1.

1 INTRODUCTION TO THE STUDY

The Foreign Exchange Market is the largest financial market in the world with an
estimated $1.5- $4 trillion in currencies traded daily. To grasp the vast size of the volume in this
market, it would take the (NYSE) New York Stock Exchange at least three months to reach the
amount traded in one day on the Forex market. One of the reasons for this vast volume is that
unlike other financial markets, forex is not tied to an actual stock exchange, it is an over the
counter (OTC) market. Also, this is a 24 hour market, meaning there is no closing time or
opening time and individuals/institutions can trade the whole day.
Money exchange has been around in different forms for thousands of years. Evidently, its
practice has been evolving throughout time. The first currency traders were the moneychangers
from the Middle East introducing the coin exchange between cultures. A different form of
currency was first utilized by the Babylonians who utilized paper bills and receipts. However,
this idea was later implemented during the middle ages in order to ease the foreign money
exchange trading for merchants. Long before the foreign exchange market was created in 1973
as it is known today, it went through several alterations during its early stages. At the end of
World War I it stopped being a quite stable market. The volatility as well as the speculative
activity increased which was not as promising for many institutions at the time. The elimination
of the gold standard in 1913 along with the Great Depression caused the market to lose activity.
Changes made to the market from 1931 to 1973 extremely affected the global economies and
speculative activity was nearly null. The World War II had an enormous effect in the
development of the forex market and some currencies. After the stock market crash of 1929 the
US dollar was but an unsuccessful currency until the World War II turned it around making it the
most popular benchmarking currency. While on the contrary, the Great British Pound was
tremendously affected by the Nazis losing its popularity as a major currency. It was not until the
end World War II that in efforts to support the global economies Great Britain, France and the
United States joined forces. Due to the United States was the only untouched country by war, the
three nations met in Bretton Woods, New Hampshire, at was it was called the United Nations
Monetary and Financial Conference. At the conference the Bretton Woods Accord was
established to provide a safe setting in which global economies could reinstate them. The
pegging of currencies and the International Monetary Fund (IMF) were established by the

Bretton Woods Accord. Major currencies pegged to the 8 United States currencies given its
strength at the time, and fluctuation of one percent on both sides of the set standard was allowed
for these currencies. In case a currencys exchange rate would reach the limit on either side of the
standard, the banks were responsible for bringing the rate back into the range. The agreement
failed eventually, but brought back stability for Europe and Japans economy. Similar agreements
were established with a greater fluctuation band for currencies such as the Smithsonian
Agreement in 1971 and The European Joint Float in 1972. This last agreement was an attempt by
the European society to be independent form the United States currency. Yet, in 1973 both
agreements failed committing similar mistakes to the Bretton Woods Accord and the free floating
system emerged as a result. This system was officially accredited in 1978 allowing currencies to
freely peg or float. During the same year a second effort for independence from the US dollar
was made by Europe presenting the European Monetary System which shared the same faith of
prior agreements failing in 1993.Since then the free-floating system has been used world-wide
allowing currencies to move freely from other currencies and letting anyone to become a trader.
Speculative activity has increased from all types of traders, from bank to just an individual
trader. Sporadically central banks would interfere to move currencies to their levels. However the
forex market working on supply and demand has been the main factor that caused its success
since the global free-floating system. This great market was only open to banks and big
corporations; nevertheless thanks to the advances in technology it became available to everyone
in 1995. Unlike traditional trading in which traders were required to meet in a single location
called trading rooms to perform the 9 transactions, the Internet allowed individuals to trade from
home at any time. These advantages allowed the foreign exchange market to become the fastest
and most profitable trading market world-wide.

1.2 INDUSTRY PROFILE

1.2.1 FINANCIAL SYSTEM: INTRODUCTION
The development of any country depends upon the existence of a well-organized
financial system. It is the financial system which supplies the necessary financial input for
production of goods and services which in turn promote the wellbeing and standard of living of
the people of a country.
Financial system is a boarder term which brings under its fold the financial market and
financial institution which support the system. Generally speaking there is no specific place or
location to indicate a financial market. Wherever a financial transaction takes place, it is deemed
to have taken place in the financial market. So it can be said as the mechanism or system through
which financial assets are created and transferred is known as financial market.
When the financial asset transferred are corporate securities and government securities,
such mechanism of transfer is known as securities market. Some serious attention was paid to the
development of a sound financial system in India only after the launching of planning era in the
country. At the time of independence in 1947, there was no strong financial institutional
mechanism in the country. There was absence of issuing institution and nonparticipation of
intermediary financial institutions. The industrial sector also had no access to the saving of the
community. The capital market was very primitive and shy. The private as well as the
unorganized sector played a key role in the provision of in the provision of liquidity. On the
whole, chaotic conditions prevailed in the system.
With the adoption of theory of mixed economy, the development of the financial system
took a different turn so as to fulfill the socio-economic and political objectives. The Government
started creation of new financial institution to supply finance both for agricultural and industrial
development and it also progressively started nationalizing some important financial institution
so that the flow of finance might be in the right direction.

1.2.2 FINANCIAL MARKET

Wherever a financial transaction takes place, it is deemed to have taken place in the
financial market. So it can be said as the mechanism or system through which financial assets are
created and transferred is known as financial market. Hence, financial markets are pervasive in
nature since, financial transactions are themselves very pervasive throughout the economic
system. For instance, issue of equity shares, granting of loan by term lending institutions, deposit
of money into bank, purchase of debentures, sale of share and so on.
The financial market may be classified as primary market and secondary market
depending on whether the securities traded are newly issued securities or securities already
outstanding and owned by investors. The market mechanism for the buying and selling of new
issue of securities is known as primary market. This market is also termed as new issue markets
because it deals with new issue of securities. The secondary market, on the other hand, deals with
securities which have already being issued and are owned by investors. The buying and selling of
securities already issued and outstanding take place in stock exchange. Hence, stock exchange
constitutes the secondary market in securities.
Participants in financial market
A financial market is essentially a system by which financial securities are exchanged.
This system is composed of participants, securities, markets, trading arrangements and
regulations. The major participants are the buyers and sellers of securities or the investors and
issuer. Financial intermediaries are the second major class of participants in the financial market.
The term financial intermediary includes all kinds of organization which intermediate and
facilitate financial transaction of both individuals and corporate customers. Thus, it refers to all
kinds of financial institutions and investing institutions which facilitate financial transaction in
financial market.

1.2.3 FOREIGN EXCHANGE

The word FOREX is derived from the words foreign exchange and is the largest financial
market in the world. Foreign Exchange is a type of financial trading in which the currency of a
country is exchanges for that of another. With a daily turnover of over$4.9 trillion, the forex
market is the largest financial trading market in the world. The market is open 24 hours a day,
five and a half days a week across almost every time zone. For instance, when the trading day in
the US ends, the Forex market begins a new in Tokyo and Hong Kong. As such, the Forex
market can be extremely active any time of the day, with price quotes changing constantly.
The Forex market started evolving in the 1970s when international trade switched from a
fixed rate (set by the Bretton Woods Agreement) to a floating exchange rate. Since then, the
relative rates of currencies have been determined by buying and selling activity within the
international foreign exchange market. When more of a currency is bought, its relative price goes
up, and when more is sold its price goes down.
History of Foreign Exchange
Before money became the official standard of exchange people exchanged goods and
services through barter. It wasnt until the establishment of paper money and a set of standard
characteristics for money in all countries was introduced that a refined international commerce
system was developed. Early examples of money were gold and silver coins and when paper
money began circulating it was backed by the concept that the holder of paper could at any time
request convertibility into gold. If a dollar holder found that his dollar holdings were falling in
value he could exchange them for gold and essentially reduce the amount of dollars in circulation
which in turn stabilized the dollar and then caused it to appreciate. The exchange into gold from
dollars was then reserved. Although the gold standard seemed and sounded ideal nevertheless it
was ended in the 1930s.
At Bretton Woods in 1944 a new International Monetary System was established. This
system set a gold based value for the dollar and the British pound and linked all other currencies
to the dollar. Gold was set at $35 an ounce and the international monetary fund was founded with
a purpose to help member countries who needed monetary assistance. As economies grew after

the war the supply of dollars in Europe was soon worth more than the amount of gold in the
USA.
In 1956, the Eurodollar market was formed. Eurodollars were dollars held by non-US
banks outside the USA therefore they were not regulated by the US. As these dollars were not
regulated they bore a higher risk premium and their yield was higher than domestic dollars. It
was from this liquid market that Forex forwards and Forex swaps were born. In the early
seventies due to the pressure on the dollar convertibility into gold was suspended and the
German mark was allowed to revalue. Later the price of gold was again fixed but this time at $38
per ounce in 1963 the dollar was under immense pressure again and it was devalued by 10%. The
Bretton Woods system had finally collapsed and the dollar was allowed to freely float against
other currencies. The era of fixed exchange rates had ended and the era of floating exchange
rates was ushered in. With it came the European Monetary System (EMS) formed in 1979 where
European currencies were floating in a band against the dollar and eventually in the introduction
of the single currency in 1999.
History of Foreign Exchange Markets
At the end of World War II, the major countries of the world set up the International
Monetary Fund (IMF). The IMF is an international organization that monitors balance of
payments and exchange rate activities. In July 1944, at Bretton Woods, new Hampshire, 44
countries signed the Articles of Agreement of the IMF. At the centerpiece of those agreements
were the establishments of a worldwide system of fixed exchange rates between countries. The
anchor for this fixed exchange rate system was gold. One ounce of gold was defined to be worth
35 US dollars. All other currencies were pegged to the US dollar at a fixed exchange rate.
Although the fixed exchange system served well during the 1950 and early 1960, it came
under increasing strain in the late 1960s and by 1971 the order was almost collapsed. Most
economists trace the breakup of the fixed exchange rate system to the US macroeconomic policy
package of 1965-68 to finance both the Vietnam conflict and its welfare programs, President
Johnson backed an increase in us government spending that was not financed by an increase in
taxes. Instead, it was financed by an increase in money supply, which in turn, led to rise in price
inflation from less than 4% in 1966 to close to 9% by 1968. With more money in their pockets

the American spent more, particularly on imports, from here the US trade balance started to
deteriorate rapidly.
The rise in inflation and the worsening of US trade position gave support to the
speculation in the foreign exchange market that the dollar would be devalued. Things came to a
head on spring 1971, when US trade figures were released, which showed that for the first time
since 1945, the United States was importing more than it was exporting. This set off the massive
purchases of Deutsche Marks by the speculators who guessed that the DM would revalue against
the dollar. On a single day may, 4, 1971 the Bundesbank had to buy $1billion to hold the
dollar/DM rate at its fixed exchange rate given the great demand for DMs. On the morning of
May 5, the Bundesbank purchased another $1 billion during the first hour of the trading. At that
point, the Bundesbank faced the inevitable and allowed its currency to float.
Gold Standard System
The creation of the gold standard monetary system in 1875 is one of the most important
events in the history of the Forex market. Before the gold standard was created, countries would
commonly use gold and silver as method of international payment. The main issue with using
gold and silver for payment is that the value of these metals is greatly affected by global supply
and demand. For example, the discovery of a new gold mine would drive gold prices down.
The basic idea behind the gold standard was that governments guaranteed the conversion
of currency into a specific amount of gold, and vice versa. In other words, a currency was backed
by gold. Obviously, governments needed a fairly substantial gold reserve in order to meet the
demand for currency exchanges. During the late nineteenth century, all of the major economic
countries had pegged an amount of currency to an ounce of gold. Over time, the difference in
price of an ounce of gold between two currencies became the exchange rate for those two
currencies. This represented the first official means of currency exchange in history.
The gold standard eventually broke down during the beginning of World War I. Due to
the political tension with Germany, the major European powers felt a need to complete large
military projects, so they began printing more money to help pay for these projects. The financial
burden of these projects was so substantial that there was not enough gold at the time to
exchange for all the extra currency that the governments were printing off.

After Bretton Woods

Switching away from the fixed currency system after 27 years out of necessity, not by
choice was a difficult task. The Smithsonian Agreement reached in Washington in December
1971 had a transactional role to the free-floating markets. This agreement failed to address the
real cause behind the international economic and financial pressure, focusing instead on
increasing the range of currency fluctuation. From 1% the band of foreign currencies fluctuation
was expanded to 4.5%.
Parallel to Washingtons efforts, the European Economic Community, established in
1957, tried to move away from the US dollar block toward the deutsche mark block, by
designing its own monetary system. In April 1972, West Germany, France, Italy, the Netherlands,
Belgium and Luxembourg developed the European joint float. Under this system the member
countries were allowed to move between 2.25 % band, known as the snake, against each other,
and collectively within 4.5% band, known as the tunnel, against the US dollar.
Unfortunately, both the Smithsonian institution agreement and the European joint float
did not address the independent domestic problems of the member countries from the bottom up,
attempting instead to focus solely on the large international picture and maintain it by artificially
enforcing the intervention points. By 1973, both systems collapsed under heavy market
pressures.
The idea of regional currency stability with the goal of financial independence from the
US dollar block persisted. By July 1978, the members of the European community approved the
plans for the European Monetary System: West Germany, France, Italy, Netherlands, Belgium,
Great Britain, Denmark, Ireland and Luxembourg. The system was launched in March 1979, as a
revamped European joint float, or a mini Bretton Woods Accord. Additional features, such as the
threshold of divergence, were designed to protect this monetary system from the fate of the
previous ones. Judging from its expended life span, until 1993 at least the European Monetary
System was obviously better. Until it proved to be devastating in 1992, when the Pound fell
against the dollar from 2.01 to 1.4000 with days.

The Beginning of the Free-Floating System

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971.
This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation
band for the currencies. In 1972, the European community tried to move from its dependency on
the dollar. The European Joint Float was established by West Germany, France, Italy,
Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton woods accord,
but allowed a greater range of fluctuation in the currency values.
Both agreements made mistakes similar to the Bretton Woods Accord and in 1973
collapsed. The collapse of the Smithsonian Agreement and the European Joint Float in 1973
signified the official switch to the free-floating system. This occurred by default as there were no
new agreements to take their place. Governments were now free floating system was officially
mandated.
In a final effort to gain independence from the dollar, Europe created the European
Monetary System in July of 1978. Like all of the previous agreements, it failed in 1993.
The major currencies today move independently from other currencies. The currencies
are traded by anyone who wishes. This has caused a recent influx of speculation by banks, hedge
funds, brokerage houses and individuals. Central banks intervene on occasion to move or attempt
to move currencies to their desired levels. The underlying factor that drives todays Forex
markets, however, is supply and demand. The free-floating system is ideal for todays Forex
markets. It will be interesting to see if in the future our planet endures another war similar to
those of the early 20th century.

Time Line of Foreign Exchange

1944

Bretton Woods Accord is established to help stabilize the global

1971

economy after World War 11

Smithsonian Agreement established

1972

fluctuation band for currencies

European Joint Float established as the European Community tried

1973

to move away from its dependency on the US dollar

Smithsonian Agreement and European Joint Float failed and

1978

signified the official switch to a Free-Floating System

The European Monetary System was introduced so other countries

1978
1993

could try to gain independence from the US dollar

Free-Floating System officially mandated by the IMF
European Monetary System fails making way for a world-wide

to

allow

for

greater

Free- Floating System

Forex Market in India

The evolution of Indias foreign exchange market may be viewed in line with the shifts in
Indias exchange rate policies over the last few decades from a par value system to a basket-peg
and further to a managed float exchange rate system. During the period from 1947to 1971, India
followed the par value system of exchange rate. Initially the rupees external par value was fixed
at 4.15 grains of fine gold. The reserve bank maintained the par value of the rupee within the
permitted margin of +1 or -1 percent using pound sterling as the intervention currency. Since the
sterling-dollar exchange rate was kept stable by the US monetary authority, the exchange rates of
rupee in terms of gold as well as the dollar and other currencies were indirectly kept stable. The
devaluation of rupee in September 1949 and June 1966 in terms of gold resulted in the reduction
of the par value of rupee in terms of gold to 2.88 and 1.83 grains of fine gold, respectively. The
exchange rate of the rupee remained unchanged between 1966 and 1971.
Given the fixed exchange regime during this period, the foreign exchange market for all
practical purposes was defunct. Banks were required to undertake only cover operations and
maintain a square or near square position at all times. The objective of exchange controls was
primarily to regulate the demand for foreign exchange for various purposes, within the limit set

by the available supply. The Foreign Exchange Regulation Act initially enacted in 1947 was
placed on a permanent basis in 1957. In terms of the provisions of the act, the reserve bank, and
in certain cases, the central government controlled and regulated the dealings in foreign
exchange payments outside India, export and import of currency notes and bullion, transfers of
securities between residents and non-residents, acquisition of foreign securities, etc.
With the breakdown of the Bretton Woods System in1971 and the floatation of major
currencies, the conduct of exchange rate policy posed a serious challenge to all central banks
world wide as currency fluctuations opened up tremendous opportunities for market players to
trade in currencies in a borderless market. In December 1971, the rupee was linked with pound
sterling. Since sterling was fixed in terms of us dollar under the Smithsonian agreement of 1971,
the rupee also remained stable against dollar. In order to overcome the weakness associated with
a single currency peg and to ensure stability of the exchange rate, the rupee, with effect from
September 1975, was pegged to a basket of currencies. The currency selection and weights
assigned were left to the discretion of the reserve bank. The currencies included in the basket as
well as their relative weights were kept confidential in order to discourage speculation. It was
around this time that banks in India became interested in trading in foreign exchange.
Foreign Exchange Market in India: Historical Perspective
Indian Forex market since independence can be grouped in three distinct phases.
1947-1977: During 1947 to 1977, India exchange rate system followed the par value
system. RBI fixed rupees external par value at 4.15 grains of fine gold. 15.432 grains of gold is
equivalent to 1 gram of gold. RBI allowed the par value to fluctuate within the permitted margin
of +1 or -1 percent. With the breakdown of the Bretton Woods System in 1971 and the floatation
of major currencies, the rupee was linked with pound-sterling. Since pound-sterling was fixed in
terms of US dollar under the Smithsonian Agreement of 1971, the rupee also remained stable
against dollar.

