Foreign Exchange Market

Foreign Exchange
Market
Dr. Amit Kumar Sinha

dramitksinha@gmail.com
1/1/2015
Definitions
FOREIGN CURRENCY: Any currency other than
the countrys currency is known as foreign

currency. For example, in India all other
currencies than Rupee will be foreign currencies.
FOREIGN EXCHANGE: Forex includes foreign
currency, Traveler Cheques, foreign DDs,
Cheques, LCs in denomination of foreign
currencies.
1/1/2015
Foreign Exchange Market Definition

The Foreign exchange market provides the Physical &
Institutional structure through which the money of one
country is exchanged for that of another country, the
rate of exchange between currencies are determined,
and foreign exchange transaction are physically
completed .
1/1/2015
Foreign Exchange Transaction

A foreign exchange transaction is an agreement
between a buyer and seller that a fixed amount of one
currency will be delivered for some other currency at a
specified rate.
1/1/2015
Functions/ Significance of Forex Markets

The Foreign exchange market is the mechanism by
which participant Transfer purchasing power
between countries, obtain or provide credit for
international trade transactions, and minimize
exposure to the risk of exchange rate fluctuations.
Hence there are three major functions of Foreign
exchange market:
1. Transfer of purchasing power
2. Provide Credit
3. Minimization of foreign exchange risk
1/1/2015

Transfer of Purchasing Power:
Transfer of purchasing power is necessary because
international trade and capital transactions normally
involves parties living in countries with different national
currencies. Each party usually wants to deal in its own
currency, but the trade or capital transaction can be
invoiced in only one currency.
1/1/2015

Provide Credit:
The movement of goods between countries take time,
inventory in transit must be financed. The foreign
exchange market provide a source of credit. Specialized
instruments, such as Bankers acceptances and letters of
credit are available to finance international trade.
1/1/2015

Minimization of Foreign Exchange Risk: The
foreign exchange market provides Hedging facilities for
transferring foreign exchange risk to someone else more
willing to carry risk.
1/1/2015
PARTICIPANTS IN THE FE MARKET
Major participants in the FE market are:

a) Large commercial banks operating either at retail level for
individual exporters and corporations or at a wholesale level
in the inter bank market.
b) Central Banks of various countries that intervene in order to
maintain or influence the exchange rate of their currencies
within a certain range, as also to execute the orders of the
government.
c) Individual brokers or corporations: Bank dealers often use
brokers to stay anonymous since the identity of banks can
influence short term quotes.
1/1/2015
Correspondent Banking
Relationships
Large commercial banks maintain demand deposit
accounts with one another which facilitates the efficient

functioning of the forex market.
International commercial banks communicate with one
another with:
SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.
CHIPS: Clearing House Interbank Payments System
ECHO Exchange Clearing House Limited, the first global
clearinghouse for settling interbank FOREX transactions.
CHAPS :Clearing House Automated Payment System.
1/1/2015
Kinds of Forex Markets

Spot market
Forward market
Derivative market- currency swaps, futures options
1/1/2015
Spot Market
Spot Rate Quotations
The Bid-Ask Spread
Spot FX trading
Cross Rates
1/1/2015
Spot market of foreign exchange

Definition: Spot market is the system under which
purchase and sale of foreign exchange with delivery
either immediately or on the second following business
day.
The Indian rupee Vs dollar settlements take
place first following business day.
The spot transactions should not be rolled over
to next month.
1/1/2015
Quoting in FE Market
Foreign exchange rates are quoted either for

immediate delivery (spot rate) or for delivery on a
future date (forward rate).
In practice, delivery in spot rate is made two days
later.
A FE quotation is the price of currency expressed in
units of another currency.
1/1/2015
The quotation can be either direct or indirect.

