Foreign Exchange Market - hemanth

8/7/2019 Foreign Exchange Market - hemanth

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FOREIGN EXCHANGEMARKET-Hemanth



MEANING

It is the mechanism of exchanging one currency

with another.

A means to reduce the exposure to the risks of

fluctuating exchange rates. It is by far the largest market In the world, In

terms of cash value traded, and includs trading

between large banks, central banks, currency

speculators, multinational corporations,

governments, other financial markets and

institutions.



UNIQUE MARKET BECA USE OF«.

Its trading volume.

The extreme liquidity of the market.

The large number and variety of traders in the

market. Its geographical dispersion.

Its long trading hours.

The variety of factors that affects exchange rates.



CHARACTERISTICS OF MARKET

The world wide volume of foreign exchange

trading is enormous, and it has ballooned in the

recent years.

New technologies like internet links are beingused in many trading centers through out the

world.

The integration of financial centers implies that

there can be no significant arbitrsge.



GEOGRAPHICAL EXTENT

Global Currency trading is a 24 hour ² a ² day

process. Many large international banks operate

trading rooms in major trading center on a round

the clock basis.S

ome currency trading isconducted on an official trading floor by open

bidding but most of it is done through dealers.



NATURE

It is a network of Banks, Brokers and Foreign

Exchange Dealers.

Important Exchange markets are in London,

New York, Zurich, Frank Furt, Tokyo, Singaporeand Paris.

Foreign Exchange Market is governed by an

unwritten code of conduct of all participants.

Foreign Exchange Markets are large commercialbanks that operate at two levels ² retail and inter

bank.



FUNCTIONS

Transfer of Purchasing power.

Financing of Inventory in transit.

Hedging facilities.

Currency conversions.

Reducing Foreign exchange risks: the risk exist

that the exchange values of the national

currencies may fluctuate i.e Transaction

Exposure



MARKET PARTICIPANTS

Bank and Nonbank Foreign exchange dealers.

Individuals and firms conducting commercial and

investment transactions.

Speculators and Arbitrageurs. Central Banks and Treasuries.

Foreign exchange brokers.



TERMINOLOGY

In the markets currency name are shortened to

3 letters to meet the needs of screen based tables.

These were developed by International

Organisation for Standardisation and are called

ISO codes or SWIFT codes.



FOREIGN CURRENCY ² FUTURES &

OPTIONS

Future Contracts: Foreign Currency is traded for

only a limited number of currencies for a given

delivery date.Amount of transaction and

maturity date is fixed by foreign exchange

markets.

Foreign Currency options: a currency option is

the right but not the obligation to buy (Call) or

sell (Put)



CALLS AND PUTS

A call option gives its holder the right to buy

shares of the underlying security at the strike

price, anytime prior to the options expiry date.

The writer(seller) of the option has the obligation

to sell the shares.

A put option gives its holders the right to sell the

shares of the underlying security at the strike

price, anytime prior to the options expiry date.

The writer(seller) of the option has the obligationto buy the shares.



TYPES OF MARKETS

Spot Market.

Forward Market.

Arbitrage.

Swaps.



EXCHANGE RATE DETERMINATION

Fixed Exchange rate

Flexible Exchange rate



SHOULD EXCHANGE RATES BE FIXED OR

FLEXIBLE

Depends on the

The effects of the exchange rate system on the

monetary policy.

The effects of the exchange rate system on tradeand economic integration.

Foreign Exchange Market - hemanth

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