1978-1992: During this period, exchange rate of the rupee was officially determined in
terms of a weighted basket of currencies of Indias major trading partners. During this period,

RBI set the rate by daily announcing the buying and selling rates to authorized dealers. In other
words, RBI instructed authorized dealers to buy and sell foreign currency at the rate given by the
RBI on daily basis. Hence exchange rate fluctuated but within a certain range. RBI managed the
exchange rate in such a manner so that it primarily facilitates imports to India.
Indias perennial trade deficit widened during this period. By the beginning of 1991,
Indian foreign exchange reserve had dwindled down to such a level that it could barely be
sufficient for three-weeks worth of imports. During June 1991, India airlifted 67 tons of gold,
pledged these with Union Bank of Switzerland and Bank of England, and raised US $ 605
million to shore up its precarious Forex reserve. At the height of the crisis, between 2 nd and 4th
June 1991, rupee was officially devalued by 19.5%from 20.5 to 24.5 to 1 US $. This crisis paved
the path to the famed liberalization program of government of India to make rules and
regulations pertaining to foreign trade, investment, public finance and exchange rate
encompassing a broad gamut of economic activities more market oriented.
1992 onwards: 1992 marked a watershed in Indias economic condition. During this
period, it was felt that India needs to have an integrated policy combining various aspects of
trade, industry, foreign investment, exchange rate, public finance and the financial sector to
create a market-oriented environment. Many policy changes were brought in covering different
aspects of import-export, FDI, Foreign Portfolio Investment etc.
One important policy changes pertinent to Indias Forex exchange system was brought in
rupees was made convertible in current account. This paved to the path of foreign exchange
payments/receipts to be converted at market-determined exchange rate. However, it is
worthwhile to mention here that changes brought in by government of India to make the
exchange rate market oriented have not happened in one big bang. This process has been gradual

A Brief History of FOREX Trading

The creation of the gold standard monetary system in 1875 marked one of the most
significant events in the history of the Forex currency market. As countries each attached an
amount of their currency to be equal to an ounce of gold the changing price of gold between two
currencies became the first standardized means of currency exchange in history.
World War I brought with it the breakdown of the gold standard due to the major
European powers not having enough gold to exchange for all the currency that the governments
were printing off at the time in order to complete large military projects. The gold standard was
used again between the wars, but by the start of World War II most countries had again dropped
it, however gold never lost its spot as the ultimate form of monetary value.
In 1944 the Bretton Woods System was implemented and led to the formation of fixed
exchange rates that resulted in the U.S. dollar replacing the gold standard as the primary reserve
currency. This also meant that the U.S. dollar became the only currency that would be backed by
gold. In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were
held in foreign reserves, this market the end of the Bretton Woods System.
It was this break down of the Bretton Woods System that ultimately led to the mostly
global acceptance of floating foreign exchange rates in 1976. This was effectively the birth of
the current foreign currency exchange, although it did become widely electronically traded until
about the mid 1990s.
Uses of Forex Market
Forex trading involves transactions in which one party purchases a quantity of one
currency by paying in a quantity of another currency. The Forex market is a global decentralized
financial market for the exchange of currencies. Around the world various financial centers act as
hubs for trading between a wide range of different types of buyers and sellers 24 hours a day,
except weekends. It is the foreign exchange market that determines the value of one countrys
currency relative to another. The primary reason the Forex market exists is to facilitate
international trade and investment by giving businesses the ability to convert one currency into
another.
Benefits of Trading the Forex market

 Trading can be done from anywhere in the world through internet facility.
Huge trading volume, this leads to dense liquidity making it easier to get in and out of
positions at the price seller want.
Greater availability of leverage to enhance profit margins relative to account size than
compare to other markets.
Fewer variables to consider as compared to stock or commodity trading.
No inherent market bias like the bullish bias stocks, this means greater opportunities to
profit from the volatility in both rising and falling markets.
Ease of accessibility and low start-up costs.
Advantages like the ones listed above and others are the reason why the Forex market has
been referred to as the market closest to the ideal of perfect competition. According to the
Bank for International Settlements, average daily turnover in global foreign exchange
markets is estimated at $3.98 trillion, as of April 2010 a growth of approximately 20% over
the $3.21 trillion daily volume recorded in April 2007.
The Most Traded Forex Currencies

United States dollar = 84.9%

Euro = 39.1%
Japanese yen = 19.0%
Pound Sterling = 12.9%
Australian dollar = 7.6%
Swiss franc = 6.4%
Canadian dollar = 5.3%
Hong Kong dollar = 2.4%
New Zealand = 1.6%

1.2.4 MARKET PARTICIPANTS

Unlike a stock market, the foreign exchange market is divided into levels of access. at the
top is the inter-bank market, which is made up of the largest commercial banks and securities
dealers. Within the inter-bank 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
euro) 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 53% 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 FX market
makers. Central banks also participate in the foreign exchange market to align currencies to their
economic needs.
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 trading.
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. The mere
expectation or rumour of central bank intervention might be enough to stabilize a currency, but
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 199293 erm collapse and in more recent times in Southeast 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. Specialist firms is quite small, many have a large value
of assets under management (AUM), and hence can generate large trades.
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.
1.2.5 FINANCIAL INSTRUMENTS
SPOT MARKET
A foreign exchange spot market is a market for trading one currency against another in
such a way that the delivery takes place within 2 days of the execution of the trade. It usually
takes two days to transfer cash from one bank to the other.
The price is based on the ongoing exchange rate i.e. the current value of one country's currency
relative to another. The foreign exchange spot market is the largest market in the world with
a transaction of more than US $ 1 trillion in a single day. The forex futures market is a minor
derivative of this market and its size is 1/100th of that of the foreign exchange spot market.
Nature of Foreign Exchange Spot Market
A currency's spot rate is expressed as its value relative to the US dollar i.e. the number of
US dollars needed to buy one unit of the other currency. A foreign exchange spot market allows a

company to buy or sell a foreign currency according to its requirements. But even the daily
movements in spot exchange rates are characterized by a number of vagaries.
So those operating in this market are speculators rather than trend-followers. For this
reason, it exposes an entrepreneur's cash management to a number of unpleasant alterations in
foreign currencies.
The spot rate of a currency can be affected by various reasons such as the current
and future expectations about the inflation rate, BOP (Balance Of Payments) situation, policies
created by government and central bank and other economic indicators of the country.
Reasons for the trades to be settled 'on the spot':
Foreign exchange spot market is the most common form of currency trade because if the
contracts are settled afterwards, then the traders might ask for compensation against the value
that the money has gained over the duration of delivery. So these contracts are settled
instantaneously using the electronic forex systems.
FUTURE MARKET
A currency future, also FX future or foreign exchange future, is a futures contract to
exchange one currency for another at a specified date in the future at a price (exchange rate) that
is fixed on the purchase date; see Foreign exchange derivative. Typically, one of the currencies is
the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This
can be different from the standard way of quoting in the spot foreign exchange markets.
The trade unit of each contract is then a certain amount of other currency, for instance 125,000.
Most contracts have physical delivery, so for those held at the end of the last trading day, actual
payments are made in each currency. However, most contracts are closed out before that.
Investors can close out the contract at any time prior to the contract's delivery date.
Currency futures were first created in 1970 at the International Commercial Exchange in
New York. But the contracts did not "take off" due to the fact that the Bretton Woods system was
still in effect. They did so a full two years before the Chicago Mercantile Exchange (CME) in
1975, less than one year after the system of fixed exchange rates was abandoned along with
the gold standard. Some commodity traders at the CME did not have access to the inter-bank

exchange markets in the early 1970s, when they believed that significant changes were about to
take place in the currency market. The CME actually now gives credit to the International
Commercial Exchange (not to be confused with the ICE for creating the currency contract, and
state that they came up with the idea independently of the International Commercial Exchange).
The CME established the International Monetary Market (IMM) and launched trading in seven
currency futures on May 16, 1975. Today, the IMM is a division of CME. In the fourth quarter of
2009, CME Group FX volume averaged 754,000 contracts per day, reflecting average daily
notional value of approximately $100 billion. Currently most of these are traded electronically
Foreign exchange future market refers to a type of financial derivative in which two
parties enter into a contract to buy/sell a particular currency at a pre-determined price on a
specific future date. A foreign exchange future market provides an opportunity to hedge risk and
speculate against the exchange rate fluctuations.
Evolution of Foreign Exchange Future Market:
Foreign exchange future market was introduced in 1972 by the IMM (International
Monetary Market) of the CME (Chicago Mercantile Exchange). It basically replaced the notion
of 'par value exchange rates' which was followed under the Bretton Woods System. This
approach of foreign exchange future market was then adopted by many other exchanges in U.S.
and abroad. Financial instruments like futures are nowadays also used in hedging stock
exchanges and interest rates.

Foreign Exchange Future Market gains over Traditional futures because:

Foreign exchange future market, also popularly known as forex futures market,
constitutes only 1% of the US$ 1 trillion traded in the global foreign exchange market. Foreign
exchange future market is same as that of traditional futures contract in the sense that both are
used to buy or sell an asset (a specific amount) at an agreed price on a particular future date. The
two are however different as in case of a foreign exchange future market, none of the parties
involved is actually buying or selling any commodity but currencies. This is because all quotes in
case of a foreign exchange future market are made against the U.S. dollar. Traditional futures are

traded on centralized stock exchanges whereas the deal flow of foreign exchange future markets
is available through many different exchanges in the home and foreign country. But this doesn't
imply that foreign exchange future markets are quoted in OTC (Over the Counter). They have a
designated 'size per contract' and are available in whole numbers.
Other features of a Foreign Exchange Future Market:
A foreign exchange future market is 'marked to market' thus making it a portfolio of
forward contracts that are adjusted daily for cash settlements. This in fact mitigates the credit risk
to a very large extent.
These are carried out through the clearing house of the exchange. The margin payments
accrue to the exchange and the exchange ensures the proper functioning of the contract. A
foreign exchange future market contract rarely results in a delivery. It is used by parties as it is a
highly liquid way of hedging and speculating and efficient transactions can be fixed up without
delay.
FORWARDS
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.
SWAPS
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.
OPTIONS
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 on a specified date. The FX options market is
the deepest, largest and most liquid market for options of any kind in the world.
1.2.6 CURRENCY FUTURES IN INDIA
A currency future, also known as FX future, is a futures contract to exchange one
currency for another at a specified date in the future at a price (exchange rate) that is fixed on the
purchase date. On NSE the price of a future contract is in terms of INR per unit of other currency
e.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange
risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro
(EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Currency options are currently
available on US Dollars.
NSE was the first exchange to have received an in-principle approval from SEBI for
setting up currency derivative segment. The exchange launched its currency futures trading
platform on 29th August, 2008. Currency futures on USD-INR were introduced for trading and
subsequently the Indian rupee was allowed to trade against other currencies such as euro, pound
sterling and the Japanese yen. Currency Options was introduced on October 29, 2010.

Major Currency Pairs

The most traded currency pairs in the world are called the majors. The list includes
following currencies: Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Pound Sterling
(GBP), Australian Dollar (AUD), Canadian Dollar (CAD), and Swiss Franc (CHF). These
currencies follow free floating method of evaluation. Amongst these currencies the most active
currency pairs are: EURUSD, USDJPY, GBPUSD, AUDUSD, CADUSD and USDCHF.
According to Bank of International Settlement (BIS) survey of April 2010, the share of different
currency pairs in daily trading volume is given below:

Currency
EUR/USD
USD/JPY
GBP/USD
AUD/USD
USD/CHF
USD/CAD
USD/Others
Others/Others
Total

Share (%)
28
14
9
6
4
5
18
16
100

Basics of currency markets and peculiarities in India

Currency pair
Unlike any other traded asset class, the most significant part of currency market is the
concept of currency pairs. In currency market, while initiating a trade you buy one currency and
sell another currency. Therefore same currency will have very different value against every other
currency. For example, same USD is valued at say 45 against INR and says 82 against JPY. This
peculiarity makes currency market interesting and relatively complex. For major currency pairs,
economic development in each of the underlying country would impact value of each of the
currency, although in varying degree. The currency dealers have to keep abreast with latest
happening in each of the country.
Base Currency / Quotation Currency
Every trade in FX market is a currency pair: one currency is bought with or sold for
another currency. We need to identify the two currencies in a trade by giving them a name. The
names cannot be foreign currency and domestic currency because what is foreign currency
in one country is the domestic currency in the other. The two currencies are called base
currency (BC) and quoting currency (QC). The BC is the currency that is priced and its
amount is fixed at one unit. The other currency is the QC, which prices the BC, and its amount
varies as the price of BC varies in the market. What is quoted throughout the FX market
anywhere in the world is the price of BC expressed in QC. There is no exception to this rule.

For the currency pair, the standard practice is to write the BC code first followed by the
QC code. For example, in USDINR (or USDINR), USD is the BC and INR is the quoted
currency; and what is quoted in the market is the price of USD expressed in INR. If you want the
price of INR expressed in USD, then you must specify the currency pair as INRUSD. Therefore
if a dealer quotes a price of USDINR as 45, it means that one unit of USD has a value of 45 INR.
Similarly, GBPUSD = 1.60 means that one unit of GBP is valued at 1.60 USD. Please note that
in case of USDINR, USD is bas e currency and INR is quotation currency while in case of
GBPUSD, USD is quotation currency and GBP is base currency. In the interbank market, USD is
the universal base currency other than quoted against Euro (EUR), Sterling Pound (GBP),
Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD).

COMPANY PROFILE
1.3.1 INTRODUCTION
INDITRADE Capital Ltd formerly known as JRG Securities Ltd. is one of Indias leading
financial services providers with strong presence in South India. It was incorporated in 1994 and
over the years it acquired a name of trust through equity and commodity broking businesses. In
2007, baring India private equity fund 11 ltd., a leading private equity firm of international
repute acquired a majority stake in the company. With the investment of BIPEF came fresh
inflow of talent and a focused team committed to taking this company to greater heights. Since
then Inditrade has undergone several transformations expanding into new geographies,
adopting state-of-the-art technology, strengthening credit and risk management systems, creating
new products and strengthening client relationships through service focus. The company is

committed to fully compliant with all regulatory compliances with the exchanges, SEBI, IRDA,
FMC and RBI. Inditrade is listed on the Bombay stock exchange and has a diverse set of public
share holders.
As the company transforms itself to being a professionally run, high quality brokerage
house in India, the focus is on providing best-in-class services to the customers. The new
management team consists of high quality professional talent from within the company and from
the market place. The company strives to attract and retain the best talent, which is amongst the
key building blocks for the company. The new growth strategy has four key building blocksTrust, Transparency, Technology and Talent.
The company is a member of the National Stock Exchange of India (NSE), the Bombay
Stock Exchange (BSE), the National Multi Commodity Exchange of India Ltd (NMCEIL), the
National Commodities Derivatives Exchange Ltd (NCDEX), the Multi Commodity Exchange of
India Ltd (MCX) and the Indian Pepper and Spices Trades Association (IPSTA). Inditrade is a
full-fledged depository participant of the National Securities Depository Ltd and Central
Depository Services (India) Limited. Besides these, it is also a leading Insurance Broker.
In order to expand its reach, Inditrade has launched its internet trading services through
www.inditrade.com. The online services will provide customers an opportunity to trade from the
comfort of their home or offices and also trade while travelling. Inditrade.com will empower
customers to trade and invest in equities, commodities, currencies, mutual funds and insurance.
1.3.2 VISION
Empowering the Investor in You
JRG provides a full array of financial products to you as per your needs through a
customer-centric approach and technology-oriented solutions.
1.3.3 STRATEGY
We aspire to become a pan India, full-services, brokerage house by enabling every
Indian to invest and by facilitating financial decision making. We endeavor to ensure that our
customers have a delightful experience by partnering with us. We do this by equipping our

customers with a full array of financial options, understanding their needs and priorities, and
proving smart solutions to execute their plans. We commit to providing a superior execution
platform to the customer by constantly investing and upgrading our services delivery channels,
investing in cutting-edge technology, and having the most dynamic and motivated team on the
ground, that is focused on enhancing the customers experience.
1.3.4 Inditrade Group Companies
The Inditrade Group, a leading financial and investment service company in India. From a
modest beginning a decade back, Inditrade is today a power to reckon with in the financial
services industry through the following Inditrade Group of Companies

Inditrade capital ltd

JRG Fincorp ltd
Inditrade business consultants ltd
Inditrade derivatives and commodities ltd
Inditrade insurance broking private ltd

1.3.5 Inditrade offerings

Product
IndiSave: Earn higher interest than on your fixed deposits. Invest in corporate debt,
government bonds, debt funds and gold.
IndiInvest: Create wealth. Invest in equities, gold, mutual funds and property.
IndiLever: Leverage your margins, avail margin funding, take loan against shares. Trade
in equities, commodities and currency using our advisory support.
IndiLoans: Personal loans, home loans, business loans, loans against property, loans
against securities, loans against commodities/securities/MF, Gold Loan, margin funding.
IndiSure: Insure yourself and your assets. Protect your familys future with childrens
education and health insurance.
IndiPlan: Use our financial planning services to set your financial goals.
Services

Online trading platform

Advisory desk-research and advisory calls, reports and services
Centralized risk management desk
Centralized dealing support
Client management system
Real time market information and updates

Products and Services

Depository Services
Equity
Commodity
Currency Derivative
Initial Public Offer
Mutual Fund

Depository Services
JRG is a depository participant with the National Securities Depository Limited (NSDL)
and Central Depository Services (India) Limited (CDSL) for trading and settlement of
dematerialized (DEMAT) shares. JRG performs clearing services for all securities transactions
through its accounts. At JRG, investors can open DEMAT account for holding securities, mutual
funds and commodities.
Equity
Trading in Equities with JRG brings us the very best of the Technology, Research, Access
and Ease. It empowers us to invest in equities by providing an anchor to guide us as to when,
where and how to invest.
They have some key focus areas which they work on incessantly in order to bring us a
superior trading experience. These focuses areas-based on their objective of customer centricity
include the following:
Best-in-class technology
Powerful Research & Analytics
Transparency and Compliance

 Call & Trade

Customer Service
Reach & Delivery Model Commodity
Commodity
Commodity derivative market has emerged as a new avenue for investors to create
wealth. Today commodities have evolved as the next best option after stocks and bonds for
diversifying the portfolio. Based on the fundamentals of demand and supply, commodities form a
separate asset class offering investors, arbitrageurs and speculators immense potential to earn
returns.