Quotation is direct when quoted as so many units of local
currency per unit of foreign currency.
Ex: INR 46= USD 1, is a direct quotation for USD in India.
An indirect quotation is the one where the exchange rate is
given in terms of variable units of foreign currency as
equivalent to a fixed number units of home currency.
Ex: In India USD 2.1739= Rs.100 is an indirect quotation.
Since August 2,1993 all quotations in India use direct method
of quotation.
1/1/2015
Some currencies are quoted as so many rupees against one unit while
others as so many rupees against 100 units.
Foreign currencies Quoted against their One Unit
Australian Dollar (AD)
Finish Mark (FM)
Qatar Riyal
Austrian Schilling (Sch)
French Franc (FFr)
Saudi Riyal (SR)
Bahrain Dinar
Hong Kong Dollar (HKD)
Singapore Dollar (SGD)
Canadian Dollar (CAD)
Irish Pound
Sterling Pound (GBP)
Danish Kroner (DKr)
Kuwaiti Dinar
Swedish Kroner
Deutschmark (DM)
Malaysian ringgit
Swiss Franc
Dutch Guilder
New Zealand Dollar
Thai Bhat
Egyptian Pound
Norwegian Kroner
UAE Dirham
European Currency Unit
Omani Riyak
USD
1/1/2015
Foreign currencies Quoted against their 100 units.
Belgian Franc
Italian Lira
Kenyan Shilling
Indonesian Rupiah
Japanese Yen
Spanish peseta
1/1/2015
Exchange rates are always quoted as a two way price,

i.e. a rate at which the bank (dealer) is willing to buy
foreign currency (buying rate) and a rate at which the
bank sells foreign currency (selling rate).
Dealers do expect some profit in exchange operations
and hence there is always some difference in buying
and selling rates.
However maximum spread available to dealers may be
restricted by their central bank.
Authorized dealers give both buy and sell exchange
rates.
1/1/2015
Quoting in FE Market- Two Way

Quotes
A dealer usually quotes a two way price for a given

currency i.e. bid price and offer or ask price.
In either case, the currency for which bid or ask price
is given is the unit of item priced.
In a bid quote of Rs.35/USD 1, the dealer conveys that
he will buy dollars at the price of Rs.35 per dollar,
which also means that he is willing to sell 35 rupees at
the price of one dollar.
Likewise, when the dealer quotes an offer price per
dollar, he implicitly quote the rate at which rupees
would be bought per dollar.
1/1/2015
Quoting in FE Market- Two Way Quotes
Dealer make profit from each transaction- whether it

is buy or sell.
Ex: a dealer in New Delhi may quote
USD = Rs.46.0000-46.0050
This means that he will buy dollars from an exporter
at USD 1= Rs.46.0000 and sell dollars to an importer
at USD 1= Rs.46.0050.
Thus lower rate is the buy (bid) quote and the higher
rate is the selling (ask) quote.
1/1/2015
Spread
Spread means the difference between a banks buying (bid)

and selling (offer or ask) rates in an exchange rate quotation.
It fluctuates according to
1. The level of stability in the market.
2. The currency in question
3. The volume of the business.
Thus if there is a degree of volatility in an exchange rate, and
if the business is thin and if the current rate of the currency
is rumored to be unsustainable, the dealer will protect
himself by widening the quote i.e. he will offer less currency
while selling but demand more when buying.
1/1/2015
Spread
1/1/2015
The spread can also be expressed as a percentage i.e.

Percent Spread= Ask Price- Bid Price *100
Ask Price
Ex: With dollar quoted at Rs.35.0000-35.0050, the
percent spread equals 0.014.
Cross Rates (Chain Rule)
Cross rate is the price of any currency other than home

currency.
In other words, it is direct relationship between two nonhome currencies in a foreign exchange market concerned
with or used in transactions in a country to which none of
the currencies belongs.
Thus, in India, a cross rate is an exchange rate which
excludes rupees, for example USD/FFr, DM/FFr etc.
If an importer has to remit French Francs from India with
the knowledge that INR/FFr rates are not normally quoted
would first buy dollars against the rupees and same
dollars will be used overseas to acquire French Francs.
1/1/2015
Cross Rates (Chain Rule)

