, it has became
the world's most biggest sole finance market and the also the speculation market.
Since the birth of the foreign exchange market, the fluctuation of the exchange rate
of the Forex market is becoming bigger. In September 1985, 1 US dollar
exchanged 220 Japanese Yen, but in May 1986, 1 US dollar only could exchange
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160 Japanese Yen, in 8 months, the Japanese Yen has revalued 27%. In recent
years, the foreign exchange market wave amplitude has been bigger, on September
8, 1992, 1 pound exchanged 2.0100 US dollars, on November 10, 1 pound
exchanged 1.5080 US dollars, in the short two months, the pound exchanged US
dollar exchange rate to fall more than 5,000, depreciated 25%. Not only that,
presently, every day the fluctuation of the exchange rate of the Forex market
enlarges unceasingly, within a day the rise and drop 2% to 3% is commonly seen.
On September 16, 1992, the pound exchanged US dollar from 1.8755 to fall to
1.7850, the pound on first lowers 5%. Due to the large fluctuation of the Forex
market, it has created more opportunities for the investor, attracted more and more
investors to join this ranks.

FOREX CHARTS

Forex charts assist the investor by providing a visual representation of

exchange rate fluctuations. Many variables affect currency exchange rates, such as
interest rates, bank policies, geopolitics, and even the time of day may affect
exchange rates.In order to help the investor attempt to predict when or in what
direction a rate may change, advisors provide forex charts. Quality forex websites
provide subscribers with a daily newsletter that includes a forex chart, forex signals
and a forex forecast.

There are a variety of forex charts available for the investor to use and study.
Some are very simple using only a couple of forex signals or indicators and are
ideal for beginners. Others include 30 or 40 forex signals or indicators and live on-
line streaming data so that the investor may analyze trades quickly and
accurately.In order to make an accurate forex forecast, it would seem that the more
indicators, the better, but some analysts prefer a simpler system. The idea behind
studying forex charts is that history repeats itself. Instead of trying to “see the
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future”, a forex forecast evaluates the past. That is to say that the analyst who is
responsible for attempting to predict future currency moves analyzes what
happened to an exchange rate yesterday, last week, last month or last year and uses
this knowledge to the best degree he knows how. Some people trade short term,
some intermediate term, and some long term. All three types of traders may benefit
from the use of forex charts, just adapted to their own trading time frame.Investors
also create their own forex charts to evaluate their own performance. Creating a
forex strategy for oneself is the goal of many investors. Instead of looking to a
professional to analyze forex signals, these investors choose to create their own
forex forecast.Others, however, create their own strategy but also follow the
opinions of professional currency traders at the same time. It all depends on your
personal preferences.

There are other forex charts that deal with known correlations between two
currency pairs, that is, how they move in relation to each other. Some exchange
rates are known to affect other exchange rates, either by moving in the same or the
opposite direction depending on the correlation. Charts are available that explain
these correlations in detail and show which pairs have strong correlations or strong
negative correlations, so that an investor can use the movement of the exchange
rate of one currency as a signal to trade another currency.

These correlations are also the basis for some forex forecasts. It can be
difficult and overwhelming to enter the world of forex trading alone. Experts
recommend education, practice with a demo account and advice from a reputable
broker who is backed by a quality institution. Learning to read forex charts and
evaluate forex signals is a skill that comes with time, skills that are essential when
an accurate forex forecast is the the goal.
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FOREX TRADING

Forex trading isn’t strange words for those who looking forward to make
quick profit in the financial market. Most investors will have at least hear or read
about Forex trading. If Forex is a new term to you, please do read the Introduction
to the Forex market before proceed reading this Forex trading article.
Forex trading is said to be the highest risk with highest return investment (or
speculation game to be more accurate) in the financial market. The amount traded
in the Forex market is much larger than any stock market or even combining few
stock markets. Forex trading is simply a worldwide trading market running 24
hours from Monday to Friday.

Every day, there are new Forex traders entering into trading Forex. Some of them
don’t even fully understand how Forex is traded but have already trading Forex.
They are not idiot who want to burn their hard earned money, it’s just because
Forex market is simply too lucrative market to enter with extreme high return. Any
Forex traders can easily make a double return just in few minutes time trading
Forex.