JRG aims to harness the immense potential of the commodities market by providing you
a simple yet effective interface, research and knowledge. JRG provide user friendly online
trading platform to trade various commodity sectors like bullion, base metals, energy and
agriculture.
Currency Derivatives
The global increase in trade and foreign investments has led to inter-connection of many
national economies leading to greater need for a stronger foreign exchange risk management
mechanism. The growth of the FX futures market has manifold with the participation of
speculators, investors and arbitragers and emerged as an alternative investment vehicle for Indian
investors. JRG are a member of two major currency exchanges- MCX-SX and NSE.
Trade in currency futures because:

Low commissions
No middlemen
Standardized lot size
Low transaction cost
High liquidity
Instant transactions
Online access
Self-regulatory
No insider trading

 Limited regulation
Initial Public Offer
An investor can garner estimable returns by investing early in a company through an
initial public offering. JRG helps to invest in the primary market through the IPO route in an
effortless way.

Mutual Fund
Investing in a mutual fund is an excellent way of diversifying risk as well as portfolio.
JRG presents its mutual fund services that strive to meet all your mutual fund investment needs.
They have wide spectrum of investment schemes from all top mutual fund houses.

BOARD OF DIRECTOR

Mr.P. Viswanathan

Chairman

Mr. Munish Dayal

Director

Mr. B R Menon

Director

KEY MANAGEMENT

Samson K J

M D- Inditrade Derivatives and Commodities Ltd

Dr. Shankar Anappindi

Asst. Vice President - HR

Harish Galipelli

Head Commodity & Currency

Mr. Dnyanesh Sovani

Vice President Online Business

Praveen P A

Vice President-NBFC

1.4 PROBLEM DEFINITION

The market for foreign exchange involves the purchase and sale of national currencies. A
Foreign Exchange market exists because economies employ national currencies. If the world
economy used a single currency there would be no need for foreign exchange markets. In Europe
II economies have chosen to trade their individual currencies for a common currency. But the
euro will still trade against other world currencies. For now, the foreign exchange market is a fact
of life.
Foreign exchange risk is a financial risk posed by an exposure to unanticipated changes
in the exchange rate between two currencies. Investors and multinational businesses exporting or
importing goods and services or making foreign investments throughout the global economy are
faced with an exchange rate risk which can have severe financial consequences if not managed
appropriately. In every foreign exchange transaction, there are simultaneously buying one
currency and selling another. In effect, using the proceeds from the currency that sold to purchase
the currency you are buying. Furthermore, every currency in the world comes attached with an
interest rate set by the central bank of that currency's country. From this background it has been
decided to make a study on the risk and return of forex market.

1.5 SIGNIFICANCE OF THE STUDY

This study focus on the importance of risk in the foreign exchange market from the
perspective of a carry trade investor, thereby considering known unknowns (volatility) and
unknown unknowns (uncertainty) and their relative importance. The theoretical framework
show how volatility and uncertainty affect risk and risk premia in the foreign exchange market.
Empirically examine the relation between risk, expected volatility and uncertainty of foreign
exchange returns based on this framework. The study reveals that uncertainty is the most
important factor driving risk, and therefore only
focusing on volatility gives an incomplete representation of risk. Moreover, volatility and
uncertainty are also important for the expected risk premium. In times of high volatility and/or
uncertainty, investors expect to receive a higher risk premium in the near future. The study
contributes to the foreign exchange asset market debate by showing that interest rate risk and
uncertainty about fundamentals have a significant impact on exchange rate risk. The main
objective of this study is to focus on the determinants of the risk and return in forex market.
Volatility in the foreign exchange (forex) and stock markets usually rises with macro financial
uncertainty. Price dynamics in these markets reveal information on the empirical distribution of
financial returns

1.6 SCOPE OF THE STUDY

The study on risk and return associated with forex market will give an exposure to
different currencies across the world and also a detailed description regarding individual
currencies. The study will provide informations regarding historical volatility occurred in the

forex market and trends associated with each currencies. The study also provides information on
the coefficient of variation of all currencies under study and also the return on all the currencies.
Through this study an investor also gets a detailed idea about the risk and return associated with
the currencies in the forex market.

1.7 PERIOD OF STUDY

The study was undertaken during a period of forty five days from 2011 to 2013 quarterly.

1.8 LIMITATIONS OF THE STUDY

As the time allotted for the study was short, it became difficult to gather all technical
information.
The study was mainly based on secondary data. Secondary data is not accurate in many
situations.
Lack of awareness in respect to management of currencies.

REVIEW OF LITERATURE
2.1 THEORETICAL ASPECTS OF RISK AND RETURN
Foreign Exchange is a very large financial market. At times foreign exchange market becomes
very volatile. This is responsible for the various risks in foreign exchange market. Everyone
involved in the foreign exchange trading should we aware of foreign exchange risk. Foreign
exchange risk (also known as exchange rate risk or currency risk) is a financial risk that exists
when a financial transaction is denominated in a currency other than that of the base currency of
the company. The risk is that there may be an adverse movement in the exchange rate of the
denomination currency in relation to the base currency before the date when the transaction is
completed. Investors and businesses exporting or importing goods and services or making
foreign investments have an exchange rate risk which can have severe financial consequences;
but steps can be taken to manage (i.e., reduce) the risk. Foreign exchange risk is the variability of
domestic currency values of assets, liabilities or operating incomes due to unanticipated change
in exchange rate. This is measured by the variance of the values, i.e. Var (V), where V is the
value of assets or liabilities and Var=variance= (standard deviation) 2.
Value at risk (VaR)
Risk is about odds of losing money and VaR is based on that common sense fact. Here risk is the
odds of really big loss. Big loss is different for every investor depending on the investor's
appetite. But every investor whether big or small does wants to know his/her losses in the worst
case. VAR answers the question, "What is my worst-case scenario?"

To calculate VaR we need three components. These three components are: a time period, a
confidence level and a loss amount or loss percentage. Using VaR investor will get to know
things like:

What is the most I can expect to lose with 95% confidence over a period of 10 days?

What is the maximum percentage I can expect to lose with 95% confidence over a
period of 10 days?

Time period taken can be anything like a day, 10 day, a month or a year depending upon what
investor is looking for.
A one day VAR of $10mm using a probability of 5% means that there is a 5% chance that the
portfolio could lose more than $10mm in the next trading day.
There are three methods of calculating VaR: the Historical method, the parametric method also
known as variance-covariance method and the Monte Carlo simulation.
The Historical Method: The historical method simply re-organizes actual historical returns,
putting them in order from worst to best. It then assumes that history will repeat itself, from a
risk perspective. We then put these data in the histogram that compare the frequency of return.
Tiny bars in histogram represent the less frequent daily return while the highest point in
histogram represents the most frequent daily return.
Parametric Method
This method assumes that the stock returns are normally distributed. In this method we estimate
only two factors - an expected return and a standard deviation. These two factors allow us to plot
a normal distribution curve.
Monte Carlo Simulation: The third method involves developing a model for future stock price
returns and running multiple hypothetical trials through the model. A Monte Carlo simulation
refers to any method that randomly generates trials, but by itself does not tell us anything about

the underlying methodology. Every run of Monte Carlo Simulation gives different result. But
differences between these results are likely to be very narrow
Standard Deviation
Standard deviation is a measure of how far apart the data are from the average of the data. If all
the observations are close to their average then the standard deviation will be small.
In finance, standard deviation is applied to the annual rate of return of an investment to measure
the investment's volatility. Standard deviation is also known as historical volatility and is used by
investors as a gauge for the amount of expected volatility.

Mean Return
The average expected return of a given investment, when all possible outcomes are considered.
To calculate mean return, estimate the probability of each possible return, and then take a
weighted average of those returns.
To calculate mean return, at first we need to calculate all the possible rate of return of the
investment with their respective probability.
Foreign Exchange Rates
Foreign exchange rate is the rate at which one currency can be exchanged for another. In other
words, it is the value of another country's currency compared to that of our own. If we are
travelling to another country, you need to "buy" the local currency. Just like the price of any
asset, the exchange rate is the price at which you can buy that currency. Suppose we are
travelling to Egypt, and the exchange rate for INR to Egyptian pounds is 7.5:1, this means that to
buy every Egyptian pounds we need to spend INR 7.5.

Types of Foreign Exchange Rates

The various types of foreign exchange rates are:
a.

Floating Rates

b.

Fixed Rates

c.

Pegged Rates

Floating Rates: When the value of the currencies fluctuates freely due to market forces, these
frequent changes in the values of currencies are termed as floating rates. Floating rates are
preferred by a country if there are reasons to believe that the country can cope up with the
constant change in the value of its currency. There are a number of reasons for the fluctuation in
the value of a currency. The most common reason is that of demand and supply. If there is a trade
deficit than it will cause less demand for the currency, as a result the value of currency will go
down. In case of trade surplus than it will cause more demand for the currency, as a result the
value of currency will rise.
Fixed Rates: Fixed rates are generally used by smaller economies. Smaller economies uses fixed
exchange rate because it is difficult for them to keep pace with the frequently changing exchange
rate. Fixed exchange rate secures the foreign investor from any loss due to exchange rate
fluctuation. Fixed exchange rates do have their disadvantages on the economic front. Due to
fixed exchange rate the monetary policies of the country becomes ineffective.
Pegged Rates: It is a compromise between fixed rates and floating rates. In pegged rate the
currency fluctuate within a fixed band around central value. It is better for developing economy
in comparison with the other two exchange rates as it allows certain degree of market adjustment
as well as stability.
Exchange rate depending upon type of transaction
Exchange rate also depends upon the type of transaction. Here the type of transactions are sale
transaction and purchase transaction. Authorized Dealer does quote different rates for sales and

purchase of foreign currency. Purchase of foreign currency is called inward remittance of foreign
currency. Similarly, sale of foreign currency is called outward remittance of foreign currency.
Factors influencing Foreign Exchange Rates
An exchange rate is determined by supply and demand factors. These are the various factors
which determine the demand and supply of a currency.
Inflation
If inflation in the India is lower than elsewhere, then Indian exports will become more
competitive and there will be an increase in demand for INR. Also foreign goods will be less
competitive and so Indian citizens will supply less INR to buy foreign goods. Therefore the rate
of INR will tend to increase.
Interest Rates
If interest rates in India rise relative to elsewhere, it will become more attractive to deposit
money in the India. Therefore demand for INR will rise. This is known as hot money flows
and is an important short run determinant of the value of a currency.

Speculation
If speculators believe the INR will rise in the future, they will demand more now to be able to
make a profit. This increase in demand will cause the value of INR to rise. Therefore movements
in the exchange rate do not always reflect economic fundamentals, but are often driven by the
sentiments of the financial markets.
For example, if markets see news which makes an interest rate increase more likely, the value of
the INR will probably rise in anticipation.

Change in competitiveness
If Indian goods become more attractive and competitive, this will cause the value of the
Exchange Rate to rise. This is important for determining the long run value of the INR.
Relative strength of other currencies
INR will rise if there is depreciation in the values of other currencies. For example, if USD
depreciates then this will result in the relative appreciation in the value of INR.
Balance of Payments
A large deficit on the current account means that the value of imports is greater than the value of
exports. If this is financed by a surplus on the financial / capital account then this is okay. But a
country who struggles to attract enough capital inflows will see depreciation in the currency.
Foreign Exchange Risk and Hedging
There is a spectrum of opinions regarding various foreign exchange risks and methods to hedge
them. Some firms feel hedging techniques are speculative or do not fall in their area of expertise
and hence do not venture into hedging practices. Other firms are unaware of being exposed to
foreign exchange risks. There are a set of firms who only hedge some of their risks, while others
are aware of the various risks they face, but are unaware of the methods to guard the firm against
the risk. There is yet another set of companies who believe shareholder value cannot be increased
by hedging the firm's foreign exchange risks as shareholders can themselves individually hedge
themselves against the same using instruments like forward contracts available in the market or
diversify such risks out by manipulating their portfolio.
Different categories of risk
The various risks associated with foreign exchange are:
Interest Rate Risk
Exchange Rate Fluctuation Risk

 Counter-party Risk
Political Risk
Translation Risk
Interest Rate Risk: Interest rate risk refers to the profit and loss generated by fluctuations in the
forward spreads. Along with fluctuations in forward spread, forward amount mismatches and
maturity gaps among transactions in the foreign exchange book also plays a significant role
towards the interest rate risk. The forward amount mismatch is the difference between the spot
and the forward amounts.
Exchange Rate Fluctuation Risk: Exchange rate fluctuation risk refers to the risks to which
investors are exposed because of the change in exchange rate of that foreign currency against
INR. If the value of the foreign currency goes down with respect to INR then investors are bound
to lose. In case foreign currency appreciates against INR then the investor will gain more.
Counter-party risk: Counter-party risk refers to the risk of each party of the contract that the
counterparty will not leave up to his contractual obligations. Counterparty risk is also referred to
as Default Risk.
Political Risk: Political Risk refers to the reaction of the foreign exchange market due to the
change in the business environment of a country. However, the reaction of the foreign exchange
market is more dramatic for unfavorable events than for favorable events.
Translation Risk: Translation risk is encountered when there is a need to translate foreign
currency assets or liabilities into the home currency for accounting purpose in a given period.

