THE FOREIGN THE FOREIGN EXCHANGE EXCHANGE

MARKETMARKET

MEANING OF FOREIGN EXCHANGEMEANING OF FOREIGN EXCHANGE

The term Foreign exchange implies two things:The term Foreign exchange implies two things:

a)Foreign currency and b) exchange ratea)Foreign currency and b) exchange rate

Foreign exchange generally refers to foreign Foreign exchange generally refers to foreign currency, eg for india it is dollar, euro, yen, etc… currency, eg for india it is dollar, euro, yen, etc…

the other part of foreign exchange is exchange rate the other part of foreign exchange is exchange rate which is the price of one currency in terms of the which is the price of one currency in terms of the other currency.other currency.

Forex is the international market for the free trade of Forex is the international market for the free trade of currencies. Traders place orders to buy one currency currencies. Traders place orders to buy one currency with another currency.with another currency.

FOREIGN EXCHANGEFOREIGN EXCHANGE

According to Hartly Withers, “ Foreign exchange is According to Hartly Withers, “ Foreign exchange is the art and science of international monetary the art and science of international monetary exchange”exchange”

The forex market is the world’s largest financial The forex market is the world’s largest financial market. Over $5 trillion dollars worth of currency are market. Over $5 trillion dollars worth of currency are traded each day. The amount of money traded in a traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the week is bigger than the entire annual GDP of the United States!United States!

The main currency used for forex trading is the US The main currency used for forex trading is the US dollar.dollar.

FOREIGN EXCHANGE MARKETFOREIGN EXCHANGE MARKET

Foreign exchange market is that market in Foreign exchange market is that market in which national currencies are traded for one which national currencies are traded for one another..another..

The major participants in this market are The major participants in this market are commercial banks, forex brokers, and commercial banks, forex brokers, and authorised dealers and the monetary authorised dealers and the monetary authorities.authorities.

Besides, transfer of funds form one country to Besides, transfer of funds form one country to another , speculation is an important another , speculation is an important dimension of foreign exchange market.dimension of foreign exchange market.

Its where money in one currency is exchanged Its where money in one currency is exchanged for anotherfor another

Features of Forex marketFeatures of Forex market

It’s already the world’s largest market and It’s already the world’s largest market and it’s still growing at an extremely fast pace..it’s still growing at an extremely fast pace..

It makes extensive use of information It makes extensive use of information technology – making it available to everyonetechnology – making it available to everyone

Traders can profit from both strong and Traders can profit from both strong and weak economiesweak economies

Trader can place very short-term orders – Trader can place very short-term orders – which are prohibited in some other marketswhich are prohibited in some other markets

Brokerage commissions are very low or non-Brokerage commissions are very low or non-existentexistent

The market is open 24 hours a day during The market is open 24 hours a day during weekdaysweekdays

TERMS related to forex marketTERMS related to forex market

Foreign exchange reserves- holdings of other Foreign exchange reserves- holdings of other countries currenciescountries currencies

Foreign exchange controls- controls imposed by a Foreign exchange controls- controls imposed by a government on the purchase/sale of foreign government on the purchase/sale of foreign currenciescurrencies

Retail foreign exchange platform- Speculative Retail foreign exchange platform- Speculative trading of foreign exchange by individuals using trading of foreign exchange by individuals using electronic trading platformselectronic trading platforms

Foreign exchange risk- arises from the change in Foreign exchange risk- arises from the change in price of one currency against anotherprice of one currency against another

International trade- the exchange of goods and International trade- the exchange of goods and services across national boundariesservices across national boundaries

Terminology ……………contTerminology ……………cont

Foreign exchange company- a broker that offers Foreign exchange company- a broker that offers currency exchange and international paymentscurrency exchange and international payments

Bureau de change- a business whose customers Bureau de change- a business whose customers exchange one currency for anotherexchange one currency for another

Currency pair- the quotation of the relative value of a Currency pair- the quotation of the relative value of a currency unit against the unit of another currency in currency unit against the unit of another currency in the foreign exchange marketthe foreign exchange market

Digital currency exchanger- market makers which Digital currency exchanger- market makers which exchange fiat currency for electronic moneyexchange fiat currency for electronic money