Ex: If say rates in New Delhi are INR/USD 35.0010/80 and
rates in Paris are FFr/USD 5.1025/50. Thus an
importer will get 1 USD by paying Rs.35.0080 and for 1
USD he will get FFr 5.1025. Thus a sort of chain is
formed as under:
FFr 5.1025 =1 USD
1 USD = INR 35.0080
1 FFr = INR 35.0080/5.1025= INR 6.8609
1/1/2015
Settlements
Cash
Cash rate or Ready Rate is the rate when the exchange of
currencies takes place on the date of the deal.
If the delivery is made on the day the contract is booked,
it is called a Telegraphic Transfer (TT) or cash or valuetoday deal.
Tom
When the exchange of currencies takes place on the next
working day after the date of deal, it is called the TOM
(tomorrow) rate.
1/1/2015
Settlements
Spot
When the exchange of currencies takes place on the
second working day after the date of deal, it is called the
spot rate.
This time is allowed to banks to process the necessary
paperwork and transfer the funds.
Normally, a deal done on Tuesday will be settled on
Thursday and a deal done on Friday will be settled on
the following Tuesday.
A business day is defined as one in which both banks
are open for business in both settlement countries.
In the case of a USD/DM deal done, say in London, the
occurrence of a bank holiday in the UK during the spot
period is entirely irrelevant. This is because all bank
account transfers are made in the settlement country
rather thanDr.dealing
centre.
1/1/2015
Amit Kumar Sinha
Settlements
Spot
The principle that the two sides of the deal should be
completed on the same date is referred to as the
principle of compensated value.
The only exception to the principle of compensated
value arises for deals in Middle East countries for
settlement on Friday. This is a holiday in most Middle
East countries. Even though person buying a Middle
Eastern currency (say Saudi Riyals) may make
payments (say in GBP) on Friday, the delivery of
Riyals would take place on Saturday, provided it was a
business day in both the relevant countries.
For some currencies such as USD/CAD transactions, a
spot transaction is only one day by convention.
1/1/2015
Adjustment of Demand and Supply on the Spot Market:

Process of Arbitrage
Arbitrage can be defined as an operation that consists

in deriving a profit without risk from a differential
existing between different quoted rates.
Arbitrage may result from two currencies (also known
as geographical arbitrage) or from three currencies
(also known as triangular arbitrage).
1/1/2015
Adjustment of Demand and Supply on the Spot

Market: Process of Arbitrage
Example: An arbitrage between two currencies
Suppose two traders A & B are quoting the following
rates:
Trader A(Paris)
Trader B(New York)
FFr/ USD 5.5012
USD/FFr 0.1817
We assume that buying and selling rates for these
traders are same.
Work out if an arbitrage opportunity exists.
1/1/2015
Adjustment of Demand and Supply on the Spot Market:

Process of Arbitrage
First we find out the reciprocal rate of the quote given

by the trader B, which is FFr/USD =5.5036 (=1/0.1817)
Strategy
An arbitrageur buys, say USD 10000, by paying
FFr 55012.
He sells these USD to the trader B and receives
FFr 55036.
In the process he gains FFr 24 (=55036-55012)
1/1/2015

1/1/2015
This process would tend to increase the selling rate at

the trader A because of increase in demand of USD
and reverse would happen at the trader B because of
the increased supply of USD. This would lead to an
equilibrium after some time.

Market: Process of Triangular Arbitrage
Example: An arbitrage between three currencies
Suppose both traders A & B are located at New York and
giving the following quotes
Trader A
Trader B
USD/CHF 0.6000
USD/CHF 0.6000
USD/DM 0.5100
USD/DM 0.5200
We assume that buying and selling rates for these
traders are same.
Work out if an arbitrage opportunity exists.
1/1/2015

Since three currencies are involved we will have to

find the cross rate between CHF and DM.
For Trader A, CHF/DM rate is 0.85 (=0.51/0.60)
For Trader B, CHF/DM rate is 0.867 (=0.52/60)
1/1/2015

