KARISHMA SHARMA (2K12A27)ANUJ GARG (2K12A13)

ANKIT SAPRA (2K12A55)GUNJA KUMARI (2K12A22)

J PRATEEK KUNDU (2K12A26)SHRUTIKA DHAWAN (2K12A53)

Foreign Exchange Market

Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion of currency is done by the banks who deal in foreign exchange. These banks maintain stocks of one currencies in the form of balances with banks

WHAT IS FOREIGN EXCHANGE

It also refers to the stock of foreign currencies and other foreign assets. The foreign exchange management ACT 1999 defines “Foreign exchange means foreign currency and includes… (a) Deposits credits and balances payable in any foreign currency. (b) Draft traveler’s cheques, letter or credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency. (c) Drafts travelers cheques, letter of credit or bills of exchange drawn by banks, institution or persons outside India, but payable in Indian currency

Cntd ….

Volatile, affected by hedger, arbitrager, speculator. Affected by demand and supply. Affected by rate of interest. Affected by balance of payment surplus and deficit. Affected inflation rate. Spot and forward rates are different. Affected by the economic stability of the country. Affected by the fiscal policy of the government. Affected by the political condition of the country.It can be quoted directly or indirectly

Nature of foreign exchange

Foreign exchange market operates either as:-

Spot Market: (Current Market)

Spot market for foreign exchange is that market which handles only spot transaction or current transactions.

 

Principle characteristics:- Spot Market is of daily nature. It does not trade in future deliveries. Spot rate of exchange is that rate which happens to prevail at the time when transactions are incurred.  

Operation of foreign exchange market:

Forward Market:

Forward Market for foreign exchange is that market which handles such transaction of foreign exchange as are meant for future delivery.

 

Principles Characteristics:- It only caters to forward transaction. It determines forward exchange rate at which forward transaction are to be honored.

►Fixed Exchange Rate SystemFixed rates provide greater certainty for exporters and importers. ►Flexible Exchange Rate SystemFlexible exchange rate or floating exchange rates change freely and are determined by trading in the forex market. 

Exchange Rate

Foreign exchange history can be viewed as a series of solutions that allowed countries to issue their own currency and to conduct their own monetary policy while also allowing international trade to be conducted by providing a means of exchanging one currency for another according to the exchange rate between them, which was either agreed-upon or set by the market.

History of Foreign exchange

A reliable forecast or future spot rate is called study of empirical patterns of exchange rate fluctuation. It provides essential information for an exchange rate exposure.

Exchange rate fluctuations

►The foreign exchange market or forex market as it is often called is the market in which currencies are traded. ►Currency Trading is the world’s largest market consisting of almost trillion in daily volumes and as investors learn more and become more interested, market continues to rapidly grow. ►All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency. ►The first currency of a currency pair is called the “base currency,” while the second currency is called the counter currency.

The Foreign Exchange Market for Beginners

►Foreign exchange Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market. ►Registering for a demo account allows a new trader to download the online trading platform that is used by the company’s clients trading live accounts and make trades as if they were doing it with real money.

Contd….

☻ Its huge trading volume representing the largest asset class in the world leading to high liquidity.☻ Its geographical dispersion;☻ Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday. ☻The use of leverage to enhance profit and loss margins and with respect to account size.

Characteristics of foreign exchange

People may need to exchange currencies in a number of situations.for Eg…

Fluctuations in exchange ratesA market based exchange rate will change whenever the values of either of the two component currencies change. The higher a country's interest rates, the greater will be the demand for that currency.

Retail Exchange Market

Central banks participate in the foreign exchange market to align currencies to their economic needs.Commercial companies. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rate.Central bankNational central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies.

Market Participants

Institutional Framework Foreign Exchange Regulation Act (FERA), 1973 was replaced by the market friendly Foreign Exchange Management Act (FEMA), 1999. Money and Securities Markets set up by the Reserve Bank in 1999 was expanded in 2004 to include foreign exchange markets

Measures Initiated to Develop the Foreign Exchange Market in India

Market SegmentsForeign exchange market activity takes place onshore withMany countries prohibiting onshore entities from undertaking the operations in offshore markets for their currencies. It is the central bank, or professional dealers association, which normally issues the code of conduct (Canales-Kriljenko, 2004).In auction markets, an auctioneer or auction mechanism allocates foreign exchange by matching supply and demand orders.

FOREIGN EXCHANGE MARKET STRUCTURE

Top 10 Currency Traders as on May 2012 are

► PLAN YOUR TRADE AND TRADE YOUR PLAN.► THE TREND IS YOUR FRIEND.►FOCUS ON CAPITAL PRESERVATION.►KNOW WHEN TO CUT LOSS.►TAKE PROFIT WHEN THE TRADE IS GOOD►BE EMOTIONLESS.►NOT TRADE BASED ON A TIP FROM A FRIEND OR BROKER.

CURRENCY TRADING RULES

►Trading Out of Boredom or Anger►Having Unrealistic Expectations.►Taking Highly Correlated Trades.►Failing to Use a Stop.►Taking Unnecessary Risks.►Being Too Patient With Losers and Not Patient Enough With Winners.►Being a “Possum Trader”.

Mistakes of Foreign exchange Traders