Forex trading is the trading of buying or selling certain currency. For

example, buying US Dollar, and then selling it later at a higher price to gain profit.
Forex traders may also first sell US Dollar and later on buy it back at a lower price
with the same gaining profit. It’s simple strategy of selling price minus buying
price to make profit. In Forex trading, we just treat currency as a good, buy it and
sell it.You might now think how can Forex trading make huge profit just by selling
and buying currency Forex is traded using margin, Forex traders don’t need to full
amount to buy any currency. For example, Forex traders just need 1000 Dollar to
buy up 100,000 Dollar. This allows any Forex traders to make huge profit with
little money.
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Another important factor that any Forex traders can make huge profit is the high
fluctuation for currency. Every day every seconds, the currency exchange rate is
moving up and down, the Forex exchange rate fluctuate more heavily whenever
there is any important economic data being released. Forex trading is simply
sounds too easy for anyone to make profit in very short time. But before you
committed into Forex trading, it is strongly advised to have full understanding in
Forex trading. Do read up other Forex trading articles in this website and share
Forex trading knowledge in the Forex forums.
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MARKET PARTICIPANTS

Unlike a stock market, the foreign exchange market is divided into levels of
access. At the top is the interbank market, which is made up of the largest
commercial banks and securities dealers. Within the interbank market, spreads,
which are the difference between the bids and ask prices, are razor sharp and not
known to players outside the inner circle. The difference between the bid and ask
prices widens (for example from 0-1 pip to 1-2 pips for a currencies such as the
EUR) as you go down the levels of access. This is due to volume. If a trader can
guarantee large numbers of transactions for large amounts, they can demand a
smaller difference between the bid and ask price, which is referred to as a better
spread. The levels of access that make up the foreign exchange market are
determined by the size of the "line" (the amount of money with which they are
trading). The top-tier interbank market accounts for 39% of all transactions. From
there, smaller banks, followed by large multi-national corporations (which need to
hedge risk and pay employees in different countries), large hedge funds, and even
some of the retail market makers. According to Galati and Melvin, “Pension funds,
insurance companies, mutual funds, and other institutional investors have played
an increasingly important role in financial markets in general, and in FX markets in
particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have
grown markedly over the 2001–2004 period in terms of both number and overall
size”.Central banks also participate in the foreign exchange market to align
currencies to their economic needs.
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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 trading.

Foreign exchange fixing

Foreign exchange 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 market. Banks, dealers and traders use
fixing rates as a trend indicator.The mere expectation or rumor of a central bank
foreign exchange intervention might be enough to stabilize a currency, but
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aggressive intervention might be used several times each year in countries with a
dirty float currency regime. Central banks do not always achieve their objectives.
The combined resources of the market can easily overwhelm any central bank.
Several scenarios of this nature were seen in the 1992–93 European Exchange Rate
Mechanism collapse and in more recent times in Asia.

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.
Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of
generating profits as well as limiting risk. While the number of this type of
specialist firms is quite small, many have a large value of assets under
management) and, hence, can generate large trades.
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Retail foreign exchange traders

Individual Retail speculative traders constitute a growing segment of this

market with the advent of retail foreign exchange 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 Commodity
Futures Trading Commission and National Futures Association have in the past
been subjected to periodic Foreign exchange fraud. To deal with the issue, in 2010
the NFA required its members that deal in the Forex markets to register as such
(I.e., Forex CTA instead of a CTA). Those NFA members that would traditionally
be subject to minimum net capital requirements, FCMs and IBs, are subject to
greater minimum net capital requirements if they deal in Forex. A number of the
foreign exchange brokers operate from the UK under Financial Services Authority
regulations where foreign exchange trading using margin is part of the wider over-
the-counter derivatives trading industry that includes Contract for differences and
financial spread betting.There are two main types of retail FX brokers offering the
opportunity for speculative currency trading: brokers and dealers or market
makers. Brokers serve as an agent of the customer in the broader FX market, by
seeking the best price in the market for a retail order and dealing on behalf of the
retail customer. They charge a commission or mark-up in addition to the price
obtained in the market. Dealers or market makers, by contrast, typically act as
principal in the transaction versus the retail customer, and quote a price they are
willing to deal at.
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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).
It is estimated that in the UK, 14% of currency transfers/payments are made
via Foreign Exchange Companies. These companies' selling point is usually that
they will offer better exchange rates or cheaper payments than the customer's bank.
These companies differ from Money Transfer/Remittance Companies in that they
generally offer higher-value services.

