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Arithmetic
Dr Alok Pandey
2001
1.22 bn
1.03 bn
US $ 1,800 bn
US $ 492 bn
US $ 1,480
US $ 460
Exports - Merchandise
US $ 305 bn
US $ 44.5bn
Imports - Merchandise
US $ 489 bn
US $ 50.5 bn
4.2%
1.5%
Export - Services
US $ 142 bn
US $ 16.3bn
Import Services
US $ 78 bn
US $ 14.6bn
US $ 295bn
US $ 39.5 bn
External Debt
US $ 376 bn
US$ 99.6 bn
54.5
47.7
Dr Alok Pandey
2011
41.0%
50.5%
2000
25.4%
25.9
5.3
24.7
37.4
2.3
24.2
6.8
20.7
46.9
1.2
19.0
8.1
16.4
50.0
1.0
2012-12
(Apr-Nov)
18.7
9.6
19.5
50.4
1.3
People's Republic
4,055,812
of China
Jun 2014
Japan
1,264,405
Sep 2014
Saudi Arabia
745,851
Aug 2014
Switzerland
545,948
Aug 2014[
Russia
454,240
Sep 2014
Republic of China
428,213
(Taiwan)
Aug 2014
Brazil
379,157
Aug 2014
Republic of
Korea
367,534
Aug 2014
Hong Kong
331,323
Aug 2014
India
314,182
Sep 2014
10
Singapore
273,293
Aug 2014
Dr Alok Pandey
Dr Alok Pandey
Dr Alok Pandey
Dr Alok Pandey
Geography
The foreign exchange market spans the globe, with prices moving
and currencies trading somewhere every hour of every business
day.
Dr Alok Pandey
20,000
15,000
10,000
5,000
Greenwich Mean
Time
0
1
10 AM
Lunch Europe
In Tokyo In Tokyo opening
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Asia
closing
Americas London
open
closing
Afternoon
in America
6 pm
In NY
Tokyo
opens
Source: Federal Reserve Bank of New York, The Foreign Exchange Market in the United States,, www.ny.frb.org.
Dr Alok Pandey
Market
Spot market
trade in cash today with delivery in two business days
Forward market
trade at a pre-specified price and on a pre-specified future date
Volume
volume in April 2010 in global foreign exchange markets is estimated at
$3.98 trillion per day
about 75% in the interbank market
Average transaction is about USD 4 million
Operational efficiency
small retail transactions can be expensive
large interbank transactions have very low costs
Dr Alok Pandey
10
Dr Alok Pandey
11
market
Dr Alok Pandey
12
Dr Alok Pandey
13
World Countries
Chicago
9:30p.m
Los Angeles
7:30p.m
N.York
10:30p.m
London Zurich
3:30a.m
4:30a.m
Dubai
7:30a.m
Mumbai
9:00a.m
Tokyo
12:30p.m
Hong kong
11:30a.m
Singapore
11:30a.m
Sydney
1:30p.m
4:30a.m
Dr Alok Pandey
6:30a.m
7:30a.m 12:30p.m
1:30p.m
6:00p.m
8:30p.m
9:30p.m
14
Other features
More than 90% of the turnover is speculative
40% of volume is spot
60% of volume is forward outright and swaps
Market lot $ 3 mn to $ 5 mn
US $ predominant currency of trade
Reuters, Bridge, & Bloomberg - big facilitators
Electronic market
OTC market
Dr Alok Pandey
15
40
17
Spot
Dr Alok Pandey
Other
Swaps
Forward
16
Frankfurt
Zurich
Toronto
San
Francisco
Hamburg
Dusseldorf
Chicago
New
York
Paris
Basel Rome
Madrid Vienna
Mexico
City
Tokyo
Hong Kong
Bombay
Singapore
Sydney
Rio de Janiero
So Paulo
Melbourne
17
New York
19%
Dr Alok Pandey
Other
38%
Tokyo
12%
18
1999
600
2002
2005
2008
500
400
300
200
100
0
London
New York
Tokyo
Dr Alok Pandey
19
Currency Codes
Dr Alok Pandey
20
Italy
Latvia (2014)
Luxembourg
Malta
The Netherlands
Portugal
Slovenia
Slovakia
Spain
21
Hungary
Czech
Poland,
Republic,
Denmark,
Croatia,
Lithuania (joining on
Jan. 1, 2015)
Dr Alok Pandey
Romania,
Sweden
United
Kingdom.
