FOREX MARKETS

OUTLINE

Forex and Forex Markets

Investments and Risk

Management in Forex Market

FOREX AND FOREX MARKET

WHY FOREIGN INVESTMENTS?To take

advantage of economies of

scale

Foreign firms foster forward and backward

economic linkages.

Presence of foreign investors

creates a multiplier effect

Foreign investors are a boon to

government to raise revenue

and Employment Generation

Maintain a proper balance amongst the

factors of production by the supply of

scarce resources

The parent company enters

into newer financial markets

by its investments

outsideDevelops closer political

relationship between the

home and the host country

RISKS (EXPOSURE)

Transaction Risk• Measures the effect of

an exchange rate on outstanding obligations

Translation Risk• Refers to gains and

losses caused by translation of Forex Assets and Liabilities into Home Currency

Economic Risk• Extent to which the

economic value of the company changes due to change in Forex Rates.

THE FOREX MARKETForex

Exchange Market

• A Market for converting the currency of one country into the currency of another.

Exchange Rate

• The rate at which one currency is converted into another

• Bid – Ask = Spread

Types of Market

• Over the Counter Market

• Exchange Traded Market

Uses of Market

• To facilitate conversion of Currency

• To Trade investments of Foreign currency

• To manage Forex Exposure effectively

INSTRUMENTS IN THE FOREX MARKET

Currency Forwards –

OTC

Loans - OTC

Currency Swaps – OTC

Currency Futures -

RegulatedCurrency Exchange

Traded Funds - Regulated

Currency Options - Regulated

INVESTMENT AND DECISION MAKING IN THE FOREX MARKET

INVESTORS APPROACH TO FOREX RISK MANAGEMENT

Expected Payment/Receivable in FOREX

Apply Purchasing

Power Parity Theorem

Expected Gain

Hedge Using Futures or Forward Contract

Expected Loss

Apply Interest Rate Parity

Theorem and obtain expected

Forward Rate

Hedge using Futures

Hedge Using Forward

Contract/Swaps

High Risk Instrument =

Options

Low Risk and Investment Purpose = Exchange

Traded Funds

PURCHASING POWER PARITY

It is in the equilibrium the rate

of change in exchange equals

inflation rate differential.

PPP expresses the idea that a bundle of goods in one country should cost the same

in another country after exchange rates

are taken into account.

DECISION MAKING USING PPP

INTEREST RATE PARITYInterest rate parity has to do with the idea that money should earn an equal rate of

return. 

Uses nominal interest rates to

analyze the relationship

between spot rate and a corresponding

forward rate

LEADING AND LAGGINGLeads and lags is the alteration of settlement of

forex transaction because of an

expected change in exchange rates.

Accelerating the transaction is

known as "leads", while slowing it

down is known as "lags".

Leads will result when firms or individuals making payments expect an

increase in the foreign-exchange rate, while lags

arise when the exchange rate is expected to fall.

COMPLIANCERBI Regulations• Pay/Receive Forex within Certain period• Maintain Separate NRI Account• Convert Forex to Home currency

FEMA Regulations• Permitted Current Account Transactions• Permitted Capital Account Transactions• Person Resident in India/Person Resident

outside IndiaIncome Tax Regulations• Complete and full disclosure of foreign assets

and foreign interest in IT Returns• Transfer Pricing and Scrutiny Assessments

THE WORLD IS IN YOUR HANDS

FRIENDS TEAM MEMBERSAnusha

Dharmaraj

Dalen D’Souza

Janardhan Gouda

Jyothi Vidyashr

eeRoopika Shetty

Shinoj Isac

Shravan Kumar

Sneha Rao

Bharath Rao

Thank You