Money transfer/remittance companies and bureaux de change

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 Bureaux 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.
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MARKET SIZE AND LIQUIDITY

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

The foreign 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) Of this $3.98
trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright
forwards, swaps and other derivatives.

Trading in the United Kingdom accounted for 36.7% of the total, making it
by far the most important center for foreign exchange trading. Trading in the
United States accounted for 17.9%, and Japan accounted for 6.2%.
Turnover of exchange-traded foreign exchange futures and options have grown
rapidly in recent years, reaching $166 billion in April 2010 (double the turnover
recorded in April 2007). Exchange-traded currency derivatives represent 4% of
OTC foreign exchange turnover. Foreign exchange futures contracts were
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introduced in 1972 at the Chicago Mercantile Exchange and are actively traded
relative to most other futures contracts.Most developed countries permit the trading
of derivative products (like futures and options on futures) on their exchanges. All
these developed countries already have fully convertible capital accounts. Some
governments of emerging economies do not allow foreign exchange derivative
products on their exchanges because they have capital controls. The use of
derivatives is growing in many emerging economies.Countries such as Korea,
South Africa, and India have established currency futures exchanges, despite
having some capital controls.

Top 10 currency traders

% of overall volume, May 2012

Rank Name Market share

1 Deutsche Bank 14.57%
2 Citi 12.26%

3 Barclays Investment Bank 10.95%

4 UBS AG 10.48%

5 HSBC 6.72%

6 JPMorgan 6.6%
7 Royal Bank of Scotland 5.86%

8 Credit Suisse 4.68%

9 Morgan Stanley 3.52%

10 Goldman Sachs 3.12%
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Foreign exchange trading increased by 20% between April 2007 and April 2010
and has more than doubled since 2004. The increase in turnover is due to a number
of factors: the growing importance of foreign exchange as an asset class, the
increased trading activity of high-frequency traders, and the emergence of retail
investors as an important market segment. The growth of electronic execution and
the diverse selection of execution venues has lowered transaction costs, increased
market liquidity, and attracted greater participation from many customer types. In
particular, electronic trading via online portals has made it easier for retail traders
to trade in the foreign exchange market. By 2010, retail trading is estimated to
account for up to 10% of spot turnover, or $150 billion per day (see retail foreign
exchange platform).

Foreign exchange is an over-the-counter market where brokers/dealers

negotiate directly with one another, so there is no central exchange or clearing
house. The biggest geographic trading center is the United Kingdom, primarily
London, which according to TheCityUK estimates has increased its share of global
turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April
2010. Due to London's dominance in the market, a particular currency's quoted
price is usually the London market price. For instance, when the International
Monetary Fund calculates the value of its special drawing rights every day, they
use the London market prices at noon that day.
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FOREGIN EXCHANGE MARKET IN INDIAN

During 2003-04 the average monthly turnover in the Indian foreign

exchange market touched about 175 billion US dollars. Compare this with the
monthly trading volume of about 120 billion US dollars for all cash, derivatives
and debt instruments put together in the country, and the sheer size of the foreign
exchange market becomes evident. Since then, the foreign exchange market
activity has more than doubled with the average monthly turnover reaching 359
billion USD in 2005-2006, over ten times the daily turnover of the Bombay Stock
Exchange. As in the rest of the world, in India too, foreign exchange constitutes the
largest financial market by far.