EXCHANGE RATEEXCHANGE RATE

According to Haines, “Exchange rate is According to Haines, “Exchange rate is the price of the currency of a country the price of the currency of a country can be exchanged for the number of can be exchanged for the number of units of currency of another country.” units of currency of another country.” Exchange rate is that rate at which one Exchange rate is that rate at which one unit of currency of a country can be unit of currency of a country can be exchanged for the number of units of exchanged for the number of units of currency of another country. It’s the currency of another country. It’s the the price for which one currency is the price for which one currency is exchanged for anotherexchanged for another

Factors influencing Exchange RateFactors influencing Exchange Rate

As with any market, the forex market is driven by supply and As with any market, the forex market is driven by supply and demand:demand:

If buyers exceed sellers, prices go upIf buyers exceed sellers, prices go up

If sellers outnumber buyers, prices go downIf sellers outnumber buyers, prices go down

The following factors can influence exchange rates:The following factors can influence exchange rates:

National economic performanceNational economic performance

Central bank policy Interest ratesCentral bank policy Interest rates

Trade balances – imports and exports Trade balances – imports and exports

Political factors – such as elections and policy changes Market Political factors – such as elections and policy changes Market sentiment – expectations and rumourssentiment – expectations and rumours

Unforeseen events – terrorism and natural disastersUnforeseen events – terrorism and natural disasters

Despite all these factors, the global forex market is more stable Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small than stock markets; exchange rates change slowly and by small amounts.amounts.

TYPES OF EXCHANGE RATETYPES OF EXCHANGE RATE

Fixed and Floatingexchange ratesFixed and Floatingexchange rates

Fixed exchange rate is the official rate set by Fixed exchange rate is the official rate set by the monetary authorities of the Governance the monetary authorities of the Governance for one or more currencies.for one or more currencies.

Under floating exchange rate, the value of Under floating exchange rate, the value of the currency is decided by supply and the currency is decided by supply and demand factorsdemand factors

TYPES OF EXCHANGE RATETYPES OF EXCHANGE RATE

Direct and indirect exchange ratesDirect and indirect exchange rates

Direct method - Under this, a given number of units Direct method - Under this, a given number of units of local currency per unit of foreign currency is of local currency per unit of foreign currency is quoted. They are designated as direct/certain rates quoted. They are designated as direct/certain rates because the rupee cost of single foreign currency because the rupee cost of single foreign currency unit can be obtained directly. Direct quotation is also unit can be obtained directly. Direct quotation is also called home currency quotation.called home currency quotation.

Indirect method – Under this, a given number of Indirect method – Under this, a given number of units of foreign currency per unit of local currency is units of foreign currency per unit of local currency is quoted. Indirect quotation is also called foreign quoted. Indirect quotation is also called foreign currency quotationcurrency quotation

TYPES OF EXCHANGE RATETYPES OF EXCHANGE RATE

Buying and selling Exchange ratesBuying and selling Exchange rates

They are quoted as two way quotes –They are quoted as two way quotes –

for purchasefor purchase

and for sale transactions by the Bankand for sale transactions by the Bank

TYPES OF EXCHANGE RATETYPES OF EXCHANGE RATE

Spot and forward exchange rates:Spot and forward exchange rates:

The delivery under a foreign exchange transaction can The delivery under a foreign exchange transaction can besettled in one of the following waysbesettled in one of the following ways

Ready or cash – To be settled on the same dayReady or cash – To be settled on the same day

Tom – To be settled on the day next to the date of Tom – To be settled on the day next to the date of transactiontransaction

Spot – To be settled on the second working day Spot – To be settled on the second working day from the date of contractfrom the date of contract

Forward – To be settled at a date farther than the Forward – To be settled at a date farther than the spot datespot date

FOREX MARKET SIZEFOREX MARKET SIZE

SIZE OF THE MARKETSIZE OF THE MARKET

A.A. Largest in the worldLargest in the world

1995: $1.2 trillion daily1995: $1.2 trillion daily

2010 : $ 4.0 trillion daily2010 : $ 4.0 trillion daily

2013 : $ 5.3 trillion daily 2013 : $ 5.3 trillion daily

. .

FOREX MARKET SIZEFOREX MARKET SIZE

According to the According to the Bank for International Settlements, Bank for International Settlements, foreign-exchange trading increased to an average of foreign-exchange trading increased to an average of $5.3 trillion a day in 2013. $5.3 trillion a day in 2013.

To put this into perspective, this averages out to To put this into perspective, this averages out to be $220 billion per hour. be $220 billion per hour.

