INTRODUCTION

This paper analyzes the behavior of foreign exchange rate with respect to time in context of Indian
foreign exchange market and identifies the correlation between foreign exchange rate movements.

An economy is linked to the world economy through two broad channels: trade and finance. India's
economic policy reforms of 1991 sought to globalize the hitherto relatively closed Indian economy
by opening up both these channels. The changes in both trade and the financial sector have been
slow giving the economy time to adjust. Despite restrictions, the trade channel between India and
the rest of the world was far more open than financial markets. Not only was the financial sector
closed to international agents, the price of capital (interest rate) or of the domestic currency
(exchange rate) was not market determined. The nineties saw a twin development in financial
markets - prices was allowed to be determined by the market, and the domestic financial market
was integrating with international financial markets.

At the same time, India moved from a fixed to a floating exchange rate. However, the economy
continued to have features of the closed economy and fixed exchange rate regime that had
prevailed for a long period, even after rates were supposed to be market determined. Capital
controls continue. While current account convertibility for both inflows and outflows by residents
and non-residents was established as early as August 1994, controls continue on the ability of
resident individuals and corporate to send capital abroad. Over the last three decades the foreign
exchange market has become the world's largest financial market, with over $1.5 trillion USD
traded daily. Forex is part of the bank-to-bank currency market known as the 24-hour interbank
market. The Interbank market literally follows the sun around the world, moving from major
banking centers of the United States to Australia, New Zealand to the Far East, to Europe then
back to the United States.

REVIEW OF LITERATURE

Bekaert (1995) analyzes the time variation in conditional means and variances of monthly
and quarterly excess dollar returns on Eurocurrency investments. All results are based on
a vector auto regression with weekly sampled data on exchange rate changes and forward
premiums of three currencies.
 Batten (1999) says that many of the valuation models also require an annualized risk
coefficient. However, under the random walk model, the temporal dimension of risk is
irrelevant with the risk of the asset at any time interval being estimated by the linear
rescaling of the risk from other time periods.
Bertram (2006) says that the second order properties of financial data, such as volatility
and correlation, have been the focus many recent studies investigating the presence of long-
memory, power-law tails, non-stationarity and scaling behavior in financial data.
Hodrick (1992, 1993) deduced that the vector auto regressive approach as several
advantages over the by-now standard method of using overlapping high-frequency data on
monthly or quarterly variable estimates of the conditional variance of monthly and
quarterly forward-market returns.
Johnson (2002) introduced a model to explore the connection between realized trends and
changes in volatility. Foreign exchange returns exhibit the surprising and consistent
property that volatility increases when trends continue and decreases when they reverse.
Solano (2004) says that modeling the unconditional distribution of returns on exchange
rate and measuring its tails area are issues in the finance literature that have been studied
extensively by parametric and non-parametric estimation procedures.
Vergni and Vulpiani (1999) have shown the presence of long term anomalies like the
structure functions and a generalization of the usual correlation analysis in the foreign
exchange market.

NEED FOR THE STUDY

The need to analyze the behavior of Foreign Exchange Rate with respect to time in context
of Indian Foreign Exchange Market.
The need to identify any correlation between Foreign Exchange rate movements

OBJECTIVES OF THE STUDY

To measure the volatility of 3 currencies US Dollar, EURO and Japanese Yen.

 To know a relative measure of the co-movement of Foreign Exchange Returns of Euro,
Japanese Yen and US Dollar in Indian Forex Market.
To find the volatility distribution in these 3 currencies in Indian FOREX market.
To measure the skewness and kurtosis of the volatility distribution for the 3 currencies.

RESEARCH DESIGN

Hypothesis is being tested for 5 percent of significance level. For testing the normality of the
volatility of FOREX in Indian Market

HO: The Volatility of the YEN, USD and EURO is normally distributed.

HI: The Volatility of the YEN, USD and EURO is skewed.

Source of Data: The main data required for the study is the exchange rate of US Dollars, EURO
and Japanese YEN in INR in the Indian Foreign Exchange Market. All this data is taken from the
RBI bulletin published monthly. The same source also publishes monthly data on RBI's
intervention in the forex market. Therefore, the study is done on the daily data. The daily average
of bid and ask rates are taken as reference.

Scope of the Study: The data set consists of daily observations on spot exchange rates of the US
dollar (USD) and Euro (EURO) and Japanese Yen (YEN) versus Indian Rupee (INR) for the period
of 13 years, i.e. January 1, 1996 to 31 December, 2008.

RESEARCH METHODOLOGY

In this the volatility is measured. Volatility is a measure of how far the current prices of an asset
deviate from its average past prices. Here, the volatility in Forex market for USD, EURO and YEN
by measuring the mean and the variance in logarithm of change in their daily exchange rate. The
greater the deviation, the greater is the volatility. Volatility can indicate the strength or conviction
behind the price move.

Skewness and Kurtosis is calculated of the given currency volatility distribution. Skewness
quantifies how symmetrical the distribution is. A distribution that is symmetrical has a skewness
of 0. If the skewness is positive, that means the right tail is 'heavier' than the left tail. If the skewness
is negative, then the left tail of the distribution is dominant.
Kurtosis quantifies whether the shape of the data distribution matches the Gaussian distribution.
A Gaussian distribution has a kurtosis of 0. A flatter distribution has a negative kurtosis, and a
more peaked distribution has a positive kurtosis. It is sometimes referred to as the "volatility of
volatility."

Then jarque bera is applied is applied for testing the normal distribution. This test is used to check
hypothesis about the fact that a given sample .x^ is a sample of normal random variable with
unknown mean and dispersion. As a rule, this test is applied before using methods of parametric
statistics which require distribution normality.

CONCLUSION

From the results obtained from the analysis done in the study of foreign risk management we can
conclude that the exchange rate of EURO is much more volatile than the YEN and US Dollar in
the Indian foreign exchange market when comparing their daily volatilities. For all the 3 currencies
under this study, we find generally an increasing trend in volatility when volatility is compared
along the different time span taken into consideration such as from daily to weekly to monthly.
Similarly, for the average returns in the Indian foreign exchange market for all the 3 currencies
studied comes out to be 0, which reinforces the theory in longer period the average return is equal
to 0. As far as correlation between the price movements of a pair of currency is concerned, we
conclude that the price movement of YEN - USD is very strongly correlated but apart there is no
other striking result could be concluded.

LIMITATIONS

Exchange rate currencies chosen for the above study is based not on the importance of the
currency but on the volumes traded in the foreign exchange market of India.
The time span of 13 years has been assigned for the research because of the non-availability
of the data on exchange rate of EURO.
 The Exchange rate used for the is the average of the ask and bid rate for that given day, so
the results may vary in actual.
The data collected is from the website of RBI, so it may vary from the actual rate prevalent
in the foreign exchange market of India.
The Jarque Bera test applied in this study is still not widely acclaimed by Researchers so
the reliability of the results is not guaranteed.
It does not permit progression of formulating research question to designing methods for
answering that question.
The Secondary researcher cannot engage in making observations and developing concepts.