Liberalization has radically changed India’s foreign exchange sector. Indeed

the liberalization process itself was sparked by a severe Balance of Payments and
foreign exchange crisis. Since 1991, the rigid, four-decade old, fixed exchange rate
system replete with severe import and foreign exchange controls and a thriving
black market is being replaced with a less regulated, “market driven” arrangement.
While the rupee is still far from being “fully floating” (many studies indicate that
the effective pegging is no less marked after the reforms than before), the nature of
intervention and range of independence tolerated have both undergone significant
changes. With an overabundance of foreign exchange reserves, imports are no
longer viewed with fear and skepticism. The Reserve Bank of India and its allies
now intervene occasionally in the foreign exchange markets not always to support
the rupee but often to avoid an appreciation in its value. Full convertibility of the
rupee is clearly visible in the horizon. The effects of this development s are
palpable in the explosive growth in the foreign exchange market in India.
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Features of the Forward premium on the Indian rupee

The Indian rupee has had an active forward market for some time now. The
forward premium or discount on the rupee (vis-à-vis the US dollar, for instance)
reflects the market’s beliefs about future changes in its value. The strength of the
relationship of this forward premium with the interest rate differential between
India and the US – the Covered Interest Parity (CIP) condition – gives us a
measure of India’s integration with global markets. The CIP is a no-arbitrage
relationship that ensures that one cannot borrow in a country, convert to and lend
in another currency, insure the returns in the original currency by selling his
anticipated proceeds in the forward market and make profits without risk through
this process.
Chakrabarti (2006) reports that between late 1997 and mid-2004 the average
discount on the rupee was about 4% per annum. During the period the average
difference between 90-180 day bank deposit rates in India and the inter-bank USD
offer rate was about 4.5% for 3-months and 3.5% for the 6-months period. With
these two figures in the same ballpark (particularly given that bank deposit rates
and inter-bank rates are not strictly comparable), annual averages of interest rate
differences and the forward exchange premium also indicate a moderate degree of
co-movement between the two variables. The interest rate differential explains
about 20% of the total variation in the forward discount. The deviation of the
Indian rupee-US dollar from the covered interest parity, however, exhibits long-
lived swings on both sides of the zero line. This would indicate arbitrage
opportunities and market imperfections provided we could be sure of the
comparability of the interest rates considered. Therefore, while the behavior of the
forward premium on the Indian rupee is broadly in lines with the CIP, more careful
empirical analysis involving directly comparable interest rates is necessary to
measure the strength of the covered interest parity condition and the efficiency of
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the foreign exchange market.Under market efficiency, the forward exchange rate is
considered to be an unbiased predictor of the future spot rate, with random
prediction errors. While theprediction errors of forward rates on the rupee appear
to show some degree ofpersistence, any conclusion in this matter too must await
more rigorous analysis
Intervention in Foreign Exchange Markets
The two main functions of the foreign exchange market are to determine the
price of the different currencies in terms of one another and to transfer currency
risk from more risk-averse participants to those more willing to bear it. As in any
market essentially the demand and supply for a particular currency at any specific
point in time determines its price (exchange rate) at that point. However, since the
value of a country’s currency has significant bearing on its economy, foreign
exchange markets frequently witness government intervention in one form or
another, to maintain the value of a currency at or near its “desired” level.
Interventions can range from quantitative restrictions on trade and cross-border
transfer of capital to periodic trades by the central bank of the country or its allies
and agents so as to move the exchange rate in the desired direction. In recent years
India has witnessed both kinds of intervention though liberalization has implied a
long-term policy push to reduce and ultimately remove the former kind. It is safe to
say that over the years since liberalization, India has allowed restricted capital
mobility and followed a “managed float” type exchange rate policy.
During the early years of liberalization, the Rangarajan committee
recommended that India’s exchange rate be flexible. Officially speaking, India
moved from a fixed exchange rate regime to “market determined” exchange rate
system in 1993. The overt objective of India’s exchange rate policy, according to
various policy pronouncements, has been to manage “volatility” in exchange rates
without targeting any specific levels. This has been hard to do in practice.
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The Indian rupee has had a remarkably stable relationship with the US
dollar. Meanwhile the dollar appreciated against major currencies in the late 90’s
and then went into an extended decline particularly during 2003 and 2004. The
lock-step pattern of the US dollar and the Rupee is best reflected in the movements
in the two currencies against a third currency like the Euro. The correlation of the
exchange rates of the two currencies against the Euro during 1999-2004 was 0.94.
Several studies have established the pegged nature of the rupee in recent years (see
Chakrabarti (2006) for a more detailed discussion). Based on volatility, India had a
de facto crawling peg to the US dollar between 1979 and 1991 which changed to a
de facto peg from mid-1991 to mid-1995, with a major devaluation in March 1993.
From mid-1995 to end-2001, the rupee reverted to a crawling peg arrangement in
practice. An analysis of the ratio of the variance of the exchange rate to the sum of
the variances of the interest rate and the foreign exchange reserves reveals a move
even closer to the fixed exchange rate system. A comparison of the sensitivity
(beta) of the Dollar-rupee rate with the Euro-rupee rate for a three year period
(1999 through 2001), indicates that India had a dollar beta of 1.01 – tenth highest
among the 53 countries considered. More importantly, the US dollar-Euro
exchange rate explained about 97% of all movements in the Indian rupee-Euro
exchange rate – highest among all the 53 countries considered. Clearly the Indian
rupee has been an excellent “tracker” of the US dollar.
It is instructive to consider the Rupee-Dollar exchange rate in the light of the
purchasing power parity (PPP) holding that the exchange rate between two
currencies should equal the ratio of price levels in two countries. In its dynamic
form PPP holds that that the rate of depreciation of a currency should equal the
excess of its inflation rate to that in the other country. Over a reasonably long
period of time, the devaluation in the
Indian Rupee, vis-à-vis the US dollar does seem to have an association with
the difference in the inflation rates in the two countries. Between 1991 and 2003,
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the two variables have had visible co- movements with a correlation of about 0.57
(Chakabarti (2006)). This may be a result of Indo-US trade flows dominating the
exchange rate markets but it is perhaps more likely that it reflects the exchange rate
management principles of the monetary authorities
The Reserve Bank of India has used a varied mix of techniques in
intervening inthe foreign exchange market – indirect measures such as press
statements (sometimescalled “open mouth operations” in central bank speak) and,
in more extreme situations,monetary measures to affect the value of the rupee as
well as direct purchase and sale inthe foreign exchange market using spot, forward
and swap transactions (see Ghosh(2002)). Till around 2002, the measures were
mostly in the nature of crisis managementof saving-the-rupee kind and sometimes
the direct deals would be repeated over severaldays till the desired outcome was
accomplished. Other public sector banks, particularlythe SBI often aided or veiled
the intervention process.
The exact details of the interventions are shrouded in mystery, not unusual
forcentral banks ever wary of disclosing too much of their hand to the currency
speculators.The Tara pore Committee report had urged more transparency in the
intervention processand recommended, in 1997, that a ‘Monitoring Exchange Rate
Band’ of 5% be usedaround an announced neutral real effective exchange rate
(REER), with weeklypublication of relevant figures, something yet to be
implemented. In a recent survey onforeign exchange market intervention in
emerging markets, the Bank for InternationalSettlements (BIS (2005b)) found that
out of 11 emerging market countries considered,India gave out most complete
information on intervention strategy (along with threeothers); no information on
actual interventions (five others did the same) and did notcover foreign exchange
intervention in annual reports (like two other countries). On thewhole it ranked
fourth most opaque in matters of foreign exchange intervention amongthe eleven
countries compared.
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Regulation of cross-border currency flows:

