CUSTOMS LAW AND PRACTICES

TOPIC : “FOREX”
NAMES: AMOGHAVARSGA.H (MY.BU.U3COM19126)
HARSHITH .R (MY.BU.U3COM19118)
MEANING OF FOREIGN EXCHANGE
• According to Hartley Withers, “ Foreign exchange is the art and science of
international monetary exchange "The forex market is the world’s largest
financial market. Over $4 trillion dollars worth of currency are traded each day.
The amount of money traded in a week is bigger than the entire annual GDP of
the United States. The main currency used for forex trading is the US dollar.
• The term Foreign exchange implies two things: a)foreign currency and b)
exchange rate Foreign exchange generally refers to foreign currency, e.g. for
India it is dollar, euro, yen, etc… &the other part of foreign exchange is
exchange rate which is the price of one currency in terms of the other currency.
 FOREX TRADE IN WORLD
•  FOREIGN EXCHANGE MARKET
Foreign exchange market is that market in which national currencies are
traded for one another. .The major participants in this market are
commercial banks, forex brokers, and authorized dealers and the monetary
authorities. Besides, transfer of funds form one country to another ,
speculation is an important dimension of foreign exchange market.
• Its where money in one currency is exchanged for another.
  ADVANTANGES IN FOREIGN
MARKET
• It’s already the world’s largest market and it’s still growing quickly.
• It makes extensive use of information technology – making it available to
everyone.
• Traders can profit from both strong and weak economies.
• Trader can place very short-term orders – which are prohibited in some
other markets The market is not regulated.
 TERMS RELATED TO FOREIGN
EXCHANGE
• Foreign exchange reserves- holdings of other countries' currencies.
• Foreign exchange controls- controls imposed by a government on the purchase/sale of foreign
currencies Retail foreign exchange platform- speculative trading of foreign exchange by
individuals using electronic trading platforms .
• Foreign exchange risk- arises from the change in price of one currency against another
International trade- the exchange of goods and services across national boundaries.
• Foreign exchange company- a broker that offers currency exchange and international payments
Bureau de change- a business whose customers exchange one currency for another Currency
pair- the quotation of the relative value of a currency unit against the unit of another currency
in the foreign exchange market.
 EXCHANGE RATES
According to Haines, “Exchange rate is the price of the currency of a
country can be exchanged for the number of units of currency of another
country.” Exchange rate is that rate at which one unit of currency of a
country can be exchanged for the number of units of currency of another
country. It’s the the price for which one currency is exchanged for another.
  FACTORS INFLUENCING EXCHANGE
RATES
• As with any market, the forex market is driven by supply and demand:
1. If buyers exceed sellers, prices go up If sellers outnumber buyers, prices go down.
• The following factors can influence exchange rates:
1. National economic performance
2. Central bank policy
3. Interest rates Trade
4. balances – imports and exports Political factors – such as elections and policy changes Market
sentiment – expectations and rumours Unforeseen events – terrorism and natural disasters Despite all
these factors, the global forex market is more stable than stock markets; exchange rates change slowly
and by small amounts.
 TYPES OF EXCHANGE RATES

• Fixed and Floating exchange rates :

Fixed exchange rate is the official rate set by the monetary authorities of the Governance
for one or more currencies. Under floating exchange rate, the value of the currency is
decided by supply and demand factor.
•  Direct and indirect exchange rates
Direct method - Under this, a given number of units of local currency per unit of foreign
currency is quoted. They are designated as direct/certain rates because the rupee cost of
single foreign currency unit can be obtained directly. Direct quotation is also called home
currency quotation. Indirect method – Under this, a given number of units of foreign
currency per unit of local currency is quoted. Indirect quotation is also called foreign
currency quotation.
 TYPES OF EXCHANGE RATES

• Buying and selling Exchange rates are quoted as two way quotes –
for purchase and for sale transactions by the Bank.
 Spot and forward
•  The delivery under a foreign exchange transaction can be settled in one of
the following ways Ready or cash – To be settled on the same day Tom –
To be settled on the day next to the date of transaction Spot – To be settled
on the second working day from the date of contract Forward – To be
settled at a date farther than the spot date
Theories of exchange rate determination
• Meaning: Theories which determine the prices of forex rate considering
inflation, interest rate, and elasticity of price etc.. Methods:
1. Long run theory .
2. Short run theory.
 LONG RUN THEORY OF EXCHANGE
RISK DETERMINATION
This are the theories which predominately take into account the fundamental changes of economy. Here
fundamental changes refers to the change which are going to change the economic performance of the economy
Purchasing power for all times to come.
•Types of theory:
Purchasing power parity.
1.Absolute purchasing power parity.
2. Relative purchasing power parity.
•Interest Rate parity.
1.Covered Interest Rate parity
2. Uncovered Interest Rate parity
 Short Run theory of exchange rate
determination
This theories are based more on current information or immediate
performance of economic variables. This theories try to take into account the
short run factor which may be eliminated in the long run.