22
Dr Alok Pandey
23
Exchange Traded
OTC
Onshore
Options, Futures
Spot, Forward,
Swap, Options
Offshore
Futures
Forwards, Swap,
Options
Dr Alok Pandey
24
Billion (USD)
19.82
4.40
11.34
Exchange Futures
(onshore)
7.02
Exchange Options
(onshore)
1.45
Exchange Futures
(offshore)
1.17 [a]
OTC (offshore)
20.03 [b]
Total
65.23
Source:- RBI Weekly Statistical Supplement, NSE, USE, MCX-SX, DGCX, and BIS Survey (Tables D.1.1 and D.1.2)
[a] DGCX data as on June 6, 2012 for May 2012.
[b] This is the April 2010 BIS survey valuation of the offshore market, adjusted for the DGCX daily average value
(estimated from overall value of futures contracts) for April 2010.
Dr Alok Pandey
25
Dr Alok Pandey
26
Dr Alok Pandey
27
Dr Alok Pandey
28
Spot
Forwards
Swaps
Korean Won
Mexican Peso
Russian Ruble
12
Indian Rupee
South African
Rand
Brazilan Real
14
Chinese Renminbi
Turkish Lira
Polish Zloty
10
11
Taiwan Dollar
Dr Alok Pandey
29
Dr Alok Pandey
30
Dr Alok Pandey
31
Factors
Balance of Payments
Economic Growth
Relative Inflation
Interest Rates
Money Supply
Fiscal Policy - Budget Deficits / Surpluses
Resource Discoveries
Capital Movements / Asset Markets
Reserves
Dr Alok Pandey
32
Factors
Random Shocks (Gulf War / September 11
attacks)
Sentiment
Speculation
Technical Factors
Exchange Rate Policy
Central Bank Intervention
Dr Alok Pandey
33
Relative Inflation
Nominal Exchange rates of major trading partners and
competitors
Budget Deficit
Current Account Deficit
Politics
Ratings
Investment outlook for India
Dr Alok Pandey
34
Capital Flows
FDI/FII/NRI
GDR/ECB
Official Transactions
Reserves
Herd Mentality - Leads & Lags
Random Shocks - Unexpected Events (Pokhran/Kargil)
RBI policy
Dr Alok Pandey
35
Dr Alok Pandey
36
Dr Alok Pandey
37
Principles
Direct
38
Dr Alok Pandey
39
Interpretation of Quotation
The market quotation for a currency consists of the spot
rate and the forward margin. The outright forward rate has
to be calculated by loading the forward margin into the spot
rate. For example US Dollar is quoted as under in the
inter-bank market on a given day as under :
Spot
1 USD = Rs. 59.1000/1300
Spot/November
0200/0500
Spot/December
1500/1800
Dr Alok Pandey
40
TT Buying Rate
Dr Alok Pandey
41
Dr Alok Pandey
42
Problem
You would like to import machinery from USA worth
USD 100000 to be payable to the overseas supplier on
31st Oct. Your bank website shows following data:
[a] Spot Rate
USD = Rs.63.8500/8600
Forward Premium
September 0.2950/3000
October 0.5400/5450
November 0.7600/7650
[b] exchange margin 0.125%
[c] Last two digits in multiples of nearest 25.
What should be the appropriate rate quoted by the
bank ?
Dr Alok Pandey
43
Solution
This is an example Forward Sale Contract .
Inter Bank Spot Selling Rate Rs. 63.8600
Add Forward Margin
.5450
-------------64.4050
Add Exchange Margin
.0805
--------------Forward Rate
64.4855
Rounded Off to multiple of 25 paise
Rs.64.4850
Amount Payable to the bank
Rs.64,48,500
Dr Alok Pandey
44
Dr Alok Pandey
45
Direct Quote
Indirect Quote
Home Currency Foreign Currency
Direct Quote
Buy Low and Sell High
Buy Dollar at 55.70 and Sell Dollar at 55.72
Dr Alok Pandey
46
Dr Alok Pandey
47
Currency
Bid
Ask
USD/INR
55.70
55.72
Dr Alok Pandey
48
Tom
Spot
Forward
Dr Alok Pandey
49
Short Rates
Spot USD/INR
Cash / Spot
Cash USD/INR
Value Today
55.70
55.72
0.02
0.03
55.67
55.70
Value TOM
Spot USD/INR
55.70
55.72
TOM / Next
TOM USD/INR
0.01
55.68
0.02
55.71
Dr Alok Pandey
50
Dr Alok Pandey
51
Dr Alok Pandey
52
Dr Alok Pandey
53
Dr Alok Pandey
54
In
Dr Alok Pandey
55
45.70
45.71
31 Jan
6.00
6.75
28 Feb
15.50
17.00
31 Mar
23.25
24.50
30 Apr
29.25
30.75
Dr Alok Pandey
56
45.70
45.71
31 Jan
6.00
6.75
28 Feb
15.50
17.00
31 Mar
23.25
24.50
30 Apr
29.25
30.75
Dr Alok Pandey
57
Dr Alok Pandey
58
3.00
2.00
1.00
-1.00
01/05/05
01/04/05
01/03/05
01/02/05
01/01/05
01/12/04
01/11/04
01/10/04
01/09/04
01/08/04
01/07/04
01/06/04
01/05/04
01/04/04
01/03/04
01/02/04
01/01/04
0.00
USD-INR INT
DIFF.