Market: Process of Arbitrage: Problem
Are there any arbitrage gains possible from the data given below?
Assume there is no transaction costs.
INR/GBP
55.500 in London
INR/USD
35.625 in Delhi
USD/GBP
1.5820 in New York
USD/GBP rate at London and New Delhi is 1.5579 which is different from
the rate prevailing in New York. Because of the difference in rate
triangular currency arbitrage is possible. The strategy of the arbitrageur
is as follows:
Use USD 1000 to buy rupees in Delhi. The arbitrageur would get
Rs.35625 (=1000*35.625)
Sell Rs.35625 in London to get GBP 641.89 (=35625/55.500)
Sell GBP 641.89 in New York to get USD 1015.47 (=64189*1.5820)
Net Profit is USD 15.47 (=1015.47-1000)
1/1/2015
The Forward Market

A forward contract is an agreement to buy or sell a
financial asset in the future at prices agreed upon today.

If the exchange of currencies takes place after a
certain period from the date of the deal (more than
two working days) it is called the Forward Rate.
1/1/2015
The Forward Market
A forward contract is a binding contract between a

customer and a dealer for the purchase or sale of specific
quantity of stated foreign currency, at a rate of exchange
fixed at the time of making the contract (for executing by
delivery & payment at a future time agreed upon when
making the contract).
Forward rates are generally expressed by indicating
premium/discount on the spot rates for the forward period.
1/1/2015
The Forward Market
Premium on one countrys currency implies discount on

another countrys currency.
The forward market is not located at any specified place.
Operations take place mostly by telephone/telex etc
through brokers.
Generally, participants in the market are banks which want
to cover order for their clients.
Though the forward rate may be quoted for any future date,
the normal practice is to quote them for 30 days, 60 days,
90 days and 180 days.
1/1/2015
Forward Rate Quotations
Quotations for forward rates can be made in two ways.

They can be made in terms of exact amount of local
currency at which the trader quoting the rates will buy and
sell a unit of foreign currency. This is called the outright
rate and it is used by traders in quoting rates to the
customers.
The forward rates can also be quoted in terms of points of
premium or discount on the spot rate, which is used in
inter bank quotations
1/1/2015
Forward Rate Quotations

The points are added to the spot price if the foreign
currency is trading at a forward premium; the points are

subtracted from the spot price if the foreign currency is
trading at a forward discount.
1/1/2015
Premium or Discount
1/1/2015
Premium or Discount of a currency in the forward

market on the spot rate is calculated as follows:
Premium or discount (percent)=
(Fwd Rate- Spot rate)/Spot rate * 12/n * 100
where n is the number of months forward.
FR>SR it implies premium.
FR<SR it implies discount.
Long and Short Forward

Positions
If you have agreed to sell anything (spot or forward),
you are short.

If you have agreed to buy anything (forward or spot),
you are long.
If you have agreed to sell forex forward, you are short.
If you have agreed to buy forex forward, you are long.
1/1/2015
Forward Rate- Problem
Convert the following rates into outright rates and indicate their
spreads:
Currency
Pair
Spot
1-mth
3-mth
6-mth
INR/USD
45.6300/25
20/25
25/35
30/40
INR/GBP
75.2200/35
40/30
50/35
55/42
INR/DM
23.9000/30
30/25
40/60
45/65
1/1/2015
Rupee Rate of Dollar
INR/USD
Spot
1-mth
3-mth
6-mth
Bid
45.6300
45.6320
45.6325
45.6330
Ask
45.6325
45.6350
45.6360
45.6365
Spread
0.0025
0.0030
0.0035
0.0035
1/1/2015
Rupee Rate of Deutschmark
INR/DM
Spot
1-mth
3-mth
6-mth
Bid
23.9000
23.8970
23.9040
23.9045
Ask
23.9030
23.9005
23.9090
23.9095
Spread
0.0030
0.0035
0.0050
0.0050
1/1/2015
ARBITRAGE IN CASE OF FORWARD MARKET