The foreign exchange market is largely made up of The foreign exchange market is largely made up of institutional investors, corporations, governments, institutional investors, corporations, governments, banks, as well as currency speculators. Roughly banks, as well as currency speculators. Roughly 90% of this volume is generated by currency 90% of this volume is generated by currency speculators capitalizing on intraday price speculators capitalizing on intraday price movements.movements.

FOREX MARKET CENTRESFOREX MARKET CENTRES

B.The BIS – Bank for International Settlements – the B.The BIS – Bank for International Settlements – the oldest international financial institution, released its oldest international financial institution, released its 83th detailed survey with the Global foreign 83th detailed survey with the Global foreign exchange market turnover. In the list below we have exchange market turnover. In the list below we have gathered the seven largest Forex Trading centres in gathered the seven largest Forex Trading centres in the world:the world:

1. United Kingdom1. United Kingdom Financial capital:Financial capital: London. London. The number one on the financial centres list is London, with a The number one on the financial centres list is London, with a

bit more than 40% of the total daily trading volume. London bit more than 40% of the total daily trading volume. London has held the first place for several years and it doesn’t look like has held the first place for several years and it doesn’t look like it will lose it any time soon as its share is much higher than it will lose it any time soon as its share is much higher than anyone else is on the list.anyone else is on the list.

FOREX MARKET CENTRESFOREX MARKET CENTRES

2 United States2 United States Financial capital:Financial capital: New York City. New York City. The second financial centre on the list is situated on The second financial centre on the list is situated on

the other side of the Atlantic. New York recorded a the other side of the Atlantic. New York recorded a daily trading volume of almost 19%, which is one daily trading volume of almost 19%, which is one percentage point more than in 2010.percentage point more than in 2010.

3. Singapore3. Singapore Financial capital:Financial capital: Singapore. Singapore. This southern Asian city can be proud to be at the This southern Asian city can be proud to be at the

third place. Indeed, Singapore just dethroned Tokyo third place. Indeed, Singapore just dethroned Tokyo for the first time with almost 6% of daily trading for the first time with almost 6% of daily trading volume.volume.

FOREX MARKET CENTRESFOREX MARKET CENTRES

4. Japan4. Japan Financial capital:Financial capital: Tokyo. 5.6% Tokyo. 5.6% 5. Hong Kong SAR5. Hong Kong SAR Financial capital:Financial capital: Hong Kong.: 4.1% Hong Kong.: 4.1% 6. Switzerland6. Switzerland Financial capital:Financial capital: Zurich.: 3.2% Zurich.: 3.2% 7. Australia7. Australia Financial capital:Financial capital: Sydney.: 2.7% Sydney.: 2.7%

FOREX MARKET development in INDIAFOREX MARKET development in INDIAIn 1978, RBI first allowed banks to act as foreign currency exchanger. In 1978, RBI first allowed banks to act as foreign currency exchanger.

India has seen a systematic transition from being a closed door economy to an India has seen a systematic transition from being a closed door economy to an open market economy since 1991.open market economy since 1991.

NSE was the first exchange to have received an in-principle approval from SEBI NSE was the first exchange to have received an in-principle approval from SEBI for setting up currency derivative segment. The exchange launched its for setting up currency derivative segment. The exchange launched its currency futures trading platform on 29th Aug, 2008. Currency futures on currency futures trading platform on 29th Aug, 2008. Currency futures on USD-INR were introduced for trading and subsequently the Indian rupee was USD-INR were introduced for trading and subsequently the Indian rupee was allowed to trade against other currencies such as euro, pound sterling and the allowed to trade against other currencies such as euro, pound sterling and the Japanese yen. Japanese yen.

Currency Options was introduced on Oct 29, 2010 & is available on USDCurrency Options was introduced on Oct 29, 2010 & is available on USD

On NSE the price of a future contract is in terms of INR per unit of other currency On NSE the price of a future contract is in terms of INR per unit of other currency e.g. US Dollars. Currency future contracts allow investors to hedge against e.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange risk. Currency Derivatives are available on four currency foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Currency options are currently available on US Dollars.Japanese Yen (JPY). Currency options are currently available on US Dollars.

Forex market in India is in a development & growth stageForex market in India is in a development & growth stage

THANK YOU THANK YOU - - FCA KAPIL AGRAWALFCA KAPIL AGRAWAL