A feature of the economy that is intricately related with the exchange rate
regimefollowed is the freedom of cross-border capital flows. This relationship
comes from theso-called “impossible trinity” or “trilemma” of international
finance, which essentiallystates that a country may have any two but not all of the
following three things – a fixedexchange rate, free flow of capital across its
borders and autonomy in its monetarypolicy. Since liberalization, India has been
having close to a de facto peg to the dollar andsimultaneously has been liberalizing
its foreign currency flow regime.
Close on the heels of the adoption of market determined exchange rate
(withinlimits) in 1993 Came current account convertibility in 1994. In 1997, the
Taraporecommittee, on Capital Account Convertibility, defined the concept as “the
freedom toconvert local financial assets into foreign financial assets and vice versa
at marketdetermined rates of exchange” and laid down fiscal consolidation, a
mandated inflationtarget and strengthening of the financial system as its three main
preconditions.Meanwhile capital flows have been gradually liberalized, allowing,
on the inflow side,foreign direct and portfolio investments, and tapping foreign
capital markets by Indiancompanies as well as considerably better remittance
privileges for individuals; and on theoutflow side, international expansion of
domestic companies. In 2000, the infamousForeign Exchange Regulation Act
(FERA) was replaced with the much milder ForeignExchange Management Act
(FEMA) that gave participants in the foreign exchangemarket a much greater
leeway.
The ultimate goal of capital account convertibility now seems to be within
thegovernment’s sights and efforts are on to chalk out the roadmap for the last leg,
though itis not expected to be accomplished before 2009. Expectedly, the wisdom
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of the move has been hotly debated. Advocates of convertibility cite the
“consumption smoothing”benefits of global funds flow and point out that it
actually improves macroeconomicdiscipline because of external monitoring by the
global financial markets. Convertibilitycan spur domestic investment and growth
because of easier and cheaper financing. It canalso contribute to greater efficiency
in the banking and financial systems. On the otherhand, skeptics like Williamson
(2006), for instance, points out that India is yet to fulfill atleast one of the three
major preconditions to Capital Account Convertibility set out by theTarapore
committee, viz. fiscal discipline, with a public sector deficit of 7.6% of the GDP
and the ratio of public debt to GDP of over 83% in 2005-06. In any case, the
argumentgoes, the benefits of convertibility do not necessarily outweigh the risks
and cross-bordershort-term bank loans – usually the last item to be liberalized – are
the most volatile. It isgenerally held that it was, in fact, the lack of convertibility
that protected India fromcontamination during the Asian contagion in 1997-98.