(OR COVERED INTEREST ARBITRAGE)
Covered interest arbitrage is an arbitrage trading
strategy whereby an investor capitalizes on the
interest rate differential between two countries by
using a forward contract to cover (eliminate exposure
to) exchange rate risk. Using forward contracts
enables arbitrageurs such as individual investors or
banks to make use of the forward premium (or
discount) to earn a riskless profit from discrepancies
between two countries' interest rates.
1/1/2015

(OR COVERED INTEREST ARBITRAGE
The thumb rule is that if the interest rate
differential is greater than premium or
discount, place the money in the
currency that has higher rate of interest
and vice versa.
1/1/2015

(OR COVERED INTEREST ARBITRAGE)
Strategy
Sell your domestic currency, to buy foreign
currency at the Spot Rate
Invest the foreign currency at the foreign
interest rate.
Enter into a Forward Rate Agreement to sell
the value of the Invested Capital at a

matching maturity length
1/1/2015
Arbitrage in case of forward market (or

Covered Interest Arbitrage): Problem 1
Exchange Rate: CAD/USD 1.317 (Spot)
CAD/USD 1.2950 (6 mth
fwd.)
Interest Rate : USD : 10%
CAD : 6%
Work out the arbitrage possibilities.
Arbitrage in case of forward market (or Covered Interest

Arbitrage): Problem 1
In this case it is clear USD is at discount on 6 mth
forward market and the rate of annualized discount
is:
(1.2950-1.317)/1.317*12/6*100 = 3.34%
Differential in interest rate = 10-6= 4%
The interest rate differential is greater than the
discount. So in order to derive an arbitrage gain,
money is to be placed in USD money market since
this currency has a higher rate of interest.
Arbitrage in case of forward market (or Covered Interest

Arbitrage): Problem 1
Strategy:
Borrow CAD 1000 at 6% for 6 mths.
Convert this sum into USD at the spot rate to obtain

USD 759.3(= 1000/1.317)
Place these USD at 10% for 6 mths in the money

market to obtain USD 797.23 {=759.3*(1+0.1*6/12)}
Sell USD 797.23 in the forward market to yield, at the

end of 6 mths, CAD 1032.40 (=797.23*1.295)
At the end of 6 mths, refund the debt taken in CAD

plus interest i.e. CAD 1030 {=1000+ (1+0.06*6/12)}
Net Gain = CAD 1032.40-1030 =CAD 2.40
Speculation
A speculator is a trader who enters the market to profit from
short term price changes. In doing so, he/she assumes risk

that other individuals are trying to dispose of.
Most individuals have no heavy exposure in the futures
market. As such when they enter the futures market it is for
speculation.
There are three kind of speculators:
1. Scalpers
2. Day Traders
3. Position Traders
1/1/2015
Scalpers
A scalper is an individual that enters the futures market to
profit from very short term price movements. A scalper is

generally trying to guess the short term psychology of the
market.
How Long of Intervals?
From the next few seconds to the next few minutes.
Requires the scalper to be in the trading pit to observe the
behavior of other buyers and sellers.

Generally involves a great many trades earning a small
profit on each trade. One study shows that scalpers make
about 70 trades per day.
By trading very frequently, scalpers provide liquidity to the
market.
1/1/2015
Services Provided by Scalpers

1. Provide a party willing to take the opposite side of a trade for
an off-the-floor trader.
2. Actively trade, thereby generating price quotations and
allowing the market to discover prices more effectively.
3. By competing for trades, help to close the bid-asked spread,
thereby reducing execution costs for other traders.
4. Attract hedging activity, because hedgers know their orders
can be executed.
1/1/2015
Day Traders
Day traders attempt to profit from trades that occur during
a single trading day.

Day traders close all of their positions before the end of
the trading day. As such, day traders have no position in
the futures market overnight.
By closing all of their positions at the end of the day, day
traders are able to reduce their risk. Holding a position
overnight is a risky proposition as the supply of many
commodities is driven by weather.
1/1/2015
Position Traders
A position trader is a speculator that holds a position
overnight. Sometimes they may hold them for weeks or

months.
There a two types of position traders:
Outright Position
Spread Position
1/1/2015
Outright Positions
This is simply taking a naked position in a commodity. For
example, a trader thinks that long-term interest rate will

increase, and consequently futures prices for bonds will fall.
Therefore, the trader sells a futures contract on U.S. Treasury
bonds.
If long-term interest rates rise as the trader expected, the
trader will earn a profit.
The risk is that the long-term interest rate will decline rather
than increase. In which case the position trader will lose
money.
1/1/2015
Spread Positions
Spread positions involve trading multiple contracts on the
same or related commodities.