2.2 EMPERICAL PERSPECTIVE

Soenen1 A key assumption in the concept of foreign exchange risk is that exchange rate changes
are not predictable and that this is determined by how efficient the markets for foreign exchange
are. research in the area of efficiency of foreign exchange markets has thus far been able to
establish only a weak form of the efficient market hypothesis conclusively which implies that
successive changes in exchange rates cannot be predicted by analyzing the historical sequence of
exchange rates (Soenen, 1979). However, when the efficient markets theory is applied to the
foreign exchange market under floating exchange rates there is some evidence to suggest that the
present prices properly reflect all available information. This implies that exchange rates react to
new information in an immediate and unbiased fashion, so that no one party can make a profit by
this information and in any case, information on direction of the rates arrives randomly so
exchange rates also fluctuate randomly. It implies that foreign exchange risk management cannot
be done away with by employing resources to predict exchange rate changes.
Giddy and Dufey2 There is a spectrum of opinions regarding foreign exchange hedging. Some
firms feel hedging techniques are speculative or do not fall in their area of expertise and hence
do not venture into hedging practices. Other firms are unaware of being exposed to foreign
exchange risks. There are a set of firms who only hedge some of their risks, while others are
aware of the various risks they face, but are unaware of the methods to guard the firm against the
risk. There is yet another set of companies who believe shareholder value cannot be increased by
hedging the firms foreign exchange risks as shareholders can themselves individually hedge
themselves against the same using instruments like forward contracts available in the market or
diversify such risks out by manipulating their portfolio (Giddy and Dufey, 1992). There are some
explanations backed by theory about the irrelevance of managing the risk of change in exchange
rates. For example, the international fisher effect states that exchange rates changes are balanced
out by interest rate changes, the purchasing power parity theory suggests that exchange rate
changes will be offset by changes in relative price indices/inflation since the law of one price
should hold. Both these theories suggest that exchange rate changes are evened out in some form
or the other. Also, the unbiased forward rate theory suggests that locking in the forward exchange
rate offers the same expected return and is an unbiased indicator of the future spot rate. But these
theories are perfectly played out in perfect markets under homogeneous tax regimes. Also,
exchange rate-linked changes in factors like inflation and interest rates take time to adjust and in
the meanwhile firms stand to lose out on adverse movements in the exchange rates. The

existence of different kinds of market imperfections, such as incomplete financial markets,

positive transaction and information costs, probability of financial distress, and agency costs and
restrictions on free trade make foreign exchange management an appropriate concern for
corporate management. (Giddy and Dufey, 1992) it has also been argued that a hedged firm,
being less risky can secure debt more easily and this enjoy a tax advantage (interest is excluded
from tax while dividends are taxed). This would negate the Modigliani-miller proposition as
shareholders cannot duplicate such tax advantages. The mm argument that shareholders can
hedge on their own is also not valid on account of high transaction costs and lack of knowledge
about financial manipulations on the part of shareholders. There is also a vast pool of research
that proves the efficacy of managing foreign exchange risks and a significant amount of evidence
showing the reduction of exposure with the use of tools for managing these exposures. in one of
the more recent studies, Allayanis and OFEK (2001) use a multivariate analysis on a sample of
S&P 500 non-financial firms and calculate a firms exchange-rate exposure using the ratio of
foreign sales to total sales as a proxy and isolate the impact of use of foreign currency derivatives
(part of foreign exchange risk management) on a firms foreign exchange exposures. they find a
statistically significant association between the absolute value of the exposures and the (absolute
value) of the percentage use of foreign currency derivatives and prove that the use of derivatives
in fact reduce exposure.2 based on giddy, Ian h and Dufey, gunter,1992, the management of
foreign exchange risk corporate hedging for foreign exchange risk.
John Russell3 In forex trading, the market tends to be "moody", meaning it follows the moods of
its participants. These moods come in mainly two flavors, risk taking, and risk aversion. Risk
taking is when investors are not worried about any upcoming issues in the market. They
generally feel that there are no surprises coming. Risk aversion is when the future is looking a
little murky, or just plain unpredictable. During the financial crisis of 2008, the forex market
overreacted with massive risk aversion. Investors pulled their money out of anything that paid
interest and focused on "safe haven" type currencies. This caused a crash on the Australian
Dollar and a surge in the US Dollar. Ironically, the center of the triggers for the financial crisis
were based on the United States, but because the US Dollar is viewed as a safe haven during
unpredictable times money flowed into it day after day as investors were increasingly unsure of
what was to come. This is true of any time of uncertainty in the markets, even mild uncertainty.
Whenever the market terrain is unpredictable, you will see risk aversion. It comes out as the

selling of higher yielding assets and moves into lower yielding (safe) assets. Sometimes the
moves last for days and sometimes months or years.
Profiting from risk aversion is possible, but ironically risky. To profit from risk aversion, you
have to keep an eye on the bigger picture and keep your trading light. In the instance of the 2008
financial crisis, some days had moves up and down of 500 pips. If you traded that looking to
make big money with highly leveraged trades, a poor entry could have left you without an
account. The two ways to profit from risk aversion are, stand aside and wait for things to return
to normal, or trade small with large targets. It seems like leaving money on the table to trade this
way, but the alternative, losing a lot of money on trades, is much worse. If you plan on using risk
aversion to your advantage, just make sure that you have an adequate grip on the reason for the
risk aversion. Failure to know the reason behind the attitude shift in the market could leave you
trading the wrong direction after the turn around.
Jack Clark francis24 (1986) revealed the importance of the rate of return in investments and
reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain world,
investors cannot predict exactly what rate of return an investment will yield. However he
suggested that the investors can formulate a probability distribution of the possible rate of return.
He also opined that an investor who purchases corporate securities must face the possibility of
default and bankruptcy by the issuer. Financial analysts can foresee bankruptcy. He disclosed
some easily observable warnings of a firm's failure, which could be noticed by the investors to
avoid such a risk.
Lewis Mandells5 (1992) reviewed the nature of market risk, which according to him is very
much 'global'. He revealed that certain risks that are so global that they affect the entire
investment market. Even the stocks and bonds of the well-managed companies face market risk.
He concluded that market risk is influenced by factors that cannot be predicted accurately like
economic conditions, political events, mass psychological factors, etc. Market risk is the
systemic risk that affects all securities simultaneously and it cannot be reduced through
diversification.
Sunil Damodaro6 (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for shortterm risk control. He opined that derivatives have become an indispensable tool for finance

managers whose prime objective is to manage or reduce the risk inherent in their portfolios. He
disclosed that the over-riding feature of 'financial futures' in risk management is that these
instruments tend to be most valuable when risk control is needed for a short- term, ie, for a year
or less. They tend to be cheapest and easily available for protecting against or benefiting from
short term price. Their low execution costs also make them very suitable for frequent and short
term trading to manage risk, more effectively.
Philippe Jhorion and Sarkis Joseph Khoury 7 (1996) reviewed international factors of risks and
their effect on financial markets. He opined that domestic investment is a subset of the global
asset allocation decision and that it is impossible to evaluate the risk of domestic securities
without reference to international factors. Investors must be aware of factors driving stock prices
and the interaction between movements in stock prices and exchange rates. According to them
the financial markets have become very much volatile over the last decade due to the
unpredictable speedy changes like oil price shocks, drive towards economic and monetary
unification in Europe, the wide scale conversion of communist countries to free market policies
etc. They emphasized the need for tightly controlled risk management measures to guard against
the unpredictable behavior of financial markets.
S.Rajagopal8 (1996) commented on risk management in relation to banks. He opined that good
risk management is good banking. A professional approach to Risk Management will safeguard
the interests of the banking institution in the long run. He described risk identification as an art of
combining intuition with formal information. And risk measurement is the estimation of the size,
probability and timing of a potential loss under various scenarios.

V.T.Godse9 (1996) revealed the two separate but simultaneous processes involved in risk
management. The first process is determining risk profile and the second relates to the risk
management process itself. Deciding risk profile is synonymous with drawing a risk picture and
involves the following steps.
1. Identifying and prioritizing the inherent risks

2.
3.
4.
5.

Measuring and scoring inherent risks.

Establishing standards for each risk component
Evaluating and controlling the quality of managerial controls.
Developing risk tolerance levels.

He opined that such an elaborate risk management process is relevant in the Indian context. The
process would facilitate better understanding of risks and their management.
Aswath Damodaran10 (1996) reviewed the ingredients for a good risk and return model.
According to him a good risk and return model should1.
2.
3.
4.

Come up with a measure for risk that is universal

Specify what types of risks are rewarded and what types are not.
Standardize risk measures, to enable analysis and comparison.
Translate the risk measure into an expected return.

He opined that a risk measure, to be useful, has to apply to all investments whether stocks or
bonds or real estate. He also stated that one of the objectives of measuring risk is to come up
with an estimate of an expected return for an investment. This expected return would help to
decide whether the investment is a 'good' or 'bad' one.
Basudev Sen11 (1997) disclosed the implications of risk management in the changed environment
and the factors constraining the speed of risk management technology up-gradation. He opined
that the perception and management of risk is crucial for players and regulators in a market
oriented economy. Investment managers have started upgrading their risk management practices
and systems. They have strengthened the internal control systems including internal audit and
they are increasingly using equity research of better quality. He observed that risk measurement
and estimation problems constrain the speed of up-gradation. Also, inadequate availability of
skills in using quantitative risk management models and lack of risk hedging investments for the
domestic investors are major constraints. He concluded that with the beginning of a derivative
market, new instruments of risk hedging would become available.
Terry.J.Watsham12 (1998) discusses the nature of the risks associated with derivative
instruments, how to measure those risks and how to manage them. He stated that risk is the
quantified uncertainty regarding the undesirable change in the value of a financial commitment.
He opined that an organization using derivatives would be exposed to risks from a number of

sources, which are identified as market risk, credit or deficit risk, operational risk and legal risk.
He revealed that there is 'systemic risk' that the default by one market participant will precipitate
a failure among many participants because of the inter-relationship between the participants.
Ghosh T.P13 reviewed the various types of risks in relation to the different institutions. He opined
that 'Managing risk' has different meanings for banks, financial institutions, and non- banking
financial companies and manufacturing companies. In the case of manufacturing companies, the
risk is traditionally classified as business risk and financial risk. Banks, financial institutions and
non- banking financial companies are prone to various types of risks important of which are
interest rate risk, market risk, foreign exchange risk, liquidity risk, country and sovereign risk
and insolvency risk.
Mukul Gupta14 (1999) described the risk management framework as the building blocks for
Enterprise Risk Management ERM is the systems and procedures designed to deal with multiple
types of risks. The objectives of ERM are to obtain information and analyze data so that
uncertainty is turned into quantifiable risk and appropriate management action can be taken to
mitigate the risk. He opined that it is necessary to understand the three main building blocks to
the risk measurement and management process that are analytics, business process and
technology. By analytics is meant the capability of developing the mathematical tools to measure
various forms of risks. By processes is meant the knowledge of business opportunities and the
way business is conducted. Technology is the experience in implementing the hardware and
software required to facilitate the risk management information system. He concluded that a
successfully implemented ERM could be used both for a defensive or an offensive approach.
Akash Joshi15 (2000) reviewed the utility of derivatives in reducing risks. He opined that
derivatives allow an investor to hedge or reduce risks. But they tend to confound investors due to
their esoteric nature. The leverage that the derivatives offer to any trader, investor or speculator is
tremendous. By the use of derivatives the volatility of the market also gets neutralized. He
concluded the article by stating that while the discerning one stands to gain from it, a person who
fails to read it right could land up burning his fingers.
Raghavan R.S16 (2000) reviewed the need for a risk management system, which should be a
daily practice in banks. He opined that bank management should take upon in serious terms, risk

management systems, which should be a daily practice in their operations. He is very much sure
that the task is of very high magnitude, the commitment to the exercise should be visible and
failure may be suicidal as we are exposed to market risks at international level, which is not
under our control as it was in the insulated economy till sometime back.
Vijay Soodd17 (2000) revealed the risks faced by banks and financial institutions and the degree
of risk faced by them. According to him, risk management is gathering momentum at a time
when there is increasing pressure on banks to better manage their assets and improve their
balance sheet. He opined that the greater the volatility of expected returns, the higher is the risk.
The essence of risk management is to reduce the volatility.
Jayanth M Thakur J18 (2000) disclosed the implications of derivatives. The use of derivatives
can be for safeguarding oneself against risks. It is widely recognized by all including the SEBI
committee on derivatives that a substantial degree of speculative activity in a market for
derivatives is necessary and without this, a good market in derivatives cannot function. He
revealed that the basic purpose of providing a system for trading in derivatives is to enable a
person to protect himself against the risk of fluctuations in the market prices. This is known as
hedging. But he argued that it might lead to the bankruptcy of the grantor of an option to buy as
he takes a huge risk since the price could go upward to an unlimited extent and still he would
have to deliver the shares. This is one of the important reasons that the derivatives are criticized.
He concluded the article by suggesting that the objective of the Regulator would be to provide
protection to all concerned.
Lucas19 The model analyzed in this paper is a generalization of the two country model proposed
by Lucas (1982). The Lucas model is a complete, dynamic, two countries, general equilibrium
model which provides some useful insights into the possible nature of risk premiums in the
forward foreign exchange market. Given the highly stylized nature of the model and the
generality of its stochastic structure, direct empirical tests of the model are impossible without
additional restrictions. We do not pursue that strategy here; rather, we use the implications of the
Lucas model to motivate a re-examination of the empirical analysis of Hansen and Hodrick and
the trading strategy of Bilson.

Baumol and Tobin20 In the widely respected money-demand models of Baumol (1952) and
Tobin (1956), individuals choose a range of acceptable levels for their money balances, rather
than a single point value. Only when an individuals balance reaches the boundaries of his/her
range does he adjust his money holdings. As a result, money demand at any point in time is not
uniquely determined, and the equilibrium money supply can fall anywhere within a range
(determined by the aggregate of individual money demands) without generating any change in
individual behavior, interest rates, or exchange rates. With regard to money supply, reserve
accounting procedures imply that money supply is also not uniquely determined at short
horizons, even if the central bank directly controls reserves.
Carlson21 Currency traders also face incentives to avoid risk. Most significantly, they face the
gamblers ruin problem: if they run into a long series of losses, they will shortly be out of a job
even if their profitability would ultimately have been outstanding had they been permitted to
continue trading. Such traders will behave as if they are risk adverse (Carlson 1998). For some
short-term traders, risk also directly affects their annual bonus.
Lewis22 (1995), comments that the sign of the risk premium would [also] depend on the
difference between domestic holdings of foreign bonds and foreign holdings of domestic bonds.
When domestic residents are net creditors, then the overall effect on the risk premium is to
compensate domestic investors for net holdings of foreign deposits (pp. 1926-1927). Lewis is
critical of that model, stressing that countries net asset positions change sign infrequently.
Implicitly Lewis assumes that the international asset holdings relevant to currency risk premiums
encompass the entire range of capital-account items, including assets intended to be held for
many years, such as foreign direct investment, official holdings, and loans.
A.Se1varaj.x23 (1999) reviewed the strategies for combating risk. A risk management
programme should encompass all parts of the organization and all types of potential risks. Risk
management is, essential and one should be aware of how to strategically organize an effective
programme. He revealed that to safeguard a business against risk, it is necessary to know the
various kinds of risks that the business faces. There are risks in everything and the degree of risk
may vary. He recommended certain strategies for combating risks. When risks must be born,
prudence lies in the reduction of the area of uncertainty within which a business is operating. He

opined that since most of these risks proceed largely from ignorance, they could be avoided by
understanding them properly.
Bollerslev and Domowitz24 (1994) found for foreign exchange markets is that the size of bid-ask
spreads in the foreign exchange market (DM/$ rates) is positively related to the underlying
exchange rate (conditional) volatility, by using ordered profit regression to cope with
discreteness in the spreads data. Bollerslev and Domowitz (1993) suggest that quotation activity
of foreign exchange does not influence bid-ask spread changes - seemingly contradicting the fact
derived from stock markets while spreads have a positive effect on return volatility.
Aliber and Stickney25 According to Aliber and Stickney, 1975 Criticisms of foreign currency
risk management all rest on efficient market operating conditions. Proponents of foreign
currency risk management argue their case pointing at limitations in assumptions and caveats
inherent in conditions necessary for foreign exchange markets to operate efficiently. Studies have
indicated that, in the long term PPP theorem holds, in that, long term exchange rates are
approximated by relative price differentials. However, short term adjustment between price
changes and exchange rates are not immediate. Studies have shown poor correlation between
exchange rate changes and relative price changes and interest rates in the short run As long as
adjustment between exchange rates and relative price changes and interest rates is not
immediate; firms are exposed to exchange risk.
Pavlova and Rigobon26 A very interesting paper has been published in 2003 by Pavlova and
Rigobon. The authors use a two-country, two-good model to describe the behavior of the real
exchange rate, the stock and the bond markets. They make predictions that are inspired by the
concept that exchange rates behave by the same principles as the stock market, and should
therefore be treated in a similar manner. Their predictions seem to be confirmed by the data and
are therefore a welcome contribution to the literature.
Pettengill, Sundaram and Mathur27 (1995) find that when the realized return is used instead of
the expected return to estimate the CAPM, the relationship between the risk parameters beta and
the return must be conditional on the relationship between the realized market returns and the
risk-free rate. They therefore introduce a conditional relationship between beta and the realized
return as an alternative approach to that used by Fama and Macbeth (1973). They determine

whether the direction of the market is up or down based on the relationship between the
realized market returns and the risk-free rate, and separate the up market from the down
market to create a conditional relationship between risk factors and the realized return. Whether
the market is up or down depends on whether the excess market return, which they define as the
difference between the market return and risk-free rate, is positive or negative. If the excess
market return is positive, the stock market is up; if excess market returns is negative, the stock
market is down. When the excess market return (or premium) is positive, the relationship
between beta and the return will be positive. On the other hand, if excess market return is
negative, the investor will hold the risk-free asset, which has a low beta, and the relationship
between beta and return will be negative. Thus, while the relationship between expected returns
and risk is always positive, the relationship between realized returns and risk can be either
positive or negative depending on the market excess returns.
Kumar and Seppi28 (1992) and Jarrow29 (1992) studied the impact of currency derivatives on
spot market volatility and found that speculative trading executed by big players in the
derivatives market increases the volatility in the spot exchange rate. Hence, currency futures
trading increases the spot market volatility. Glen and Jorion30 (1993) examined the usefulness
of currency futures/forwards and concluded that currency risk can be minimized through
futures/forward hedging. Chatrath, Ramchander and Song31 (1996) analyzed the impact of
currency futures trading on spot exchange rate volatility by establishing relationship between
level of currency futures trading and the volatility in the spot rates of the British pound,
Canadian dollar, Japanese yen, Swiss franc and Deutsche mark. They concluded that there exists
a causal relationship between currency futures trading volume and exchange rate volatility and
also found that the trading activity in currency futures has a positive impact on conditional
volatility in the exchange rate changes. Further, futures trading activity has declined on the day
following increased volatility in spot exchange rates.
Bhargava and Malhotra32 (2007) analyzed futures trading on four currencies over the time
period of 1982-2000 and found the evidence that day traders and speculators destabilize the
market for futures but it is not clear whether hedgers stabilize or destabilize the market.
Exchange rate movements affect expected future cash flow by changing the home currency value
of foreign cash inflows and outflows and the terms of trade and competition. Consequently, the

