Foreign Exchange PPT

8/13/2019 Foreign Exchange PPT

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Foreign Exchange refers to foreign currencies possessedby a country for making payments to other countries.

It may be defined as exchange of money or credit in onecountry for money or credit in another.

It covers methods of payment, rules and regulations ofpayment and the institutions facilitating such payments.

FOREIGN EXCHANGE


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FOREIGN EXCHANGE MARKET

A foreign exchange market refers tobuying foreign currencies with domesticcurrencies and selling foreign currenciesfor domestic currencies.

Thus it is a market in which the claims toforeign moneys are bought and sold fordomestic currency.

Exporters sell foreign currencies for

domestic currencies and importers buyforeign currencies with domesticcurrencies.

Foreign Exchange transactions result ininflow & outflow of foreign exchange.


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o Largest of all financial markets with average daily turnover of over $2trillion!

o 66% of all foreign exchange transactions involve cross-bordercounterparties.

o Only 11% of daily spot transactions involve non-financial customers.

o London is the largest FX market.

o US dollar involved in 87% of all transactions.

CHARACTERISTICS OF

FOERIGN EXCHANGE MARKET


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The foreign exchange market is the mechanism bywhich participants:

transfer purchasing power between countries;

obtain or provide credit for international tradetransactions, and

minimize exposure to the risks of exchange ratechanges.

FUNCTION OF FOERIGN EXCHANGE

MARKET


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IMPORTANTCURRENCIES

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STRUCTUREOFTHEFOREX MARKET


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FOREIGNEXCHANGEMARKETPLAYERS


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FOREXMARKETPLAYERS


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The foreign exchange market is used by banks, investment companies, companies and evenindividuals who want to either cover themselves against the risk of foreign exchange fluctuationsor to speculate in hopes of making a profit. 95% of all forex transactions are purely speculative innature.

Only 5% of all forex transactions result from international companies who need to convert theirmoney back to the company's main operating currency.

1. Commercial banks are the main participants in the forex market, but their "market share" isslowly shrinking. Currently, 43% of all transactions pass through the interbank market, asopposed to 63% in 1998 and 53% in 2004. In terms of forex trading activity, the main role of

banks is to serve as middlemen for the other market participants. Their objective is to makeprofits through "market making", which means that they offer their clients a "buy" price and a"sell" price.

2. Institutional investors are the second biggest players. They include investment and insurancecompanies, pension funds and hedge funds. They participate in forex trading in order to covertheir stock, bond and currency portfolios and they represent 30% of all foreign exchangetransactions.

3. Central banksintervene to manage their stock of currency and state money. Their transactionsrepresent 5% to 10% of all forex trading volume. The central bankscan also intervene inorder to defend their respective currencies and to adjust economic or financial inbalances.
http://www.forex-central.net/central-banks.phphttp://www.forex-central.net/central-banks.php


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4. Brokers allow private individuals to access the forex market by transmitting theirclients' orders to commercial banks or to trading platforms such as EBS, ReutersDealing, HotSpot, FXall, etc... They get paid from the spread or by charging acommission on each transaction. Also, there are many brokers that operate as

market makers; like commercial banks, they also provide their clients with abuy/sell (bid/ask) price to earn the spread if they are able to find a buyer andseller at the same time. If the market maker doesn't find a buyer and a seller, itwill try to profit by covering its client's position on the interbank market.

5. Multinational companies participate in forex trading in order to convert their

money during import or export activities. Their transactions representapproximately 5% of all global forex transactions. Some companies evenhave their own trading floors, with traders speculating in order to make profitsand to reduce the risks related to exchange rate fluctuations.

6. Private investors/individuals have recently been trading the forex market aswell, thanks to the internet, which allows them to have real-time access to

currency exchange rates. Today, their transaction volume adds up to over 5% ofall forex transactions. Currency trading is now suitable for various investortypes, who can now profit, just like the bigger players, by properly applyingleverage and money management principles.


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A Spot transaction in the interbank market is the purchase offoreign exchange, with delivery and payment between banks totake place, normally, on the second following business day.

The date of settlement is referred to as the value date.

TRANSACTIONS

Types of Transactions


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An outright forward transaction (usually called justforward) requires delivery at a future value date of aspecified amount of one currency for a specifiedamount of another currency.

The exchange rate is established at the time of the

agreement, but payment and delivery are not requireduntil maturity.

Forward exchange rates are usually quoted for valuedates of one, two, three, six and twelve months.

Buying Forward and Selling Forwarddescribe the sametransaction (the only difference is the order in whichcurrencies are referenced.)



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A swap transaction in the interbank market isthe simultaneous purchase and sale of agiven amount of foreign exchange for twodifferent value dates.

Both purchase and sale are conducted withthe same counterparty.