The Dynamics of Swelling Reserves:

An important corollary of India’s foreign exchange policy has been the

quick andsignificant accumulation of foreign currency reserves in the past few
years. Starting froma situation in 1990-91 with foreign exchange reserves level
barely enough to cover twoweeks of imports, and about $32 billion at the
beginning of 2000, India’s foreignexchange position rocketed to one of the largest
in the world with over $155 billion inmid-2006. Since 2000, this implies a
compounded annual growth rate of about 28% withthe years 2003 and 2004 having
the most stunning rises at 48% and 45% respectively.During these two years the
US dollar fell against the Euro by 19% and against the rupeeby 9%. Without RBI
intervention, the latter figure is likely to have been larger and thereserves
accumulation less spectacular.
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A sizable foreign exchange reserve acts as liquidity cover and protects

against arun on the country’s currency, and reduces the rate of interest on Indian
debt in the worldmarket by lowering the country risk perception by international
rating agencies.However, beyond a point, it begins to affect the money supply in
the country, and interestrates. There are significant “sterilization costs” to avoid
this and the RBI loses money byearning low returns on the safe assets used to park
the reserves. Given this low rate of return, there has been discussion about the
unique proposal to use part of the reserves tofund infrastructure projects.

Currency Rates
1) EURO v/s Indian Rupee
1 EUR 72.675 INR
EURO = Indian Rupee
1 EUR = 72.675 INR 1 INR = 0.0138 EUR

2) United States Dollar v/s Indian Rupee

1 USD 54.39 INR

United States Dollar = Indian Rupee
1 USD = 54.39 INR 1 INR = 0.0184 USD
3) Armenian Dram v/s Indian Rupee
1 AMD149.0137 INR
Armenian Dram = Indian Rupee
1 AMD = 149.0137 INR 1 INR = 0.0067 AMD
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CONCLUSION

The foreign exchange market is the world's largest financial market, and it is
critical for global commerce. Private Citizens and business entities enter foreign
exchange markets to make international payments and explore investment
opportunities. The foreign exchange market does not refer to one centrally
organized financial exchange. Instead, it refers to a vast network of participants
that trade currencies with the help of information technology. Foreign exchange
rates shift with the supply and demand dynamics of a particular currency. Low
money supplies along with high demand for the currency support high exchange
rates. Treasury officials sell government securities to the public for cash to reduce
the money supply available in circulation. Meanwhile, economic growth and
stability improve currency demand. Currency transactions are executed either at
spot rates or forward rates. Spot transactions trade currencies at current exchange
rates. Forward negotiations are agreements to exchange currencies at set rates at a
later date. Consumers may exploit high exchange rates to buy relatively cheap
overseas goods and investments. Alternatively, businesses benefit from weak
domestic exchange rates that add value to overseas profits when they are converted
back into the home currency.
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REFERENCE

www.google.com

www.wikipedia.com

www.ibfx.com