use of currency derivatives for hedging the unexpected movement of currency becomes more
sensitive and essential. Sharma33 (2011) investigated the impact of currency futures trading in
India by establishing relation between volatility in the exchange rate in the spot market and
trading activity in the currency futures. The results show that there is a two-way causality
between the volatility in the spot exchange rate and the trading activity in the currency futures
market.
Lessard and Lightstone34 show that real exchange rate changes have both margin effects and
volume effects, and they argue that managers need to understand that exchange rates can have a
significant impact on profits. Bodnar and Gentry35 contend that exchange rate fluctuations can
significantly affect domestic profits by the changing terms of competition with foreign
competitors. Hung36 estimates the impact of exchange rate changes on firms profits and finds
that changes in exchange rate are transmitted to profits through a price-volume effect and a
currency translation effect.
Kwok37 examines whether managers should hedge cash flows originating in different currencies
independently or use an integrative approach, and he indicates that while the independent
approach does not lead to the lowest risk, this approach could save time and resources as its
effectiveness is close to that of the integrative approach. Eaker and Grant38 provide empirical
evidence on the effectiveness of cross-hedging with currency futures in reducing foreign
exchange risk. They find that cross-hedging is substantially less effective and more variable than
traditional hedging, but they suggest that if cross-hedging is the only alternative, multiple crosshedges are more effective.
Soenen39 Soenen studies the effectiveness of diversification with regard to reducing the
variability of a portfolio of currencies, and the results indicate that the marginal reduction in the
variation of a firm's currency portfolio diminishes rapidly and becomes almost insignificant with
the inclusion of more than eight currencies. DeMaskey40 compares the effectiveness of currency
futures and currency options as hedging instruments of covered and uncovered currency
positions. Results of this study indicate that currency futures provide a more effective covered
hedge while currency options are more effective for an uncovered hedge. Collier and Davis41
survey a sample of large U.K. firms about management of currency transaction risk. The results
of their survey indicate that for most firms surveyed, management of currency transaction risk is

centralized and supported by formal policies for dealing with risk exposure. In a subsequent and
similar study of U.K. and U.S. firms, Collier, Davis, Coates, and Longden42 find that U.S. firms
exhibit policies that are slightly more inclined toward asymmetric risk aversion, even when
overall risk profiles are similar.

2.3 REFERENCE
1. Soenen, L.A., Henningan, E.S.(1988), An analysis of exchange rates and stock pricesthe US experience between 1980 and 1986, Akron Business and Economic Review,
Vol.19, pp.7-16
2. Duffie, D. and giddy 1996, A yield-factor model of interest rates, Mathematical
Finance, 6, 379406.
3. Article from John Russell, former About.com Guide
4. Jack Clark Francis, lnzlestrrrents - Analysis and Management, MC Graw Hill,
International Editions, 1986.
5. Lewis Mandell, Inzlestnlerlts, Macmillan Publishing Company, New York, 1992.

6. Sunil damodar, An Introduction to Derivatives and Risk Management in Financial

Markets", State Bank of India, Monthly Review Vol. XXXII No. 8, August 1993.
7. Philippe Jhorion & Sarkis Joseph Khoury, Financial Risk Mnnngeiizeizt Domestic and
international dimensions, Black Well Publishers, Basil Blackwell, Cambridge,
Massachusetts 1996.
8. S.Rajagopal, "Bank Risk Management - A risk pricing model", State Bank of India,
Monthly Review, VoI. XXXV, No.11, November 1996, p.555.
9. V.T.Godse., "Conceptual Framework for Risk Management", I.B.A. Bulletin, July 1996,
p.22.
10. Aswath Damodaran, investment valuation Tools and Techniques, John Wiley & Sons Inc.
New York 1996
11. Basudev Sen, Development of regulation of the Indian Capital Market, Risk Management
implications, University Books House (Pvt. Ltd., Jaipur 1997)
12. Terry. J. Watsham, futures and options in risk management, Terry. J. Watsham, A division
of International Thomson Publishing, 1998
13. Ghosh.T.P. "Value at Risk", Express investment Week, Weekly Vo1.8, No. 49, November
30 to December 6, 1998
14. Mukul Gupta, "Looking Back, Looking Forward, The Economic times, Vol. 39, No. 27,
March 319' 1999, p.15
15. Akash Joshi, "Spreading the basket - Derivative Instruments Mitigate Investment Risk,
The Financial Express Daily, Vol. V, No. 223, December 219' 1999, p.11.
16. Raghavan.R.S., "Risk Management in Banks", the Hindu Daily, Vol. 123, No. 272,
November 16, 2000, Business p.4
17. Vijay Sood, "Risk in Industry and company specific" The Economic times Daily, Vol. 40,
No. 261, November 22nd, 2000.
18. Jayanth. M. Thakur, "World of Derivatives and Related Law", The Financial Express,
Daily, Vol. VI, No. 8, February 14tJ1,2000, p.2.
19. Lucas, R., 1982, Interest Rates and Currency Prices in a TwoCountry World, Journal
of Monetary Economics 10, 335-360
20. Baumol, William J. "The Transactions Demand for Cash: An Inventory Theoretic
Approach." Quarterly Journal of Economics, 1952.
21. Carlson, John A. Risk Aversion, Foreign Exchange Speculation and Gamblers Ruin.
Economica, August 1998, 65, pp. 441-453
22. Lewis, Karen K. Puzzles in International Financial Markets, in G. Grossman and K.
Roof, eds., Handbook of International Economics, Vol. III, Elsevier Science, 1995, pp.
1913-1971

23. A.Selvaraj., "Risk Management - Profitability" The management accountant, Monthly,

Vo1.2, No. 2, February 1999
24. Bollerslev, T., and I. Domowitz, 1993, Trading patterns and prices in the interbank
foreign exchange market, Journal of Finance 48, 14211443
25. Aliber, R and C. Stickney (1975)"Accounting Measures of Foreign Exchange Exposure"
The Accounting Review, January pp 44-47
26. Anna Pavlova and Roberto Rigobon. Asset prices and exchange rates. June 2003
27. Pettengill, G., Sundaram, S., & Mathur, I. (1995). The conditional relation between beta
and return. Journal of Financial and Quantitative Analysis 30, 101116
28. Kumar, P. and D.J. Seppi (1992), Futures Manipulation with Cash Settlement, The
Journal of Finance, Vol. XLVII (4): pp.1485-1501
29. Jarrow, R.A., (1992), Market Manipulation, Bubbles, Corners, and Short Squeezes,
Journal of Financial and Quantitative Analysis, Vol. 27(3): pp.311- 336
30. Glen, J. and Jorion, P., (1993), Currency Hedging for International Portfolios, Journal of
Finance, Vol. 48: pp.1865-86
31. Chatrath, A., Ramchander, S. and Song, F.,(1996), The Role of Futures Trading Activity
in Exchange Rate Volatility, The Journal of Futures Markets, Vol.16(5): pp.561- 584
32. Bhargava V., Malhotra D.K., (2007), the relationship between futures trading activity and
exchange rate volatility, revisited, Journal of Multinational Financial Management, Vol.
17: pp.95-111.
33. Sharma, S., (2011), An Empirical analysis of the relationship between Currency futures
and Exchange Rates Volatility in India, Working Paper Series, Reserve Bank of India,
1/2011.
34. Lessard, D.R. and J.B. Lightstone. (1986). "Volatile Exchange Rates Can Put Operations
at Risk," Harvard Business Review, 64, 107-114
35. Bodnar, G.M. and W.M. Gentry. (1993). "Exchange Rate Exposure and Industry
Characteristics: Evidence from Canada, Japan, and the USA, Journal of International
Money and Finance, 12, 29-45
36. Hung, J. (1993). "Assessing the Exchange Rate's Impact on U.S. Manufacturing Profits,"
Federal Reserve Bank of New York Quarterly Review, 17, 44-63
37. Kwok, C.Y. (1987). "Hedging Foreign Exposures: Independent vs. Integrative
Approaches," Journal of International Business Studies, 18, 33-51.
38. Eaker, M.R. and D.M. Grant. (1987). "Cross-Hedging Foreign Currency Risk," Journal of
International Money and Finance, 6, 85-105
39. Soenen, L.A. (1988). "Risk Diversification Characteristics of Currency Cocktails,"
Journal of Economics and Business, 40, 177-189

40. DeMaskey, A.L. (1995). "A Comparison of the Effectiveness of Currency Futures and
Currency Options in the Context of Foreign Exchange Risk Management," Managerial
Finance, 21, 40-51.
41. Collier, P. and E.W. Davis. (1985). "The Management of Currency Transaction Risk by
UK Multinational Companies," Accounting and Business Research, 15, 327-334
42. Collier, P., E.W. Davis, J.B. Coates, and S.G. Longden. (1990). "The Management of
Currency Risk: Case Studies of US and UK Multinationals," Accounting and Business
Research, 20, 206-210.

3.1 TOPIC OF THE STUDY

A study on risk and return in forex market

3.2 RESEARCH DESIGN

Financial research can be a systematic and organized effort to investigate into a problem
encountered in the investment scenario. It comprises a series of theoretical concepts design and
executed, with the goal of finding answers to the issues that are of concern to the manager and
the work environment. The first step in the process is to identify the problem areas that exist in
the selection of securities. Once the problem is clearly identified the next step is to gather
information analyze the data, and determine the factors that are associated with the problem and
solve it by taking necessary corrective actions. The entire process by which we attempt to solve
the problem is called research. Thus research involves a series of well thought out and carefully
executed actions that will enable the manager to know how organizational problems can be
solved. Research thus encompasses the process of enquiry, investigation, examination and
experimentation. These processes are to be carried out critically, objectively, and logically.
A research design encompasses the methodology and procedures employed to conduct
scientific research. Research design stands for the framework of research. The research design
utilized in this study is analytical. For that various statistical tools as well as Microsoft excel
tools are being used here.

3.3 DATA COLLECTION METHOD

Secondary data were used to carry out the study.

Secondary Data includes

Details from company files, records and documents.
Various published books, journals and news papers.
Web pages of forex market etc.

3.4 RESEARCH METHODOLOGY

This project is designed as analytical in nature which help an investor to know and familiarize
with the risk and return associated with forex market. For conducting this research appropriate
method and techniques are selected. It helped in arriving at best solution by critically analyzing
and relating available datas with unknown aspect of the problem.

3.5 OBJECTIVES OF THE STUDY

Primary Objective
To study on the risk and return in forex market.
Secondary Objectives
To evaluate market return in the forex market.
To find out volatility in forex market
To study on risk associated with forex market

3.6 DATA ANALYSIS TOOLS AND TECHNIQUES

The major tools used in data analysis and data interpretation are;
a. Coefficient of variation

Co-efficient of variation is a relative measure of dispersion. So it is free from the unit in

which values in the series are measured.
coefficient of variation=

SD
100
Mean

b. Standard deviation
Standard deviation (represented by the symbol ) shows how much variation or
"dispersion" exists from the average (mean, or expected value). It can be calculate with
the formula:

x2
n

[ ( x ) ]
n
=

c. Moving average
Moving average is used for analyzing the historical volatility of share. For that first
change in the price is found out and the standard deviation of the change. Finally
volatility is found out by using formula
Moving Average=SDNumber of days

d. Price Volatility
A statistical measure of the dispersion of returns for a given security or market index.
Volatility can either be measured by using the standard deviation or variance between
returns from that same security or market index.
PriceVolatility=

Price Difference
100
Priceat the Beginning

4.1 RISK AND RETURN ANALYSIS

US DOLLAR (USD)
Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

45.3884

45.2854

-0.226930229

30-Jun-11

FUTCUR

45.4916

45.3348

-0.344679018

30-Sep-11

FUTCUR

49.4995

49.6167

0.236770068

31-Dec-11

FUTCUR

54.5234

54.2859

-0.435592791

31-Mar-12

FUTCUR

52.0992

51.8521

-0.474287513

30-Jun-12

FUTCUR

56.8925

56.0542

-1.473480687

30-Sep-12

FUTCUR

52.4862

52.5

0.026292625

31-Dec-12

FUTCUR

54.689

54.689

31-Mar-13

FUTCUR

54.4017

54.355

-0.085842906

30-Jun-13

FUTCUR

59.6964

59.597

-0.166509203

30-Sep-13

FUTCUR

62.702

62.702

31-Dec-13

FUTCUR

61.753

61.7744

0.034654187

TOTAL

649.6229

648.0465

-2.909605466

-0.242467122

SD

0.4414541

AVERAGE
RETURN

VARIANCE

0.194881723

Table 4.1.1
Interpretation
It can be seen from the above that the standard deviation of US DOLLAR (i.e. total risk
associated with stock) is 0.4414541, where as the average value is -0.242467122. Here it means
that all risk associated with this stock can be eliminated with proper diversification of the
portfolio.

Return
0.4
0.2
0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.2
-0.4
Return
-0.6
-0.8
-1
-1.2
-1.4
-1.6

Chart 4.1.1

Inference
From the graph, the beta is less than one and it shows that the less volatility of the price of the
stock in comparison with the market returns. Here it can be ascertained that there exist a
comparatively high difference between systematic risk and unsystematic risk.

EURO (EUR)
Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

63.954

63.8429

-0.17371861

30-Jun-11

FUTCUR

65.103

65.235

0.202755633

30-Sep-11

FUTCUR

67.2921

67.4628

0.253670193

31-Dec-11

FUTCUR

70.4507

70.2921

-0.225121965

31-Mar-12

FUTCUR

69.2967

69.1593

-0.19827784

30-Jun-12

FUTCUR

70.8806

70.4966

-0.541756136

30-Sep-12

FUTCUR

67.7412

67.4908

-0.369642108

31-Dec-12

FUTCUR

72.2726

72.2704

-0.003044031

31-Mar-13

FUTCUR

69.7315

69.663

-0.09823394

30-Jun-13

FUTCUR

77.8525

77.5184

-0.429144857

30-Sep-13

FUTCUR

84.7725

84.7725

31-Dec-13

FUTCUR

84.8653

85.0387

0.204323793

TOTAL
AVERAGE
RETURN

-0.114849156

864.2127

863.2425

SD

0.258149766

VARIANCE

0.066641302

-1.378189868

Table 4.1.2
Interpretation
It can be seen from the above that the total risk associated with stock (standard deviation) of
EURO is 0.258149766, where as the average value is -0.114849156. Here it means that all risk
associated with this stock can be eliminated with proper diversification of the portfolio.

Return
0.3

0.2

0.1

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.1

Return

-0.2

-0.3

-0.4

-0.5

-0.6

Chart 4.1.2

Inference
From the graph, the beta is less than one and it shows that the less volatility of the price of the
stock in comparison with the market returns. Here it can be ascertained that there exist a
comparatively high difference between systematic risk and unsystematic risk.

JAPANESE YEN (JPY)

Trade Date

Instrument

Open Price

Close Price

31-Mar-11

FUTCUR

0.5536

0.5465

-1.282514451

30-Jun-11

FUTCUR

0.5624

0.5598

-0.46230441

30-Sep-11

FUTCUR

0.6467

0.6475

0.123704964

31-Dec-11

FUTCUR

0.7009

0.7012

0.042802112

31-Mar-12

FUTCUR

0.6315

0.6302

-0.205859066

30-Jun-12

FUTCUR

0.7161

0.7047

-1.591956431

30-Sep-12

FUTCUR

0.6755

0.6736

-0.281273131

31-Dec-12

FUTCUR

0.6366

0.6366

31-Mar-13

FUTCUR

0.5779

0.5767

-0.207648382

30-Jun-13

FUTCUR

0.6034

0.601

-0.397746105

30-Sep-13

FUTCUR

0.6379

0.6379

31-Dec-13

FUTCUR

0.587

0.587

Total
AVERAGE
RETURN

-0.355232908

7.5295

7.5027

SD

0.540921454

VARIANCE

0.292596019

Return

-4.2627949

Table 4.1.3
Interpretation
The total risk associated with stock (standard deviation) of JAPANESE YEN is 0.540921454,
where as the average value is -0.355232908. Here it means that all risk associated with this stock
can be eliminated with proper diversification of the portfolio.

Return
0.5

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.5

Return

-1

-1.5

-2

Chart 4.1.3
Inference
From the graph JAPANESE YEN has a less volatility of the price of the stock in comparison
with the market returns as the average return is less than one.