USD-INR
PREMIUM
USD-EURO
INT DIFF.
USD-EURO
DISC.
-2.00
-3.00
-4.00
Dr Alok Pandey
59
Low risk
Relatively short maturities: Maturities of less than 5 years
Low interest rate risk: Interest rates tied to a variable rate
base such as the London Interbank Offer Rate (LIBOR)
Low default risk: Traded between large commercial banks,
investment banks and multinational corporations
Highly competitive
Daily volume of several hundred billion dollars ensures
competitive bid and offer prices
Dr Alok Pandey
60
2%
Dr Alok Pandey
Eurocurrency loan
rate for commercial
accounts
1/2%
Eurocurrency deposit
rate for commercial
accounts
Eurocurrency
loan rate in the
interbank
market
LIBOR
1/8%
1/8%
Eurocurrency
deposit rate in
the interbank
market
LIBID
61
Japanese
internal
credit market
Dr Alok Pandey
Eurocurrencies
external
credit
markets
external
credit
markets
U.K.
internal
credit market
62
S$
ie
Interest
Rate
for Rs ie
SRs
DRs
D$
Quantity of $
Quantity of Rs
Dr Alok Pandey
63
Expected receipt in Rs
at E[S1Rs/$] = Rs 65/$
Actual exchange
S1Rs/$ = Rs 60/$
Net loss from
original position
-Rs50,000
DVRs
Risk (or payoff) profile
of underlying exposure
+ slope
-Rs5/$
DSRs/$
-Rs 50000
Dr Alok Pandey
64
+Rs650,000
Market exchange of $
for Rs at S1Rs/$ = Rs60/$
+600,000
-$10,000
-$ 10,000
Net gain on forward
Risk profile
of a forward
contract
Dr Alok Pandey
+Rs50,000
DVRs/$
+Rs50000
-Rs 5/$
DSRs/$
65
Underlying position
(long dollars)
+Rs650,000
-$10,000
+Rs650,000
Net position
Net exposure
DVRs/$
shortdollars
long dollars
DSRs/$
Dr Alok Pandey
66
Rules of the Game - Buy ringgits low and sell ringgits high
Dr Alok Pandey
67
Bank B
$0.26627/Rg Offer
$0.26617/Rg Bid
$0.26612/Rg Offer
Sell to B
Buy from A
$0.26602/Rg Bid
1. Buy Rg1 billion from Bank A at $0.26612/Rg offer price
2. Sells Rg1 billion to Bank B at its $0.26617/Rg bid price
Arbitrage Profit = ($0.00005/Rg)(Rg1 billion) = $50,000
with NO NET INVESTMENT and NO RISK.
Dr Alok Pandey
68
Counterparty
Penn Square
Citicorp
Bk of Tokyo
Bk of Tokyo
...
Contracts
BUY 1
BUY 3
SELL 2
SELL 4
Price
0.22004
0.22010
0.22016
0.22020
Dr Alok Pandey
0.22023 -$0.44046
+$0.00032/Rg
x Rg1,000,000,000
+$320,000
69
Opening prices:
$0. 21945/Rg BID & $0.21950/Rg OFFER
News announcements:
Dr Alok Pandey
70
P$
D$
P$
D$
Q$
DRg
DRg
QRg
71
This makes it easier for U.S. businesses to borrow and increases economic
activity. If this also increases U.S. inflation, then the value of the U.S.
dollar should fall. This will result in an appreciation of the ringgit against
the dollar.
Increases in the domestic discount rate
usually, but not always, lead to increases
in the value of the domestic currency.
Dr Alok Pandey
72
Dr Alok Pandey
73