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FOREIGN EXCHANGE MARKET

By: Apoorva khire vinod kumar

MEANING

The foreign exchange market is the "place" where currencies are traded A market for converting the currency of one country into the currency of another. EXAMPLE- Re/$ 44.76 means 44.76=1USD

The foreign exchange market is a worldwide decentralized financial market for the trading of currencies.

Open 24 hours a day


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FOREIGN EXCHANGE MARKET IN INDIA- A BRIEF BACKGROUND


The foreign exchange market in India started three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. Trading is regulated by the Foreign Exchange Dealers Association of India

Clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Limited .

T YPES OF MARKET
Spot market

Future market

Forward market
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SPOT MARKET

Currencies are bought and sold according to the current price. It is settled on the second working day Saturday and Sunday are holiday

Ex: Spot rate: Rs./$40.35-41.36 supposing you have 124000 dollar

received on Thursday the bank will settle 124000*40.35=50,03,400


on the following Monday.
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FORWARD MARKET
Rate contracted today for exchange of currencies at a specified future date.
It allows for more flexibility. Determine the terms of the agreement between themselves.

FUTURE MARKET

These transactions involve future payment and future delivery at an agreed exchange rate

It bought and sold based upon a standard size and settlement date on public commodities markets

FUNCTIONS

Transfer purchasing power between countries

Obtain or provide credit for international trade transactions

Minimize exposure to the risks of exchange rate changes


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MARKET PARTICIPANTS

Bank and Nonbank Foreign Exchange Dealers


Individuals and Firms Speculators and Arbitragers Central Banks and Treasuries Foreign Exchange Brokers

FACTORS AFFECTING FOREIGN CURRENCY EXCHANGE RATES


Economic factor

International trade Capital movements Change in prices Speculations Political factors Interest rate

Market psychology
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1. ECONOMIC FACTOR

Economic factors are the most basic things that create changes in a countrys currency.
The more prosperous a countrys economy is, the more investors will be able to adhere to doing trade in a more positive attitude. If the economic fundamentals of a country are strong, the exchange rate of its domestic currency remains stable and strong.
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2. INTERNATIONAL TRADE

Trade of goods and services between countries is the major reason for the demand and supply of foreign currencies. The value or strength or weakness of a countries currency in terms of other currencies depends on its trade with those countries. If a countrys imports are higher, the demand for foreign currency in this country will be high

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3. CAPITAL MOVEMENT

International investments in the form of Foreign direct investment (FDI) and Foreign institutional investments (FII) have become the most important factors affecting the exchange rate in todays open world economy

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4. CHANGE IN PRICE

Domestic inflation or deflation affects the exchange rate by


affecting the demand and supply of domestic currency in the foreign exchange market. Ex: if prices in India go up, making Indian goods costlier, the demand for Indian goods will go down. When exports go down, the demand for rupee will fall, causing depreciation in its exchange value.
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5. SPECULATION

If the speculators expect a fall in the value of currency in the near future, they will sell that currency and start buying the other currency that they expect to appreciate. The selling of the former currency will thus increase its supply in the foreign exchange market and bring down its value The other currency appreciates as its demand increases.
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6. POLITICAL FACTORS

Political scenario of the country ultimately decides the strength of the country.

Any events in a region can surely create negative or positive interest among investors for a nations currency.

Stable efficient government at the centre will encourage positive development in the country, 16

7. INTEREST RATES

Difference in interest rates is an important factor for movements in exchange rates. In this respect the growing integration of the financial markets of major currencies, the revolution in

telecommunication facilities, the growth of specialized asset managing agencies, the emergence of foreign exchange trading etc. having accelerated the potential for exchange rates volatility.

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8. MARKET PSYCHOLOGY

The perception of traders and investors will greatly influence the foreign exchange market in so many ways.
The market is highly dependent on whether or not people would want to invest on a countrys economy in order to determine whether currency prices will go up or down.

People or investors also invest based on what they have seen for a long period and time.
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HOW A FOREIGN EXCHANGE TRANSACTION IS CONDUCTED

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GLOBAL INTEREST RATE


country Canada U.S Brazil E.M.U Iceland Current (%) 1 .25 11.25 1 4025 Previous (%) .75 1 10.75 1.25 4.5 Last change Sep. 8, 2010 Dec. 16, 2008 Jan. 24,2011 May 07, 2009 Feb. 02, 2011

Switzerland
U.K South Africa Australia China India Japan

.25
.5 6 4.75 6.06 6.5 .1

.5
1 6.5 4.5 5.81 6.25 .3

Mar. 12, 2009


Mar. 05, 2009 Sep. 10, 2010 Nov. 02, 2010 Feb. 08, 2011 Jan. 25, 2011 Dec. 19, 2008
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MOST TRADED CURRENCIES


Rank
1 2 3 4 5 6 7 8 9 10

Currency
United states dollar Euro Japanese yen Pound sterling Australian dollar Swiss franc Canadian dollar Hong kong dollar Swedish krona New zealand dollar Other currencies

code (Symbol)
USD ($) EUR () JPY () GBP () AUD ($) CHF (Fr) CAD ($) HKD ($) SEK (kr) NZD ($)

% daily share (April 2010)


84.9% 39.1% 19.0% 12.9% 7.6% 6.4% 5.3% 2.4% 2.2% 1.6% 18.6% 22 Total 200%

KEY CURRENCY CROSS RATES


THURSDAY, MARCH 03, 2011

Dollar Canada Japan Mexico Switzer land U.K. Euro U.S. 0.9723 82.359 11.998 0.9319 0.6147 0.7163 ....

Euro 1.3573 114.97 16.749 1.3009 0.8581 .... 1.3960

Pound 1.5818 133.99 19.519 1.5161 .... 1.1654 1.6269

SFranc 1.0434 88.379 12.875 .... 0.6596 0.7687 1.0731

Peso 0.0810 6.8646 .... 0.0777 0.0512 0.0597 0.0833

Yen 0.0118 .... 0.1457 0.0113 0.0075 0.0087 0.0121

CdnDlr .... 84.706 12.340 0.9584 0.6322 0.7367 1.0285


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CONCLUDING NOTE
Thus we can say that foreign exchange market is a
fluctuating one depending on various factors. A balance between these factors can help in reducing the uncertainty and gaining advantage of foreign exchange market

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