GREAT BRITAIN POUND (GBP)

Trade
Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

72.5928

72.5993

0.008954056

30-Jun-11

FUTCUR

72.6878

72.6155

-0.099466485

30-Sep-11

FUTCUR

77.3678

77.5276

0.206545876

31-Dec-11

FUTCUR

84.1083

83.8886

-0.261210844

31-Mar-12

FUTCUR

82.8555

82.8975

0.05069066

30-Jun-12

FUTCUR

88.4638

87.5275

-1.058399029

30-Sep-12

FUTCUR

85.0528

84.8631

-0.223037925

31-Dec-12

FUTCUR

88.3413

88.3408

-0.000565987

31-Mar-13

FUTCUR

82.666

82.5614

-0.126533278

30-Jun-13

FUTCUR

90.9606

90.6375

-0.355208739

30-Sep-13

FUTCUR

101.173

101.173

31-Dec-13

FUTCUR

101.729

101.854

0.122875483

TOTAL

1027.9987

1026.4858

-1.735356212

-0.144613018

SD

0.330250256

AVERAGE
RETURN

VARIANCE

0.109065232

Table 4.1.4
Interpretation
The total risk associated with stock (standard deviation) of GBP is 0.330250256, where as the
average value is -0.144613018. Here it means that all risk associated with this stock can be
eliminated with proper diversification of the portfolio.

Return
0.4

0.2

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.2
Return
-0.4

-0.6

-0.8

-1

-1.2

Chart 4.1.4

Inference
From the graph that the GBP has a less volatility of the price of the stock in comparison with the
market returns as the average return is less than one.

AUSTRALIAN DOLLAR (AUD)

Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

46.5158

46.6852

0.364177333

30-Jun-11

FUTCUR

47.6679

48.0327

0.765294884

30-Sep-11

FUTCUR

48.9031

48.5822

-0.65619562

31-Dec-11

FUTCUR

55.0146

55.2327

0.396440218

31-Mar-12

FUTCUR

53.9774

53.8495

-0.23695102

30-Jun-12

FUTCUR

57.285

56.9455

-0.592650781

30-Sep-12

FUTCUR

54.731

54.4772

-0.46372257

31-Dec-12

FUTCUR

56.7185

56.7174

-0.001939402

31-Mar-13

FUTCUR

56.6463

56.6178

-0.0503122

30-Jun-13

FUTCUR

55.0287

54.4287

-1.090340132

30-Sep-13

FUTCUR

58.3894

58.3894

31-Dec-13

FUTCUR

54.7564

54.8106

0.098983863

TOTAL

645.6341

644.7689

-1.467215428

-0.122267952

SD

0.517885504

VARIANCE

0.268205395

AVERAGE
RETURN

Table 4.1.5
Interpretation
It can be seen from the above that the total risk associated with stock (standard deviation) of
AUSTRALIAN DOLLAR is 0.517885504, where as the average value is -0.122267952. Here it
means that all risk associated with this stock can be eliminated with proper diversification of the
portfolio.

Return
1

0.5

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547

Return

-0.5

-1

-1.5

Chart 4.1.5
Inference
From the graph beta is less than one and it shows that the less volatility of the price of the stock
in comparison with the market returns. Here it can be ascertained that there exist a comparatively
high difference between systematic risk and unsystematic risk.

BAHRAINI DINAR (BHD)

Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

120.107

119.774

-0.277252783

30-Jun-11

FUTCUR

120.648

120.232

-0.344804721

30-Sep-11

FUTCUR

131.003

131.202

0.151904918

31-Dec-11

FUTCUR

144.23

143.534

-0.482562574

31-Mar-12

FUTCUR

137.476

136.896

-0.421891821

30-Jun-12

FUTCUR

150.013

147.814

-1.465872958

30-Sep-12

FUTCUR

138.384

137.011

-0.992166724

31-Dec-12

FUTCUR

144.964

144.987

0.015866008

31-Mar-13

FUTCUR

143.419

142.402

-0.709111066

30-Jun-13

FUTCUR

157.415

155.585

-1.16253216

30-Sep-13

FUTCUR

165.34

162.36

-1.80234668

31-Dec-13

FUTCUR

162.881

162.36

-0.319865423

Total

1715.88

1704.157

-7.810635984

-0.650886332

SD

0.594243192

VARIANCE

0.353124971

AVERAGE
RETURN

Table 4.1.6
Interpretation
As from the above it can be seen that the standard deviation (total risk associated with stock) of
BAHRAINI DINAR is 0.594243192, where as the average value is -0.650886332. Here it means
that all risk associated with this stock can be eliminated with proper diversification of the
portfolio.

Return
0.5

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.5
Return

-1

-1.5

-2

Chart 4.1.6

Inference
From the graph, the beta is less than one and it shows that the less volatility of the price of the
stock in comparison with the market returns. Here it can be ascertained that there exist a
comparatively high difference between systematic risk and unsystematic risk.

KUWAITI DINAR (KWD)

Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

163.391

162.921

-0.287653543

30-Jun-11

FUTCUR

165.244

164.513

-0.442376123

30-Sep-11

FUTCUR

178.628

179.16

0.297825649

31-Dec-11

FUTCUR

195.621

194.671

-0.485632933

31-Mar-12

FUTCUR

187.185

186.404

-0.417234287

30-Jun-12

FUTCUR

202.378

199.24

-1.550563796

30-Sep-12

FUTCUR

186.544

186.501

-0.023050862

31-Dec-12

FUTCUR

194.098

194.001

-0.049974755

31-Mar-13

FUTCUR

189.87

189.688

-0.095855059

30-Jun-13

FUTCUR

208.984

208.578

-0.194273246

30-Sep-13

FUTCUR

221.148

220.937

-0.095411218

31-Dec-13

FUTCUR

218.17

218.655

0.222303708

TOTAL

2311.261

2305.269

-3.121896464

-0.260158039

SD

0.474591506

VARIANCE

0.225237098

AVERAGE
RETURN

Table 4.1.7
Interpretation
The total risk associated with stock (standard deviation) of GBP is 0.474591506, where as the
average value is -0.260158039. Here it means that all risk associated with this stock can be
eliminated with proper diversification of the portfolio.

Return
0.5
0.3

0.22

-0.02 -0.05
-0.1
-0.1
40724
40908
41090
41274
41455
41639
-0.19
40633
40816
40999
41182
41364
41547
-0.29
-0.5

-0.44

-0.49

-0.42
Return

-1

-1.5

-1.55

-2

Chart 4.1.7
Inference
It can be seen from the above graph that the KUWAITI DINAR (KWD) has a less volatility of
the price of the stock in comparison with the market returns as the average return is less than
one.

OMANI RIAL (OMR)

TRADE
DATE

INSTRUMENT

OPEN PRICE

CLOSE
PRICE

RETURN

31-MAR-11

FUTCUR

117.562

117.298

-0.224562359

30-JUN-11

FUTCUR

118.129

117.722

-0.344538598

30-SEP-11

FUTCUR

128.211

128.507

0.230869426

31-DEC-11

FUTCUR

140.538

141.186

0.461085258

31-MAR-12

FUTCUR

134.923

134.29

-0.469156482

30-JUN-12

FUTCUR

147.314

145.128

-1.483905128

30-SEP-12

FUTCUR

135.922

135.943

0.015450038

31-DEC-12

FUTCUR

141.663

142.049

0.272477641

31-MAR-13

FUTCUR

140.933

140.823

-0.078051273

30-JUN-13

FUTCUR

154.598

154.26

-0.218631548

30-SEP-13

FUTCUR

162.436

162.419

-0.01046566

31-DEC-13

FUTCUR

159.978

160.054

0.047506532

TOTAL

1682.207

1679.679

-1.801922152

-0.150160179

SD

0.497016701

VARIANCE

0.247025601

AVERAGE
RETURN

Table 4.1.8
Interpretation
The total risk associated with stock (standard deviation) of GBP is 0.497016701, where as the
average value is -0.150160179. Here it means that all risk associated with this stock can be
eliminated with proper diversification of the portfolio.

RETURN
1

0.5

0.46
0.27

0.23

0.05
-0.01
-0.08
40724 40908 41090 41274 41455 41639
-0.22
40633 40816 40999 41182 41364 -0.22
41547
-0.34
-0.47
-0.5
0

0.02

RETURN
Linear (RETURN)

-1

-1.5

-1.48

-2

Chart 4.1.8
Inference
It can be seen from the above graph that the OMANI RIAL (OMR) has a less volatility of the
price of the stock in comparison with the market returns as the average return is less than one.

GERMAN MARK* (DEM)

Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

32.6992

32.6424

-0.173704555

30-Jun-11

FUTCUR

33.2867

33.3541

0.202483274

30-Sep-11

FUTCUR

34.4059

34.4932

0.253735551

31-Dec-11

FUTCUR

36.0209

35.9398

-0.225147067

31-Mar-12

FUTCUR

35.4308

35.3606

-0.198132698

30-Jun-12

FUTCUR

36.2407

36.0443

-0.541932137

30-Sep-12

FUTCUR

34.6356

34.5075

-0.369850674

31-Dec-12

FUTCUR

36.9524

36.9513

-0.002976803

31-Mar-13

FUTCUR

35.6532

35.6181

-0.098448386

30-Jun-13

FUTCUR

39.8053

39.6345

-0.429088589

30-Sep-13

FUTCUR

43.3435

43.3435

31-Dec-13

FUTCUR

43.3909

43.4796

0.204420743

TOTAL

441.8651

441.3689

-1.378641341

-0.114886778

SD

0.258175478

AVERAGE
RETURN

VARIANCE

0.066654577

Table 4.1.9
Interpretation
As from the above it can be seen that the standard deviation (total risk associated with stock) of
BAHRAINI DINAR is 0.594243192, where as the average value is -0.650886332. Here it means
that all risk associated with this stock can be eliminated with proper diversification of the
portfolio.

Return
0.3

0.2

0.1

0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.1

Return

-0.2

-0.3

-0.4

-0.5

-0.6

Chart 4.1.9
Inference
From the graph the beta is less than one and it shows that the less volatility of the price of the
stock in comparison with the market returns. Here it can be ascertained that there exist a
comparatively high difference between systematic risk and unsystematic risk.

SWISS FRANC (CHF)

Trade Date

Instrument

Open Price

Close Price

Return

31-Mar-11

FUTCUR

49.4206

49.132

-0.58396701

30-Jun-11

FUTCUR

54.577

54.417

-0.293163787

30-Sep-11

FUTCUR

55.157

55.2931

0.246750186

31-Dec-11

FUTCUR

57.8007

57.7577

-0.074393563

31-Mar-12

FUTCUR

57.4894

57.403

-0.150288575

30-Jun-12

FUTCUR

59.011

58.6685

-0.580400264

30-Sep-12

FUTCUR

55.9984

55.8475

-0.269471985

31-Dec-12

FUTCUR

59.842

59.8394

-0.004344775

31-Mar-13

FUTCUR

57.2939

57.208

-0.149928701

30-Jun-13

FUTCUR

63.1741

63.0289

-0.229841027

30-Sep-13

FUTCUR

69.1686

69.1686

31-Dec-13

FUTCUR

69.2275

69.3697

0.2054097

TOTAL

708.1602

707.1334

-1.8836398

-0.156969983

SD

0.260644556

VARIANCE

0.067935585

AVERAGE
RETURN

Table 4.1.10
Interpretation
As from the above it can be seen that the standard deviation (total risk associated with stock) of
SWISS FRANC (CHF) is 0.260644556, where as the average value is -0.156969983. Here it
means that all risk associated with this stock can be eliminated with proper diversification of the
portfolio.

Return
0.3
0.2
0.1
0
40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
-0.1
Return
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7

Chart 4.1.10

Inference
From the graph the beta is less than one and it shows that the less volatility of the price of the
stock in comparison with the market returns. Here it can be ascertained that there exist a
comparatively high difference between systematic risk and unsystematic risk.

CURRENCIES

STANDARD
DEVIATION

AVERAGE
RETURN

VARIANCE

0.44145

-0.2425

0.19488

0.25815

-0.1148

0.06664

0.54092

-0.3552

0.2926

0.33025

-0.1446

0.10907

0.51789

-0.1223

0.26821

0.59424

-0.6509

0.35312

0.47459

-0.2602

0.22524

0.49702

-0.1502

0.24703

0.25818

-0.1149

0.066655

0.26064

-0.157

0.06794

US DOLLAR (USD)

EURO (EUR)
JAPANESE YEN (JPY)
GREAT BRITAIN POUND (GBP)
AUSTRALIAN DOLLAR (AUD)

BAHRAINI DINAR (BHD)

KUWAITI DINAR (KWD)

OMANI RIAL (OMR)
GERMAN MARK* (DEM)
SWISS FRANC (CHF)

Table 4.1.11

Interpretation
The above table shows that the standard deviation of BAHRAINI DINAR (BHD) is the highest
among other currencies and the value of which is -0.1148. The standard deviation of JAPANESE
YEN is -0.1149 and that of AUSTRALIAN DOLLAR is 0.51789. The EURO has the lowest
standard deviation with the value of 0.25815.
The average return of EURO is the highest among other currencies and the value of which is
0.59424. The average return of GERMAN MARK* (DEM) is 0.54092 and that of SWISS
FRANC (CHF) is -0.157. The BAHRAINI DINAR (BHD) has the lowest average return with the
value of -0.6509.
The the variance of BAHRAINI DINAR (BHD) is the highest among other currencies and the
value of which is 0.35312. The variance of JAPANESE YEN is 0.2926 and that of
AUSTRALIAN DOLLAR is 0.26821. The EURO has the lowest variance with the value of
0.06664.

standard deviation
0.6
0.5
0.4
0.3
0.2
0.1

M
AR
K*

AR

G
ER
M
AN

D
IN
W
AI
TI
KU

AU

ST
RA
LI
AN

(D
EM
)

(K
W
D
)

D
)
(A
U
D
O
LL
AR

YE
N
ES
E
JA
PA
N

D
O
LL
AR

(U

SD
)

(JP
Y)

Chart 4.1.11
Inference
The chart shows that the standard deviation of BAHRAINI DINAR (BHD) is the highest among
other currencies. The EURO has the lowest standard deviation.

-0.2

(C
H
F)
C

(K
W
D
)

FR
AN

AR

SW
IS
S

W
AI
TI
KU

BR
ITA
IN
G
RE
AT

-0.1

D
IN

N
PO
U

D
O
LL
A

(U

SD
)

(G
BP
)

average return

average return

-0.3

-0.4

-0.5

-0.6

-0.7

Chart 4.1.12
Inference
The chart shows that the average return of EURO is the highest among other currencies. The
BAHRAINI DINAR (BHD) has the lowest average return.

variance
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05

(D
EM
)

G
ER
M
AN

AR
D
IN
W
AI
TI
KU

M
AR
K*

(K
W
D
)

D
)
(A
U

AU

ST
RA
LI
AN

D
O
LL
AR

YE
N
ES
E
JA
PA
N

D
O
LL
AR

(U

SD
)

(JP
Y)

Chart 4.1.13
Inference
The chart shows that the variance of BAHRAINI DINAR (BHD) is the highest among other
currencies. The EURO has the lowest variance.

4.2 MOVING AVERAGE

A moving Average is a moving mean of data. In other word, moving average perform a
mathematical function where data. In other words, Moving Average perform a mathematical
function where data within selected period is averaged and the average moves as a new data is
included in the calculation while older data is removed or lessened. Moving averages essentially
smooth data by removing noise. This smoothing of data makes moving averages popular tools
in identifying price trends and trend reversals. The difference between the four main types of
moving averages (simple, Exponential, Volume adjusted and weighted) lies in the way that they
are calculated and whether they look at all the data available or only the data within selected
period. This means that each type of moving average has its own characteristics, for example
how quickly each will respond to change in the underlying price.

US DOLLAR (USD)

3 period total

3 period moving
average

49.6167

140.2369

46.7456

31-Dec-11

54.2859

149.2374

49.7958

31-Mar-12

51.8521

155.7547

51.9182

30-Jun-12

56.0542

162.1922

54.0690

30-Sep-12

52.5

160.4063

53.4687

31-Dec-12

54.689

163.2432

59.4144

31-Mar-13

54.355

161.544

53.848

30-Jun-13

59.597

168.641

56.2136

30-Sep-13

62.702

176.659

58.8846

31-Dec-13

61.7744

189.0734

61.3578

Trade Date

Close Price

31-Mar-11

45.2854

30-Jun-11

45.3348

30-Sep-11

Table 4.2.1
Interpretation
The above table as well as the chart shows that the volatility of US DOLLAR show an upward
volatility as the moving average increases. It can be seen from the above that the moving average
as on 30-Sep-11was 46.7456 and the same had been increased to 49.7958 on 31-Dec-11. There
after it had been increased to 61.3578 on 31-Dec-13.

3 Period Moving Average

70
60
50
40
30
20
10
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.1
Inference
The moving average shows an increase it can be concluded from the above that the US
DOLLAR is more volatile.

