INTRODUCTION TO FOREIGN EXCHANGE MARKET

By: Roshan Rudra kumar Samanna srinivas Sanath kumar Sandeep kumar

FOREIGN CURRENCY
A currency in the most specific use of the word refers to money

in any form when in actual use or circulation, as a medium of exchange, especially circulating paper money.
Early currency Coinage Paper money Banknote era

FOREIGN CURRENCY MARKETS

The foreign exchange market is a form of exchange for the global

decentralized trading of international currencies.

The foreign exchange market is unique;
Its huge trading volume and high liquidity Its geographical dispersion Its continuous operation: 24 hours a day except weekends The variety of factors that affect exchange rates The low margins of relative profit compared with other markets of

fixed income

Factors influencing exchange rates

International trade:
Capital movement: Change in prices: Speculation:

Continued
Strength of the economy:

Government policies:
Stock exchange operation: Political factors:

Participants of foreign exchange markets

RETAIL CLIENTS: These are made up of businesses,

international investors, MNC who need foreign exchange for the purposes of operating their business.
Commercial banks: These banks carry out buy/sell order

from clients and buy/sell currencies on their own

accounts.
FOREIGN EXCHANGE BROKERS: banks do not trade

directly buy/sell currencies via foreign exchange brokers.

Continue.
CENTRAL BANK: Monetary authorities of a country are

not indifferent to changes in the external value of their currency and even through exchange rates of major industrialized nation

central bank intervene to buy /sell their currency in a bid

to influence the rate at which their currency traded.

Equilibrium of exchange rates:

Determinants of equilibrium are Demand and supply.

Laws of demand and supply:

High supply causes low prices, and high demand causes high prices. When there is an abundant supply of a given commodity then the price

should fall.
When there is a scarce supply of a given commodity then the price

should increase.
Therefore, an increase in the demand for a commodity would cause it to

appreciate in value, whereas an increase in supply would cause it to depreciate.

Appreciation of domestic currency value:

The demand for foreign exchange is inversely proportional to the rise of

exchange rate.
Remittance of funds from outside to India. Loan borrowings, donations received. An increase in the preference of foreign countries for domestic goods. An increase in foreign GDP and income. An increase in the real interest rate on domestic bonds relative to foreign bonds. A decrease in the riskiness of investments relative to foreign investments.

Depreciation of domestic currency value:

The supply of foreign exchange shifts depending on demand

and not on the exchange rate.

Imports are high. Remittance of fund from India to outside. Charity and donation to other country. Payments of loan amounts to IMF. Lending of money to other governments.

Investments in other countries.

Equilibrium in the Foreign Exchange Market

The foreign exchange market is considered to be in equilibrium

when the deposits of all the currencies provide equal rate of return that was expected.
The Basic Equilibrium condition depends on interest rate parity. The interest rate parity condition is achieved when the

anticipated returns on deposits of any two currencies are same when evaluated in the same currency.

FOREX MARKET COMPONENTS

3 major components of this are, Transactions between Banks and public. Transactions between banks (Intern bank market) and also with agent banks. Transactions between banks and central bank.

Exchange Rate Quotations

Exchange rate- Price for any purchase or sale

of a currency in the exchange market. It is the ratio between different currencies. That is how many units of one currency will equal one unit of another currency. Two types of quotations are direct quote and indirect quote. Direct quote 1$ = Rs.54.6 Indirect quote Rs.100 = 1.8$

Exchange Rates
Bid Rate Buying Rate, it is always given first. Ask Rate Selling Rate, it is also called as

offer rate. (Rs.40.00 40.30/USD) Spread It is the difference between the Bid and Ask rate ( B.R A.R)/AR x 100. Cross Rate One currency is sold for common currency and that is exchanged for desired one.

TYPES OF TRANSACTIONS IN FOREIGN EXCHANGE MARKET

Spot Transaction
A Spot transaction in the interbank market is

the purchase of foreign exchange, with delivery and payment between banks to take place, normally, on the second following business day.
The date of settlement is referred to as the value date.

Forward Transaction
An outright forward transaction (usually called

just forward) requires delivery at a future value date of a specified amount of one currency for a specified amount of another currency. the agreement, but payment and delivery are not required until maturity. same transaction (the only difference is the order in which currencies are referenced.)

The exchange rate is established at the time of Buying Forward and Selling Forward describe the

Swap Transaction
A swap transaction in the interbank market is the simultaneous purchase and sale of a given

amount of foreign exchange for two different value dates.

Both purchase and sale are conducted with the same counterparty.

Some different types of swaps are:

spot against forward, forward-forward,

Non-deliverable forwards (NDF).

A fool with a tool still remains as fool.