The idea is to profit when the difference in prices between
the two related commodities changes.
There are two basic types of spreads:
1. Inter-commodity spread
In an inter-commodity spread, a trader takes a position in two or
more different but related commodities.
2. Intra-commodity spread
In an intra-commodity spread, a trader takes a position in two or
more maturity months for the same good.
1/1/2015
DERIVATIVES FX MARKETS CURRENCY

SWAPS
A swap is an agreement to provide a counterparty with
something he wants in exchange for something that you

want.
Swap transactions account for approximately 51 percent
of interbank FX trading, whereas outright trades are
less than 9 percent.
1/1/2015
CURRENCY SWAPS
A swap can be viewed as a portfolio of spot and forward
positions.
For example, firm A would borrow in dollars and then
swap for pounds with the bank and simultaneously
enter into a series of forward contracts with the bank to
exchange dollars for pounds.
1/1/2015
CURRENCY SWAPS-Types
Back to back currency swaps
suppose Co. A in U.K. wants to invest in Germany DM 1 million

and Co. B of Germany wants to invest 1 million in U.K..
Both companies can raise loans in local currencies and
exchange the loan obligations. In this swapping they may avoid
any tax on foreign exchange transactions and also take
advantage of favourable rate of interest.
Swaps became popular only after 1981- World Bank/IBM case.
Spot cum forward swaps.
Forward forward swaps.
1/1/2015
FOREIGN CURRENCY FUTURES

DEFINITION: Foreign currency futures
contract is a
standardized agreement to deliver or receive a specified
amount of the specified currency at a specified price
(exchange rate ) on a specified date.
CHARACTERISTICS:
Buyer of futures receives the foreign currency and seller of
futures contract delivers the currency.
Forex futures are traded on organized exchanges, e.g., at
International Monetary Market Chicago
It is a standardized, specific sized contract. For example, at
IMM, Australian dollars futures size is 1.00.000 dollars
.India-only Re/$ Futures .Lot: $1000.
Forex futures quotations are in direct quotes, e.g., dollars
futures in rupees
will be quoted $1 =Rs 43
1/1/2015
FOREIGN CURRENCY FUTURES

Characteristics (contd.)
Forex futures have standard maturity date. At IMM it is
third Wednesday of March, June, September and

December.
Margins are to be deposited with the Clearing House.
Margins are transferred to respective accounts daily.
Futures contracts are transacted in exchange clearing
house through brokers.
1/1/2015
Difference Between Foreign Currency

Futures & Forward Contracts
1.
2.
3.
4.
5.
6.
7.
Characteristics
Size of contract
Maturity
Location
Margin
Settlement
Commission
Risk
1/1/2015
Futures
Forwards
Standardized Desired size
Fixed
Flexible
Exchange
Banks
Required
No margin
Flexible
Fixed date
Yes
No
Low
High
Advantages of Foreign currency Futures

1.
2.
3.
4.
1/1/2015
Contracts are flexible, i.e., contract can be liquidated

any time.
Risk lower.
Speculative gains
Hedging against exchange rate risk
Limitations of Foreign Currency Futures

1.
2.
3.
1/1/2015
Available only in developed countries

Futures are not available in all currencies of the world
Futures need specialized skills to forecast prices
FOREIGN CURRENCY OPTIONS

DEFINITION: An option is a financial contract in
which the buyer of the option has the right but not
the obligation to buy or sell the foreign exchange, at
a prespecified rate, on or upto a specified date.
The seller of the option has obligation
to perform the other side of option, if the buyer
exercises his /her option.
EXAMPLE: Life Insurance-Premium-Protection, if
adverse happens .A fortune if favourable happening
.Options can be related to exchange dealings or any
commodity, shares, debt-instruments or interest, etc.
1/1/2015
FOREIGN CURRENCY OPTIONS TYPES

1. CALL OPTIONS: Right but not obligation to buyer to
purchase currency Y against currency x at a given price on or
before a specified date. EXAMPLE: 3 months call option on
U.S.$ against rupee @ $1= Rs. 44. Amount $1 million for a
premium of 5%.
Buyer is called Option Buyer.