EURO (EUR)
3 period total

3 period moving
average

67.4628

196.5407

65.5136

31-Dec-11

70.2921

202.9899

67.6633

31-Mar-12

69.1593

206.9142

68.9714

30-Jun-12

70.4966

209.998

69.9826

30-Sep-12

67.4908

207.1467

69.0489

31-Dec-12

72.2704

210.2578

70.0859

31-Mar-13

69.663

209.4242

69.8080

30-Jun-13

77.5184

219.4518

73.1506

30-Sep-13

84.7725

231.9539

77.3179

31-Dec-13

85.0387

247.3296

82.4432

Trade Date

Close Price

31-Mar-11

63.8429

30-Jun-11

65.235

30-Sep-11

Table 4.2.2
Interpretation
The above table shows that the volatility of EURO show an upward volatility as the moving
average increases. It can be seen from the above that the moving average as on 30-Sep-11was
65.5136and the same had been increased to 67.6633on 31-Dec-11. There after it had been
increased to 82.4432 on 31-Dec-13.

3 Period Moving Average

90
80
70
60
50
40
30
20
10
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.2

Inference
The moving average shows an increase it can be concluded from the above that the EURO is
more volatile.

JAPANESE YEN (JPY)

3 period
total

3 period
moving
average

0.6475

1.7538

0.5846

31-Dec-11

0.7012

1.9085

0.6362

31-Mar-12

0.6302

1.9789

0.6596

30-Jun-12

0.7047

2.0361

0.6787

30-Sep-12

0.6736

2.0085

0.6695

31-Dec-12

0.6366

2.0149

0.6716

31-Mar-13

0.5767

1.8869

0.6289

30-Jun-13

0.601

1.8143

0.6048

30-Sep-13

0.6379

1.8156

0.6052

31-Dec-13

0.587

1.8259

0.6086

Trade Date

Close Price

31-Mar-11

0.5465

30-Jun-11

0.5598

30-Sep-11

Table 4.2.3
Interpretation
The above table shows that the volatility of JAPANESE YEN is highly volatile. It can be seen
from the above that the moving average as on 30-Sep-11was 0.5846 and the same had been
increased to 0.6362on 31-Dec-11. There after it had been increased to 0.6086 on 31-Dec-13.

3 Period Moving Average

0.7
0.68
0.66
0.64
0.62
0.6
0.58
0.56
0.54
0.52

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.3
Inference
The moving average shows an increase it can be concluded from the above that the JAPANESE
YEN is volatile.

GREAT BRITAIN POUND (GBP)

Trade Date

Close Price
3 period total

3 period
moving
average

31-Mar-11

72.5993

30-Jun-11

72.6155

30-Sep-11

77.5276

222.7424

74.2475

31-Dec-11

83.8886

234.0417

78.0139

31-Mar-12

82.8975

244.3137

81.4379

30-Jun-12

87.5275

254.3136

84.7712

30-Sep-12

84.8631

255.2881

85.0960

31-Dec-12

88.3408

260.7314

86.9104

31-Mar-13

82.5614

255.7653

85.2551

30-Jun-13

90.6375

261.5397

87.1799

30-Sep-13

101.173

274.3719

91.4573

31-Dec-13

101.854

293.6645

97.8882

Table 4.2.4
Interpretation
The above table shows that the volatility of GREAT BRITAIN POUND show an upward
volatility as the moving average increases from 74.2475 to 97.8882. It can be seen from the
above that the moving average as on 30-Sep-11was 74.2475and the same had been increased to
78.0139 on 31-Dec-11. There after it had been increased to 97.8882on 31-Dec-13.

3 Period Moving Average

120

100

80

60

40

20

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.4

Inference
The moving average shows an increase it can be concluded from the above that the GREAT
BRITAIN POUND is more volatile.

AUSTRALIAN DOLLAR (AUD)

Trade Date

3 period total

3 period
moving
average

Close Price

31-Mar-11

46.6852

30-Jun-11

48.0327

30-Sep-11

48.5822

143.3001

47.7667

31-Dec-11

55.2327

151.8476

50.6159

31-Mar-12

53.8495

157.6644

52.5548

30-Jun-12

56.9455

166.0277

55.3425

30-Sep-12

54.4772

165.2722

55.0908

31-Dec-12

56.7174

168.1401

56.0467

31-Mar-13

56.6178

167.8124

55.9374

30-Jun-13

54.4287

167.7639

55.9213

30-Sep-13

58.3894

169.4359

56.4786

31-Dec-13

54.8106

167.6287

55.8762

Table 4.2.5

Interpretation
The above table shows that the volatility of AUSTRALIAN DOLLAR as the moving average
increases from 47.7667 to 55.8762. It can be seen from the above that the moving average as on
30-Sep-11 was 47.7667 and the same had been increased to 50.6159on 31-Dec-11. There after
also the moving average was continuously increasing.

3 Period Moving Average

58
56
54
52
50
48
46
44
42

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.5

Inference
The chart shows that the volatility of AUSTRALIAN DOLLAR shows an upward volatility as
the moving average.

BAHRAINI DINAR (BHD)

Trade Date

Close Price

3 period total

3 period moving
average

31-Mar-11

119.774

30-Jun-11

120.232

30-Sep-11

131.202

371.208

123.736

31-Dec-11

143.534

394.968

131.656

31-Mar-12

136.896

411.632

137.2106

30-Jun-12

147.814

428.2114

142.748

30-Sep-12

137.011

421.721

140.5736

31-Dec-12

144.987

429.812

143.2707

31-Mar-13

142.402

424.4

141.4667

30-Jun-13

155.585

442.974

147.658

30-Sep-13

162.36

460.347

153.449

31-Dec-13

162.36

480.305

160.1017

Table 4.2.6

Interpretation
The above table as well as the chart shows that the volatility of BAHRAINI DINAR show an
upward volatility as the moving average increases. It can be seen from the above that the moving
average as on 30-Sep-11was 123.736 and the same had been increased to 131.656 on 31-Dec-11.
There after it had been increased to 160.1017 on 31-Dec-13.

3 Period Moving Average

180
160
140
120
100
80
60
40
20
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.6

Inference
The moving average shows an increase it can be concluded from the above that the BAHRAINI
DINAR is more volatile.

KUWAITI DINAR (KWD)

3 period total

3 period
moving average

179.16

506.594

168.8647

31-Dec-11

194.671

538.344

179.448

31-Mar-12

186.404

560.235

186.745

30-Jun-12

199.24

580.315

193.4383

30-Sep-12

186.501

572.145

190.715

31-Dec-12

194.001

579.742

193.2473

31-Mar-13

189.688

570.19

190.0633

30-Jun-13

208.578

592.267

197.4223

30-Sep-13

220.937

619.195

206.3983

31-Dec-13

218.655

648.17

216.0566

Trade Date

Close Price

31-Mar-11

162.921

30-Jun-11

164.513

30-Sep-11

Table 4.2.7

Interpretation
The above table as well as the chart shows that the volatility of KUWAITI DINAR show an
upward volatility as the moving average increases. It can be seen from the above that the moving
average as on 30-Sep-11was 168.8647and the same had been increased to 179.448 on 31-Dec-11.
There after it had been increased to 216.0566on 31-Dec-13.

3 Period Moving Average

250

200

150

100

50

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.7

Inference
The moving average shows an increase it can be concluded from the above that the KUWAITI
DINAR is more volatile.

OMANI RIAL (OMR)

3 period total

3 period moving
average

34.4932

100.4897

33.4966

31-Dec-11

35.9398

103.7871

34.5957

31-Mar-12

35.3606

105.7936

35.2645

30-Jun-12

36.0443

107.3447

35.7815

30-Sep-12

34.5075

105.9124

35.3041

31-Dec-12

36.9513

107.5031

35.8344

31-Mar-13

35.6181

107.0769

35.6923

30-Jun-13

39.6345

112.2039

37.4013

30-Sep-13

43.3435

118.5961

39.5320

31-Dec-13

43.4796

126.4576

42.1525

Trade Date

Close Price

31-Mar-11

32.6424

30-Jun-11

33.3541

30-Sep-11

Table 4.2.8
Interpretation
It can be seen from the above that the volatility of OMNI RIAL show an upward volatility as the
moving average increases. It can be seen from the above that the moving average as on 30-Sep11 was 33.4966 and the same had been increased to 34.5957on 31-Dec-11. There after the
increase was up to 42.1525 on 31-Dec-13.

3 Period Moving Average

45
40
35
30
25
20
15
10
5
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.8
Inference
The moving average shows an increase it can be concluded from the above that the OMNI RIAL
is more volatile.

GERMAN MARK* (DEM)

3 period moving
average

Trade Date

Close Price

31-Mar-11

117.298

30-Jun-11

117.722

30-Sep-11

128.507

363.527

121.1757

31-Dec-11

141.186

387.415

129.1383

31-Mar-12

134.29

403.983

134.661

30-Jun-12

145.128

420.604

140.2013

30-Sep-12

135.943

415.361

138.4537

31-Dec-12

142.049

423.12

141.04

31-Mar-13

140.823

418.815

139.605

30-Jun-13

154.26

437.132

145.7107

30-Sep-13

162.419

457.502

152.5007

31-Dec-13

160.054

476.733

158.911

3 period total

Table 4.2.9

Interpretation
It can be seen from the above that the volatility of GERMAN MARK show an upward volatility
as the moving average increases. It can be seen from the above that the moving average as on 30Sep-11 was 121.1757 and the same had been increased to 129.1383 on 31-Dec-11. There after
the increase was up to 158.911 on 31-Dec-13.

3 Period Moving Average

180
160
140
120
100
80
60
40
20
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.9

Inference
The moving average shows an increase it can be concluded from the above that the GERMAN
MARK is more volatile.

SWISS FRANC (CHF)

Trade Date

3 period total

3 period
moving
average

Close Price

31-Mar-11

49.132

30-Jun-11

54.417

30-Sep-11

55.2931

158.8421

52.9474

31-Dec-11

57.7577

167.4678

55.8226

31-Mar-12

57.403

170.4538

56.8179

30-Jun-12

58.6685

173.8292

57.9430

30-Sep-12

55.8475

171.919

57.3063

31-Dec-12

59.8394

174.3554

58.1184

31-Mar-13

57.208

172.8949

57.6316

30-Jun-13

63.0289

180.0763

60.0254

30-Sep-13

69.1686

189.4055

63.1352

31-Dec-13

69.3697

201.5672

67.1891

Table 4.2.10

Interpretation
It can be seen from the above that the volatility of SWISS FRANC show an upward volatility as
the moving average increases. It can be seen from the above that the moving average as on 30Sep-11 was 52.9474 and the same had been increased to 55.8226 on 31-Dec-11. There after the
increase was up to 67.1891on 31-Dec-13.

3 Period Moving Average

80
70
60
50
40
30
20
10
0

40724
40908
41090
41274
41455
41639
40633
40816
40999
41182
41364
41547
3 Period Moving Average

Chart 4.2.10

Inference
The moving average shows an increase it can be concluded from the above that the SWISS
FRANC is more volatile.

4.3 CO-EFFICIENT OF VARIATION

US DOLLAR (USD)
Trade Date

Close Price(X)

31-Mar-11

45.2854

2050.767

30-Jun-11

45.3348

2055.244

30-Sep-11

49.6167

2461.817

31-Dec-11

54.2859

2946.959

31-Mar-12

51.8521

2688.64

30-Jun-12

56.0542

3142.073

30-Sep-12

52.5

2756.25

31-Dec-12

54.689

2990.887

31-Mar-13

54.355

2954.466

30-Jun-13

59.597

3551.802

30-Sep-13

62.702

3931.541

31-Dec-13

61.7744

3816.076

Table 4.3.1

X
N

X 2 ( 2 ) = 5.39656895:
N

SD =
Coefficient of variation=

Mean=

SD
100
Mean
= 10.4377

Interpretation

x
n

= 54.00375

X2

The co efficient of variation of US DOLLAR is 10.4377. A high value of co efficient of

variation means that the currency is more volatile.

EURO (EUR)

Trade Date

Close Price(X)

31-Mar-11

63.8429

4075.916

30-Jun-11

65.235

4255.605

30-Sep-11

67.4628

4551.229

31-Dec-11

70.2921

4940.979

31-Mar-12

69.1593

4783.009

30-Jun-12

70.4966

4969.771

30-Sep-12

67.4908

4555.008

31-Dec-12

72.2704

5223.011

31-Mar-13

69.663

4852.934

30-Jun-13

77.5184

6009.102

30-Sep-13

84.7725

7186.377

31-Dec-13

85.0387

7231.58

Table 4.3.2

X^2

X
X
N

( 2 )

= 6.977583229:

Mean=

x
n

= 71.936875

SD =

Coefficient of variation=

SD
100
Mean
= 9.6996

Interpretation
It can be seen that the co efficient of variation of EURO is 9.6996

JAPANESE YEN (JPY)

Trade Date

Close Price(X)

31-Mar-11

0.5465

0.298662

30-Jun-11

0.5598

0.313376

30-Sep-11

0.6475

0.419256

31-Dec-11

0.7012

0.491681

31-Mar-12

0.6302

0.397152

30-Jun-12

0.7047

0.496602

30-Sep-12

0.6736

0.453737

31-Dec-12

0.6366

0.40526

31-Mar-13

0.5767

0.332583

30-Jun-13

0.601

0.361201

X2

30-Sep-13

0.6379

0.406916

31-Dec-13

0.587

0.344569

Table 4.3.3

X
N

X 2 ( 2 ) = 0.052327919:
N

SD =
Coefficient of variation=

Mean=

x
n

= 0.625225

SD
100
Mean
= 8.3695

Interpretation
The co efficient of variation of JAPANESE YEN is 8.3695.

GREAT BRITAIN POUND (GBP)

Trade Date

Close Price(X)
X2

31-Mar-11

72.5993

5270.658

30-Jun-11

72.6155

5273.011

30-Sep-11

77.5276

6010.529

31-Dec-11

83.8886

7037.297

31-Mar-12

82.8975

6871.996

30-Jun-12

87.5275

7661.063

30-Sep-12

84.8631

7201.746

31-Dec-12

88.3408

7804.097

31-Mar-13

82.5614

6816.385

30-Jun-13

90.6375

8215.156

30-Sep-13

101.173

10235.98

31-Dec-13

101.854

10374.24

Table 4.3.4

X
N

X 2 ( 2 ) = 9.371424533:
N

SD =
Coefficient of variation=

Mean=

x
n

= 85.54048333

SD
100
Mean
= 10.9555

Interpretation
The co efficient of variation of GREAT BRITAIN POUND is 10.9555. A high value of co
efficient of variation means that the currency is more volatile.

AUSTRALIAN DOLLAR (AUD)

Trade Date

Close Price(X)
X2

31-Mar-11

46.6852

2179.508

30-Jun-11

48.0327

2307.14

30-Sep-11

48.5822

2360.23

31-Dec-11

55.2327

3050.651

31-Mar-12

53.8495

2899.769

30-Jun-12

56.9455

3242.79

30-Sep-12

54.4772

2967.765

31-Dec-12

56.7174

3216.863

31-Mar-13

56.6178

3205.575

30-Jun-13

54.4287

2962.483

30-Sep-13

58.3894

3409.322

31-Dec-13

54.8106

3004.202

Table 4.3.5

X
X
N

( 2 )

= 3.842208671:

Mean=

x
n

= 53.73074167

SD =

Coefficient of variation=

SD
100
Mean
= 7.1509

Interpretation
The co efficient of variation of AUSTRALIAN DOLLAR is 7.1509. A high value of co efficient
of variation means that the currency is more volatile.

BAHRAINI DINAR (BHD)

Trade Date

Close Price(X)
X2

31-Mar-11

119.774

14345.81

30-Jun-11

120.232

14455.73

30-Sep-11

131.202

17213.96

31-Dec-11

143.534

20602.01

31-Mar-12

136.896

18740.51

30-Jun-12

147.814

21848.98

30-Sep-12

137.011

18772.01

31-Dec-12

144.987

21021.23

31-Mar-13

142.402

20278.33

30-Jun-13

155.585

24206.69

30-Sep-13

162.36

26360.77

31-Dec-13

162.36

26360.77

Table 4.3.6

X
X
N

( 2 )

= 14.12357004:

Mean=

SD =

Coefficient of variation=

SD
100
Mean
= 9.9453

x
n

= 142.0130833

Interpretation
The co efficient of variation of BAHRAINI DINAR is 9.9453.

KUWAITI DINAR (KWD)

Trade Date

Close Price(X)
X^2

31-Mar-11

162.921

26543.25

30-Jun-11

164.513

27064.53

30-Sep-11

179.16

32098.31

31-Dec-11

194.671

37896.8

31-Mar-12

186.404

34746.45

30-Jun-12

199.24

39696.58

30-Sep-12

186.501

34782.62

31-Dec-12

194.001

37636.39

31-Mar-13

189.688

35981.54

30-Jun-13

208.578

43504.78

30-Sep-13

220.937

48813.16

31-Dec-13

218.655

47810.01

Table 4.3.7

X
N

X 2 ( 2 ) = 18.38719736:
N

SD =

Mean=

x
n

= 192.10575

Coefficient of variation=

SD
100
Mean
= 9.5714

Interpretation
As from the above it can be seen that the co efficient of variation of BAHRAINI DINAR is
9.5714.