Some different types of swaps are:

spot against forward, forward-forward,

Non deliverable forwards (NDF).



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TYPES OF FOREIGN EXCHANGE MARKET


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TYPES OF

FOREIGN EXCHANGE MARKET

Foreign Exchange Market is of two types retailand wholesale market.

1. Retail Market

The retail market is a secondary price maker. Here travelers, tourists andpeople who are in need of foreign exchange for permitted small transactions,exchange one currency for another.

2. Wholesale MarketThe wholesale market is also called interbank market. The size of

transactions in this market is very large. Dealers are highly professionals andare primary price makers. The main participants are Commercial banks,Business corporations and Central banks. Multinational banks are mainlyresponsible for determining exchange rate.

3. Other Participants

a) Brokers

Brokers have more information and better knowledge of market. Theyprovide information to banks about the prices at which there are buyers andsellers of a pair of currencies. They act as middlemen between the price

makers.


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b) Price Takers

Price takers are those who buy foreign exchange which they require andsell what they earn at the price determined by primary price makers.

c) Indian Foreign Exchange Market

It is made up of three tiers

i. Here dealings take place between RBI and Authorized dealers (ADs) .(mainly commercial banks).

ii. Here dealings take place between Ads

iii. Here ADs deal with their corporate customers.


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SPOTANDFORWARDEXCHANGERATES

EXCHANGE RATE

Transactions in exchange market are carried out at what are termed asexchange rates. In foreign exchange market two types of exchange rate operationstake place. They are spot exchange rate and forward exchange rate.

1) Spot Exchange RateWhen foreign exchange is bought and sold for immediate delivery, it is called spot

exchange. It refers to a day or two in which two currencies are involved. The basicprinciple of spot exchange rate is that it can be analyzed like any other price with thehelp of demand and supply forces.

The exchange rate of dollar is determined by intersection of demand for andsupply of dollars in foreign exchange. The Remand for dollar is derived from countrysdemand for imports which are paid in dollars and supply is derived from countrysexports which are sold in dollars.

The exchange rate determined by market forces would change as these forceschange in market. The primary price makers buy (Bid) or sell (ask) the currencies inthe market and the rates continuously change in a free market depending on demandand supply. The primary dealer (bank) quotes two-way rates i.e., buy and sell rate.

(Bid) Buy Rate 1 US $ = ` 45.50

(Ask) Sell Rate 1 US $ = ` 45.75

The bank is ready to buy 1 US $ at Rs. 45.50 and sell at Rs. 45,75. The differenceof Rs.0.25 is the profit margin of dealer.


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2) Forward Exchange Rate

Here foreign exchange is bought or sold for future delivery i.e.,for the period of 30, 60 or 90 days: There are transactions for 180

and 360 days also. Thus, forward market deals in contract forfuture delivery. The price for such transactions is fixed at the time ofcontract, it is called a forward rate.

Forward exchange rate differs from spot exchange rate as theformer may either be at a premium or discount. If the forward rate is

above the present spot rate, the foreign exchange rate is said to beat a premium. If the forward rate is below the present spot rate, theforeign exchange rate is said to be at a discount. Thus foreignexchange rate may be at forward premium or at forward discount.

For Eg. an Indian importer may enter into an agreement topurchase US $ 10,000 sixty days from today at 1 US $ = Rs. 48. Noamount is paid at the time of agreement, except for usual securitymargin money of about 10% of the total amount. 60 days formtoday, the importer will get 10,000 US $ in exchange for Rs.4,80,000 irrespective of the Spot exchange rate prevailing on thatdate.


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a) Factors Influencing Forward Exchange Rate

i) Interest rates.ii) Degree of speculation in foreign exchange market.

iii) Inflation rate.iv) Foreign investorsconfidence in domestic country.v) Economic situation in the country.vi) Political situation in the country.vii) Balance of payments position etc.

b) Need For Forward Exchange Rate Contracts

To overcome the possible risk of loss due to fluctuations inexchange rate, exporters, importers and investors in othercountries mayenter in forward exchange rate contracts.

In floating or flexible exchange rate system thepossibility of wide fluctuation in exchange is more. Thus, bothexporters and importers safeguard their position through aforward arrangement. By entering into such an arrangement bothparties minimize their loss.
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REGULATORS

OFFOREIGN EXCHANGE

MARKETS


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RBISROLEINTHEFOREXMARKET

To manage the exchange ratemechanism.

Regulate inter-bank forextransactions and monitor the

foreign exchange risk of thebanks.

Keep the exchange ratestable.

Manage and maintaincountry's foreign exchangereserves.


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RBI has imposed foreign exchangeexposure limits on banks (FE 12 of 1999).

The limits are tied with the Paid up capital of

the bank.