Seller is called Option Seller or Option Writer .
2. PUT OPTION: Gives buyer the right but not the obligation to
sell currency Y against currency X, on a before an agreed
date, for an agreed premium. EXAMPLE: 3 MONTHS Put
option on X against INR @ $1 = Rs. 44 for $10,00- option to
Buyer only. Writer must take delinery ,if required.
1/1/2015
FOREIGN CURRENCY OPTIONS TYPES

AMERICAN OPTIONS: Can be
exercised by buyers on any day
from initiation to expiry.
EUROPEAN OPTIONS: Can be
exercised only on expiry date.
1/1/2015
TECHNICAL TERMS USED

Strike Price Or Exercise Price: Exchange rate agreed upon in
option.
Maturity Date or Expiry Date: Date on which option expires.
Option Premium/ Option Price/Option Value: The fee which
option buyer pays to option writer at the time of writing. It is
non-refundable.
At-the-Money, In-the-Money & Out-of-Money : In the Call
Option If S (Spot Price) = X (Exercise Price) it is called At-theMoney. ,If S>X ,then it is In-the-Money & if S < X, then it
is Out-of-Money.
In a Put Option: If S=X, it is At-the-Money, if S>X ,then it is Outof-Money & if S<X, it is In-the-Money.
Note: Gains & Losses are debited / Credited Daily in Buyers and
Writer s A/cs.
1/1/2015
ADVATAGES OF OPTIONS
Allows Hedging against Exchange Rate Risk
Also facilitates Speculation/ Return.
1/1/2015
LIMITATIONS OF OPTIONS
In India Options are written only by the banks.
They are allowed only for hedging & not for speculation.
1/1/2015
SPECULATION & ARBITRAGE IN FOREX

MARKETS
SPECULATION :Investment for windfall pofit.

ARBITRAGE: Refers to a set of transactions ,e.g., selling &
buying, lending & borrowing the same financial asset or

equivalent groups of assets, to gain profit from price
differentials.
Most often Arbitrage does not involve investment or risk.
EXAPLES:SPOT-SPOT or FORWARD-FORWARD
ARBITRAGE: Suppose Bank A quotes
GBP/USD:1.4550/1.4560(Bid/Ask) & Bank B quotes
1.4538/1.4548 .
Suppose you buy 1,00,000 GBP from bank B paying $
1,45,480. Now you sell GBP 1,00,000 to bank A @ 1.4550 and
get $ 1,45,500. You may gain $ 20.
1/1/2015
TRIANGULAR ARBITRAGE
Transactions in 3 Currencies:
Suppose Bank A quotes rates of 3 currencies as follows:
USD/JPY = 110.25/111.10( Bid/ Ask )

USD/AUD= 1.6520/1.6530
Suppose Bank B quotes as follows :
AUD/JPY = 68.30/ 69.00
Suppose you sell 11,02,500 JPY to Bank @ 110.25 & buy 10,000
USD. Now ,sell 10,000 USD @ 1.6520 & get 16,520 AUD .
Then, sell these 16,520 AUD to Bank B & buy JPY @
69.00,i.e.,total JPY= 11,39,880.
Now, GAIN = JPY 37,380.
1/1/2015

Foreign Exchange Market

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Foreign Exchange Market

Загружено:

Авторское право:

Доступные форматы

Foreign Exchange

Dr. Amit Kumar Sinha

Dr. Amit Kumar Sinha

the countrys currency is known as foreign

Dr. Amit Kumar Sinha