OMNI RIAL (OMR)

Trade Date

Close Price(X)

31-Mar-11

117.298

13758.82

30-Jun-11

117.722

13858.47

30-Sep-11

128.507

16514.05

31-Dec-11

141.186

19933.49

31-Mar-12

134.29

18033.8

30-Jun-12

145.128

21062.14

30-Sep-12

135.943

18480.5

31-Dec-12

142.049

20177.92

31-Mar-13

140.823

19831.12

30-Jun-13

154.26

23796.15

30-Sep-13

162.419

26379.93

31-Dec-13

160.054

25617.28

Table 4.3.8

X2

X
X
N

( 2 )

= 14.56501002:

Mean=

x
n

= 139.97325

SD =

Coefficient of variation=

SD
100
Mean
= 10.4056

Interpretation
As from the above it can be seen that the co efficient of variation of OMANI RIAL is 10.4056.

GERMAN MARK* (DEM)

Trade Date

Close Price(X)
X2

31-Mar-11

32.6424

1065.526

30-Jun-11

33.3541

1112.496

30-Sep-11

34.4932

1189.781

31-Dec-11

35.9398

1291.669

31-Mar-12

35.3606

1250.372

30-Jun-12

36.0443

1299.192

30-Sep-12

34.5075

1190.768

31-Dec-12

36.9513

1365.399

31-Mar-13

35.6181

1268.649

30-Jun-13

39.6345

1570.894

30-Sep-13

43.3435

1878.659

31-Dec-13

43.4796

1890.476

Table 4.3.9

X
X

( 2 )

= 3.567578926:

Mean=

x
n

= 36.78074167

SD =

Coefficient of variation=

SD
100
Mean
= 9.6996

Interpretation
As from the above it can be seen that the co efficient of variation of GERMAN MARK is
9.6996.

SWISS FRANC (CHF)

Trade Date

Close Price(X)
X2

31-Mar-11

49.132

2413.953

30-Jun-11

54.417

2961.21

30-Sep-11

55.2931

3057.327

31-Dec-11

57.7577

3335.952

31-Mar-12

57.403

3295.104

30-Jun-12

58.6685

3441.993

30-Sep-12

55.8475

3118.943

31-Dec-12

59.8394

3580.754

31-Mar-13

57.208

3272.755

30-Jun-13

63.0289

3972.642

30-Sep-13

69.1686

4784.295

31-Dec-13

69.3697

4812.155

Table 4.3.10

X
N

X 2 ( 2 ) = 5.856470393:
N

SD =
Coefficient of variation=

Mean=

x
n

= 58.92778333

SD
100
Mean
= 9.9384

Interpretation
As from the above it can be seen that the co efficient of variation of SWISS FRANC is 9.9384.

CURRENCIES
US DOLLAR (USD)

COEFFICIENT OF VARIATION
10.4377

9.6996

EURO (EUR)

8.3695

JAPANESE YEN (JPY)

GREAT BRITAIN POUND (GBP)

10.9555
7.1509

AUSTRALIAN DOLLAR (AUD)

9.9453

BAHRAINI DINAR (BHD)

9.5714

KUWAITI DINAR (KWD)

10.4056

OMANI RIAL (OMR)

9.6996

GERMAN MARK* (DEM)

9.9384

SWISS FRANC (CHF)

Table 4.3.11

Interpretation
The analysis shows that the co- efficient of variation of GREAT BRITAIN POUND is 10.9555,
the greatest and the co- efficient of variation of AUSTRALIAN DOLLAR is 7.1509, the lowest.

12
10
8
6
4
2

(D
EM
)
M
AR
K*

(K
W
D
)
AR
D
IN

W
AI
TI
KU

G
ER
M
AN

D
)
(A
U
D
O
LL
AR

AU

ST
RA
LI
AN

ES
E
JA
PA
N

D
O
LL
A

YE
N

(U

SD
)

(JP
Y)

Chart 4.3.1

Inference
The analysis shows that the co- efficient of variation of GREAT BRITAIN POUND is the
greatest and thus it can be interpreted that the GREAT BRITAIN POUND is more volatile and
the co- efficient of variation of AUSTRALIAN DOLLAR is the lowest and thus the same is less
volatile than other currency.

FINDINGS
The major findings of the study are the following.

 It was found that the co- efficient of variation of GREAT BRITAIN POUND is the
greatest and thus it can be interpreted that the GREAT BRITAIN POUND is more
volatile and the co- efficient of variation of AUSTRALIAN DOLLAR is the lowest and
thus the same is less volatile than other currency.
The moving average analysis shows that the moving average of all the currencies under
study are shows an upward trend.
It was found that the standard deviation of BAHRAINI DINAR (BHD) is the highest
among other currencies and the value of which is -0.1148.. The EURO has the lowest
standard deviation with the value of 0.25815.
The average return of EURO is the highest among other currencies and the value of
which is 0.59424. The BAHRAINI DINAR (BHD) has the lowest average return with the
value of -0.6509.
The variance of BAHRAINI DINAR (BHD) is the highest among other currencies and
the value of which is 0.35312. The EURO has the lowest variance with the value of
0.06664.

SUGGESTIONS
An investor who is looking to make decision should depend on the analysis of each
currencies rather than going with pure market information. He should consider the trend

shown by the currencies for last few years. Study of risk and return will help the investor
to take appropriate decision regarding his investment.
The moving average of the currency is technical indicators that follow the movement of
the currency. It shows a sustained movement upwards or downwards of the currency. The
moving average of the currencies shows the trend followed by each currency against
Indian rupee during the period.
The return from the currencies is the performance measure used to evaluate the efficiency
of an investment. The return from the currencies is different and EURO (EUR) has the
highest return value compared to all other currencies.
The co-efficient of variation of the currencies is used to know about the degree of
variation. The coefficient of variation is used to determine how much volatility (risk) can
be assumed in comparison to the amount of return that can be expected from your
investment. The lower the ratio of standard deviation to mean return, the better your riskreturn trade-off. GREAT BRITAIN POUND (GBP) has the highest co-efficient of
variation of all the currencies.
Higher volatility means that a security's value can potentially be spread out over a larger
range of values. A lower volatility means that a security's value does not fluctuate
dramatically. Higher the volatility, the riskier the trading of the currency. BAHRAINI
DINAR (BHD) has the highest volatility and it is riskier in trading. EURO (EUR) has the
least volatility and it has the less risk in trading.

CONCLUSION

The study carried out on risk and return associated with the Foreign Exchange market. 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. In India US Dollar, Euro, British Pound,
and Japanese Yen are the currencies which have been traded mostly. US dollar and euro are the
most preferred currency in response from the investor. 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. In the case of developing countries these results address a gap in the existing
literature on forecasting exchange rate volatility using daily data. To the best of our knowledge,
there are no existing studies of developing countries data that focus on the forecasting
performance of models that capture daily exchange rate volatility. Further work along these lines
may be called for, to check that results are not specific to the particular data set and/or the
specification in the volatility process. For instance, it would be of great interest to check whether
our results for four developing countries can be generalized for a wider range of other
developing countries, although at present our analysis focused on countries that have not been
subject to a discrete change in their exchange rate regime during the sample. This study
concluded that the investors in forex market try to study volatility in currencies and take logical
decision under the risk and return analysis.

BIBLIOGRAPHY
Avandi.V.A, (fifth edition), Investment Management, Himalaya Publication House (2003)

Elton, Edwin.J and Gruber, Martin J, (fifth edition), Modern Portfolio Theory and Investment
Analysis
Prasanna Chandra, (second edition), Investment Analysis and Portfolio Management TATA
McGraw Hill Publishing Company (2005)
Raja Rajan in the article Chennai Investors is Conservative, 1997
S Kevin Security Analysis and Portfolio Management, PHI Learning Private Limited 2010
Singh, Preethi (tenth edition), Investment Management, Himalaya Publication 2002
Stephen. J, The institute of international auditors UK and Ireland University Edition. Managing
currency risk: Using Financial derivatives, 2003.
Syama Sunder in the article Growth Prospects of Mutual Funds and Investor Perception with
the special reference to Kothari Pioneer Mutual Funds, 1998
Valdez. S. 5th edition. An introduction to global financial markets, Palgrave Macmillan, 2007

ABBREVIATIONS
AUD: Australian Dollar
AUM: Assets under Management

BHD: Bahraini Dinar

CDSL: Central Depository Services (India) Ltd
CHF: Swiss Franc
CME: Chicago Mercantile Exchange
DEM: German Mark
EUR: Euro
GBP: Great Britain Pound
JPY: Japanese Yen
KWD: Kuwaiti Dinar
NCDEX: National Commodities Derivative Exchange Ltd
NMCEIL: National Multi Commodity Exchange of India Ltd
NSDL: National Securities Depository Ltd
OMR: Omani Rial
USD: US Dollar

APPENDIX
US DOLLAR (USD)
Trade

Instrumen

Open

High Price

Low Price

Average

Close

Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

Price
45.3884
45.4916
49.4995
54.5234
52.0992
56.8925
52.4862
54.6890
54.4017
59.6964
62.7020
61.7530

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

45.3884
45.4916
49.6167
54.5234
52.0992
56.8925
52.5000
54.6890
54.4017
59.6964
62.7020
61.7744

45.2854
43.3348
49.4995
54.2859
51.8521
56.0542
52.4862
54.6890
54.3550
595970
62.7020
61.7530

Open
Price
63.9540
65.1030
67.2921
70.4507
69.2967
70.8806
67.7412
72.2726
69.7315
77.8525
84.7725
84.8653

High Price

Low Price

63.9540
65.2350
67.4628
70.4507
69.2967
70.8806
67.7412
72.2726
69.7315
77.8525
84.7725
85.0387

63.8429
65.1030
67.2921
70.2921
69.1593
70.4966
67.4908
72.2704
69.6630
77.5184
84.7725
84.8653

Open
Price
0.5536
0.5624
0.6467

High Price

Low Price

0.5536
0.5624
0.6475

0.5465
0.5598
0.6467

Price
45.3369
45.4132
49.5581
54.4047
51.9757
56.4733
52.4931
54.6890
54.3783
59.6467
62.7020
61.7637

Price
45.2854
45.3348
49.6167
54.2859
51.8521
56.0542
52.5000
54.6890
54.3550
59.5970
62.7020
61.7744

Average
Price
63.8984
65.1690
67.3775
70.3714
69.2280
70.6886
67.6160
72.2715
69.6972
77.6855
84.7725
84.9520

Close
Price
63.8429
65.2350
67.4628
70.2921
69.1593
70.4966
67.4908
72.2704
69.6630
77.5184
84.7725
85.0387

Average
Price
0.5501
0.5611
0.6471

Close
Price
0.5465
0.5598
0.6475

EURO (EUR)
Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

JAPANESE YEN (JPY)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11

Instrumen
t
FUTCUR
FUTCUR
FUTCUR

31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

0.7009
0.6315
0.7161
0.6755
0.6366
0.5779
0.6034
0.6379
0.5870

0.7012
0.6315
0.7161
0.6755
0.6366
0.5779
0.6034
0.6379
0.5870

0.7009
0.6302
0.7047
0.6736
0.6366
0.5767
0.6010
0.6379
0.5870

0.7010
0.6309
0.7104
0.6746
0.6366
0.5773
0.6022
0.6379
0.5870

0.7012
0.6302
0.7047
0.6736
0.6366
0.5767
0.6010
0.6379
0.5870

High Price

Low Price

72.5993
72.6878
77.5276
84.1083
82.8975
88.4638
85.0528
88.3413
82.6660
90.9606
101.173
101.854

72.5928
72.6155
77.3678
83.8886
82.8555
87.5275
84.8631
88.3408
82.5614
90.6375
101.173
101.729

Average
Price
72.5960
72.6516
77.4477
83.9984
82.8765
87.9957
84.9580
88.3410
82.6137
90.7990
101.173
101.791

Close
Price
72.5993
72.6155
77.5276
83.8886
82.8975
87.5275
84.8631
88.3408
82.5614
90.6375
101.173
101.854

High Price

Low Price

46.6852
48.0327
48.9031
55.2327
53.9774
57.2850
54.7310

46.5158
47.6679
48.5822
55.0146
53.8495
56.9455
54.4772

Average
Price
46.6005
47.8503
48.7426
55.1236
53.9134
57.1153
54.6041

Close
Price
46.6852
48.0327
48.5822
55.2327
53.8495
56.9455
54.4772

GREAT BRITAIN POUND (GBP)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

Open
Price
72.5928
72.6878
77.3678
84.1083
82.8555
88.4638
85.0528
88.3413
82.6660
90.9606
101.173
101.729

AUSTRALIAN DOLLAR (AUD)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

Open
Price
46.5158
47.6679
48.9031
55.0146
53.9774
57.2850
54.7310

31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

56.7185
56.6463
55.0287
58.3894
54.7564

56.7185
56.6463
55.0287
58.3894
54.8106

56.7174
56.6178
54.4287
58.3894
54.7564

56.7180
56.6320
54.7287
58.3894
54.7835

56.7174
56.6178
54.4287
58.3894
54.8106

Open
Price
120.107
120.648
131.003
144.230
137.476
150.013
138.384
144.964
143.419
157.415
165.340
162.881

High Price

Low Price

120.107
120.648
131.202
144.230
137.476
150.013
138.384
144.987
143.419
157.415
165.340
162.881

119.774
120.232
131.202
143.534
136.896
147.814
137.011
144.964
142.402
155.585
162.360
162.360

Average
Price
119.941
120.440
131.102
143.882
137.186
148.913
137.697
144.976
142.911
156.500
163.850
162.341

Close
Price
119.774
120.232
131.202
143.534
136.896
147.814
137.011
144.987
142.402
155.585
162.360
162.360

Open
Price
163.391
165.244
178.628
195.621
187.185
202.378
186.544
194.098
189.870
208.984
221.148

High Price

Low Price

163.391
165.244
179.160
195.621
187.185
202.378
186.544
194.098
189.870
208.984
221.148

162.921
164.513
178.628
194.671
186.404
199.240
186.501
194.001
189.688
208.578
220.937

Average
Price
163.156
164.879
178.894
195.146
186.794
200.809
186.523
194.050
189.774
208.781
221.043

Close
Price
162.921
164.513
179.160
194.671
186.404
199.240
186.501
194.001
189.688
208.578
220.937

BAHRAINI DINAR (BHD)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

KUWAITI DINAR (KWD)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

31-Dec-13

FUTCUR

218.170

218.655

218.170

218.412

218.655

Open
Price
117.562
118.129
128.211
140.538
134.923
147.314
135.922
141.663
140.933
154.598
162.436
159.978

High Price

Low Price

117.562
118.129
128.507
141.186
134.923
147.314
135.943
142.049
140.933
154.598
162.436
160.054

117.298
117.722
128.211
140.538
134.290
145.128
135.922
141.663
140.823
154.260
162.419
159.978

Average
Price
117.430
117.925
128.359
140.862
134.506
146.221
135.933
141.856
140.878
154.429
162.149
160.054

Close
Price
117.298
117.722
128.507
141.186
134.290
145.128
135.943
142.049
140.823
154.260
162.419
160.054

Open
Price
32.6992
33.2867
34.4059
36.0209
35.4308
36.2407
34.6356
36.9524
35.6532
39.8053
43.3435
43.3909

High Price

Low Price

32.6992
33.3541
34.4932
36.0209
35.4308
36.2407
34.6356
36.9524
35.6532
39.8053
43.3435
43.4796

32.6424
33.2867
34.4059
35.9398
35.3606
36.0443
34.5075
36.9513
35.6181
39.6345
43.3435
43.3909

Average
Price
32.6708
33.3204
34.4496
35.9804
35.3957
36.1425
34.5716
36.9519
35.6356
39.7199
43.3435
43.4352

Close
Price
32.6424
33.3541
34.4932
35.9398
35.3606
36.0443
34.5075
36.9513
35.6181
39.6345
43.3435
43.4796

OMANI RIAL (OMR)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

GERMAN MARK* (DEM)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

SWISS FRANC (CHF)

Trade
Date
31-Mar-11
30-Jun-11
30-Sep-11
31-Dec-11
31-Mar-12
30-Jun-12
30-Sep-12
31-Dec-12
31-Mar-13
30-Jun-13
30-Sep-13
31-Dec-13

Instrumen
t
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR
FUTCUR

Open
Price
49.4206
54.5770
55.1570
57.8007
57.4894
59.0110
55.9984
59.8420
57.2939
63.1741
69.1686
69.2275

High Price

Low Price

49.4206
54.5770
55.2931
57.8007
57.4894
59.0110
55.9984
59.8420
57.2939
63.1741
69.1686
69.3697

49.1320
54.4170
55.1570
57.7577
57.4030
58.6685
55.8475
59.8394
57.2080
63.0289
69.1686
63.1741

Average
Price
49.2763
54.4970
55.2250
57.7792
57.4462
58.8398
55.9230
59.8407
57.2510
63.1015
69.1686
69.2986

Close
Price
49.1320
54.4170
55.2931
57.7577
57.4030
58.6685
55.8475
59.8394
57.2080
63.0289
69.1686
69.3697