Previously banks had NOP limit, which wasbased on foreign exchange volume handled

by the bank.

RBIs Rolein the Forex Market


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TREASURYOPERATIONS AT RBI

1. All Central Banks have treasuries to implement policyobjectives vis a vis EXCHANGE RATE & INTEREST

RATES

2. Dealing room catered to the FX market only

3. Money market was being looked after by the Securities

department

4. It soon became apparent that the two cannot work inisolation with each other as the linkage between themoney market & exchange market became pronounced

5. Finally the dealing room and securities departmentwere merged to form EDMD to from first ever Treasuryof RBI.


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FOREIGNEXCHANGEMANAGEMENTACT,1999 (FEMA)


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INTRODUCTION

A system of exchange control was first time introduced through a series ofrules under the Defense of India Act, 1939 on temporary basis. The foreigncrises persisted for a long time and finally it got enacted in the statute underthe title Foreign Exchange Regulation Act, 1947. Subsequently, this act wasreplaced by the Foreign Exchange Regulation Act, 1973(FERA) which wascame into force with effect from January 1, 1974 and regulating foreign

exchange for more than 26 years under this Act.

In 1991 Government of India initiated the policy of economic liberalization.After this foreign investment in many sectors were permitted in India. In 1997,Tarapore committee on Capital Account Convertibility, constituted by theReserve Bank of India, recommended change in the legislative framework

governing foreign exchange transactions. Accordingly, the ForeignExchange Regulation Act, 1973 was repealed and replaced by the newForeign Exchange Management Act, 1999 (FEMA) with effect from June 01,2000. Under FEMA the emphasis was on management of foreign exchange.


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APPLICABILITY OF FEMA

The Foreign Exchange Management Act, 1999 was enacted toconsolidate and amend the law relating to foreign exchange with theobjective of facilitating external trade and for promoting the orderlydevelopment and maintenance of foreign exchange market in India.FEMA extends to the whole of India. The Act also applies to allbranches, offices and agencies outside India owned or controlled by

a person resident in India and also to any contravention committedthere under outside India by any person to whom this Act is applies.


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OVERALL STRUCTURE

The overall structure of Foreign Exchange Management Act, 1999 is covered bylegislations, rules and regulations. These legislations, rules and regulationsrelating to Foreign Exchange Management Act, 1999, can be divided in to thefollowings:

1. FEMA contains 7 chapters divided into 49 sections (Supreme Legislation)

2. 5 sets of Rules made by Ministry under section 46 of FEMA. (Delegated

legislations)

3. 23 sets of Regulations made by RBI under section 47 of FEMA. (SubordinateLegislations)

4. Master Circular issued by Reserve Bank of India every year.

5. Foreign Direct Investment (FDI) policy issued by Department of IndustrialPolicy and Promotion (DIPP) time to time.

6. Notifications and Circulars issued by Reserve Bank of India.

7. Enforcement Directorate.


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AUTHORITIES AND ENFORCEMENT MACHINARY

FEMA in itself is not an independent and isolated law. Theprovisions of FEMA are spread at different place and so thereare regulatory bodies. Reserve Bank of India makesRegulations for FEMA and the Rules are made by CentralGovernment. Authorities governing the enforcement of FEMAare:

1. Foreign Exchange Department of Reserve Bank of India.

2. Directorate of Enforcement, Department of Revenue,Ministry of Finance.

3. Capital Market Division, Department of Economic Affairs,Ministry of Finance.

4. Foreign Trade Division, Department of Economic Affairs,Ministry of Finance.


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FOREIGNEXCHANGEDEALERSASSOCIATION

OFINDIA- FEDAI


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FOREIGNEXCHANGEDEALERSASSOCIATIONOFINDIA( FEDAI )

An association of banks specializing in the foreignexchange activities in India.

Established in 1958, FEDAI (Foreign ExchangeDealers' Association of India) is a group of banks thatdeals in foreign exchange in India as a self regulatorybody under the Section 25 of the Indian Company Act(1956).


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THEROLEANDRESPONSIBILITIESOFFEDAI AREASFOLLOWS:

Formulations of FEDAI guidelines and FEDAI rules for Forex business.

Training of bank personnel in the areas of Foreign Exchange Business.

Accreditation of Forex Brokers.

Advising/Assisting member banks in settling issues/matters in their dealings.

Represent member banks on Government/Reserve Bank of India and otherbodies.

Rules of FEDAI also include announcement of daily and periodical rates to itsmember banks.

FEDAI guidelines play an important role in the functioning of the marketsand work in close coordination with Reserve Bank of India (RBI), otherorganizations like Fixed Income Money Market and DerivativesAssociation (FIMMDA), the Forex Association of India and various othermarket participants.


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Foreign Exchange PPT

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