In the name of Allah the most

beneficent and merciful

Group members are:
Sehar Shafiq
Waqar ul Hassan
Zeeshan Haider
Asma Zahid
Sehrish Shoukat
Amir Shahzad
Topic Name:

Foreign Exchange Market

Foreign exchange markets and risk:

Foreign exchange markets

Foreign exchange rate
Foreign exchange risk
 Background and history of foreign
exchange markets:

Currency depreciation
Currency appreciation
 World’s largest foreign exchange
markets:
foreign exchange markets among the largest of
all financial markets.

London continuous to be the largest center for

trading in foreign exchange.

New York, Tokyo, London are the world’s largest

market.
 Introduction of Euro
 Euro is the name of EU currency.
Started trading from January 1, 1999.
It’s aim was to break down trade barriers.
Euro is the world’s second most important
currency for international transactions.
Difference Between a Spot Foreign
Exchange Transaction And a
Forward Foreign Exchange
Transaction
 Foreign Exchange Rates
A foreign exchange rate is the price at which one currency can be
exchanged for another currency.
If the U.S. exchange rate for the Canadian Dollar is $1.60, this
means that 1 American Dollar can be exchanged for 1.6 Canadian
dollars.
In most financial papers, currencies are expressed in terms of U.S.
dollars, while the dollar is commonly compared to the Japanese yen,
the British pound and the euro. In beginning of 2006, the exchange
rate of one U.S. dollar for one euro was about 0.84, which means
that one dollar can be exchanged for 0.84 euros.
 Foreign Exchange Transactions

There are two types of foreign exchange rates

and foreign exchange transactions: spot and
forward.
 Spot Foreign Exchange Transactions

Involve the immediate exchange of currencies at

the current exchange rate.
 Forward Foreign Exchange
The exchange of currencies at a specified exchange rate at some
specified date in the future.

When a forward contract is made, the parties agree to buy/sell the

underlying currency at a certain point in the future at a certain
exchange rate.

For example, an American exporter undertakes to sell 10 million

euros in exchange for dollars at a rate of 1.35 euros per U.S. dollar in
six months' time. The exporter is obligated to deliver 10 million euros
at the specified rate on the specified date, regardless of the status of
the export order or the exchange rate prevailing in the spot market at
that time.
 Return &risk of foreign exchange
transaction
 Risk is that the value of the foreign currency
may change relative to the U.S dollar.

 Risk is also that by adding foreign currency

assets and liabilities to FI portfolio.
 Example

 On December 16,2004 firm purchase 3 million

Swiss francs.
 Sport exchange rate of U.S dollar for Swiss
francs is $.8639.
 U.S.$/SF exchange rate*Sf3 million
 =.8639*SF 3m
 =$2,591,700
 One month after the sport exchange rate of
Swiss France to the dollar has depreciated or
the exchange rate value is $.8514.
 .8514*SF 3million
 =$2,554,200
 Firm suffer $37,500 due to exchange rate
fluctuation
 Hedging Foreign Exchange Risk
 Manager cannot know the advance
pound/dollar sport exchange rate will be at the
end of the year.
 FI manager control the scale of FX exposure in
two ways
 On balance sheet hedging
 Off balance sheet hedging
 On balance sheet hedging:

 Its involves making changes in the on balance

sheet assets and liabilities to protect FX risk.

 Off balance sheet hedging:

 Its involves taking position in forward or

derivative securities to hedge FX risk.
 Hedging with forwards
 Forward hedge is a contract to buy and sell
assists at a given price or at specified date.

 That will avoid the loses if the prices changes.

 Role of financial Institutions in
foreign Exchange Transactions
Foreign exchange market transactions are conducted
among dealers mainly over the counter.

Foreign Exchange Market (commonly referred to as the

Forex Market) was developed to facilitate International
trade.

Forex Market is highly integrated globally, it can operate

24 hours a day – when one major market is closed, another
major market is open to facilitate trade.
Plays an extremely important role in facilitating cross-
border trade, financial transactions and investment.

It allows borrowers to have access to the International

capital markets.

The Forex Market does not exist physically.

In the complex world of international trade, merchants

face a number of risks that need to be managed.

Successful companies employ effective risk management

techniques when making business decisions
 Who are the Foreign Exchange
Market Participants?

Commercial Banks

Other financial Institutions, such as Brokers

(Institutional Investors, Insurance companies,
Pension, Mutual and Hedge Fund Managers)

Corporations

Banks
Interaction of Interest rates, Inflation
&Exchange rate
In context of Monetary Policy
Contractionary
Expansionary
Thank You