INTRODUCTION TO FOREIGN EXCHANGE MARKET

By: Roshan Rudra kumar Samanna srinivas Sanath kumar Sandeep kumar

FOREIGN CURRENCY
 A currency in the most specific use of the word refers to money

in any form when in actual use or circulation, as a medium of exchange, especially circulating paper money.
 Early currency  Coinage  Paper money  Banknote era

FOREIGN CURRENCY MARKETS  The foreign exchange market is a form of exchange for the global decentralized trading of international currencies.  The foreign exchange market is unique.  Its huge trading volume and high liquidity  Its geographical dispersion  Its continuous operation: 24 hours a day except weekends  The variety of factors that affect exchange rates  The low margins of relative profit compared with other markets of fixed income .

Factors influencing exchange rates  International trade:  Capital movement:  Change in prices:  Speculation: .

Continued……………  Strength of the economy:  Government policies:  Stock exchange operation:  Political factors: .

 FOREIGN EXCHANGE BROKERS: banks do not trade directly buy/sell currencies via foreign exchange brokers. international investors.  Commercial banks: These banks carry out buy/sell order from clients and buy/sell currencies on their own accounts. MNC who need foreign exchange for the purposes of operating their business. .Participants of foreign exchange markets  RETAIL CLIENTS: These are made up of businesses.

 CENTRAL BANK: Monetary authorities of a country are not indifferent to changes in the external value of their currency and even through exchange rates of major industrialized nation central bank intervene to buy /sell their currency in a bid to influence the rate at which their currency traded. .Continue…………….

and high demand causes high prices.Equilibrium of exchange rates:  Determinants of equilibrium are Demand and supply. Laws of demand and supply:  High supply causes low prices. . an increase in the demand for a commodity would cause it to appreciate in value.  When there is an abundant supply of a given commodity then the price should fall.  Therefore.  When there is a scarce supply of a given commodity then the price should increase. whereas an increase in supply would cause it to depreciate.

 An increase in the preference of foreign countries for domestic goods.  Loan borrowings.Appreciation of domestic currency value:  The demand for foreign exchange is inversely proportional to the rise of exchange rate.  An increase in foreign GDP and income.  Remittance of funds from outside to India.  A decrease in the riskiness of investments relative to foreign investments. . donations received.  An increase in the real interest rate on domestic bonds relative to foreign bonds.

 Imports are high.  Payments of loan amounts to IMF.  Investments in other countries.  Lending of money to other governments.  Remittance of fund from India to outside. .Depreciation of domestic currency value:  The supply of foreign exchange shifts depending on demand and not on the exchange rate.  Charity and donation to other country.

 The Basic Equilibrium condition depends on interest rate parity.  The interest rate parity condition is achieved when the anticipated returns on deposits of any two currencies are same when evaluated in the same currency. .Equilibrium in the Foreign Exchange Market  The foreign exchange market is considered to be in equilibrium when the deposits of all the currencies provide equal rate of return that was expected.

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.  Transactions between banks (Intern bank market) and also with agent banks.  Transactions between Banks and public.  Transactions between banks and central bank.FOREX MARKET COMPONENTS 3 major components of this are.

That is how many units of one currency will equal one unit of another currency.6 Indirect quote – Rs. It is the ratio between different currencies.100 = 1. Direct quote – 1$ = Rs.54.Exchange Rate Quotations  Exchange rate.Price for any purchase or sale     of a currency in the exchange market.8$ . Two types of quotations are direct quote and indirect quote.

30/USD)  Spread – It is the difference between the Bid and Ask rate ( B.40.00 – 40.R)/AR x 100. (Rs.Exchange Rates  Bid Rate – Buying Rate. it is also called as offer rate.  Ask Rate – Selling Rate. it is always given first.  Cross Rate – One currency is sold for common currency and that is exchanged for desired one.R – A. .

TYPES OF TRANSACTIONS IN FOREIGN EXCHANGE MARKET .

on the second following business day.Spot Transaction  A Spot transaction in the interbank market is the purchase of foreign exchange. . normally.  The date of settlement is referred to as the value date. with delivery and payment between banks to take place.

the agreement.)  The exchange rate is established at the time of  Buying Forward and Selling Forward describe the . but payment and delivery are not required until maturity. same transaction (the only difference is the order in which currencies are referenced.Forward Transaction  An outright forward transaction (usually called just “forward”) requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency.

.  Non-deliverable forwards (NDF).  Both purchase and sale are conducted with the same counterparty.  Some different types of swaps are:  spot against forward.  forward-forward.Swap Transaction  A swap transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

.A fool with a tool still remains as fool.

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