Forein Exchange Market
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Transcript of Forein Exchange Market
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FOREIGN EXCHANGE MARKET
Group 3
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FOREIGN EXCHANGE
The Currency Market where money denominatedin onecurrency is bought and sold with money
denominated in anothercurrency. Exchange rates are important becausetheyenable
us to translate differentcounties prices intocomparableterms.
Exchange rates are determined inthe same way asother asset prices.
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TIMELINE
1944 Bretton Woods Accord is established afterWorld War II to help
stabilizethe global economy.
1971 Smithsonian Agreement is established which provided greater
fluctuation bands forcurrencies.
1972
In aneffortto move away from the dependencytheEuropeancommunityhad acquired onthe U.S. dollar, theEuropean JointFloat was established.
1973
The official switchto a free floating currency system was madeafter boththeEuropean Joint Float and theSmithsonianAgreement failed.
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TIMELINE
1978
In a jointeffortto help othercountries gainindependence from the U.S. dollar, theEuropeanMonetarySystem was introduced to othercountries.
1978 The IMF officially mandated the free-floating currency
system.
1993 A worldwide free-floating currency system is established
whentheEuropean MonetarySystem failed.
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MARKET SIZE
COUNTRY TURNOVER TOTAL %
London US $ 1.36 trillion 34.1 %
New York US $ 0.66 trillion 16.6 %Tokyo US $ 0.24trillion 6 %
Dailyturnover in FOREX is US $ 3.98trillion.
FOREX futures is currently operational in developedcountries and is growing at7%. Foreignexchangetrading has increased by 38%between April 2005 and April 2006 and has morethandoubled since2001. Top 3 traders areDeutsche Bank 20.96%, UBS AG
14.58%, Barclays Capital 10.45%
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MARKET PARTICIPANTS
Banks
The interbank marketcaters for boththe majority ofcommercial turnover and large amounts ofspeculativetrading every day. A large bank maytrade billions of dollars daily.
Commercial companies
These arecompanies seeking foreignexchangetopay for goods or services.Theytrade fairly smallamounts compared to those of banks orspeculators, and theirtrades oftenhave little shortterm impact on market rates.
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MARKET PARTICIPANTS
Central Banks
National central banks play an important role intheforeignexchange markets.Theytryto control themoney supply, inflation, interest rates and oftenhave
official or unofficial target rates fortheircurrencies.
Hedge funds as speculators
70% to 90% of foreignexchangetransaction arespeculative
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MARKET PARTICIPANTS
Investment management firms
typically manage large accounts on behalf ofcustomerssuch as pension funds and endowments usethe foreignexchange marketto facilitatetransactions in foreign
securities Retail foreign exchange brokers
They participate indirectlythrough brokers or banks
Non-bank foreign exchange companies
Companies offercurrencyexchange and internationalpayments to private individuals and companies
Money transfer/remittance companies
They perform high-volume low-valuetransfers generally by
economic migrants back to theirhomecountry.
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CONVENTIONS AND STANDARDS
uoting
DirectMethod
SpotMarket
Forward
MarketIndirectMethod
Accounting AS11
Settlement
T + 1
T + 2
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SIX TYPES OF MARKETS
Spot
Forward
Future Swap
Option
Exchangetraded funds
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SPOT MARKET
Its given by all majornewspapers.
Majorcurrencies have4 different rates,
1) Spot price, 2) 30 days, 3)90 days and 4)180 days Bid-Ask Spread is used to calculatethe feecharged
by bank interms of largetransaction.
Bid = The price at whichthe bank is willing to buy
Ask = The price it will sell thecurrency
PercentageSpread Formula (PS) is used,
100x
Ask
BidAskPS
!
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FORWARD MARKET
An agreement between a bank and a customertodeliver a specified amount ofcurrency againstanothercurrency at a specified future date and at a
fixed exchange rate. The main purpose of forward market is Hedging
that is the act of reducing exchange rate risk.
Two Methods involved in Forward market are:
Outright Rate: Quoted to commercial customers.
Swap Rate: Quoted inthe interbank market as adiscount or premium.
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FORWARD MARKET
Calculating the forward Premium/Discount:
= F-S x 12 x 100S n
where F = The forward rate ofexchange
S = The spot rate of exchange
n = Thenumber of months inthe
forward contract
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Future Market
Exchangetraded forward transaction.Standard contract size and maturity date.
Interest inclusive and usually for 3 months.
Swap MarketMost prevalent market.
Two parties exchangecurrencies for a particularperiod and reversethe sametransaction at a pre
decided latter date.
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Option Market
It is a derivative wherethe ownerhas the right butnotthe obligationto exchange money from onecurrencyto another at a pre agreed rate and date.
It is the largest and most liquid market.
Exchange traded funds
They are openend investmentcompanies thatcan betraded anytimethroughoutthecourse ofthe day.
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FOREIGN EXCHANGE IN INDIA
Early years post independence 1947-1977:
Bretton Woods system
Devaluation in1966 & 1971
Eventual breakdown ofBretton Woods system
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FOREIGN EXCHANGE IN INDIA
Formative years 1978-1992:
Intra-daytrading
Daily announcement bythe RBI
High levels of regulations
Effects of FERA
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FOREIGN EXCHANGE IN INDIA
Post Liberalization Era 1992- present:
Market determined exchange rate
Restrictions oncurrent A/ctransactions wererelaxed
Internal Technical Group on FOREX Market(2005)set up by RBI made further recommendations forLiberalization
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NOSTRO & VOSTRO
NOSTRO A/c & VOSTRO A/c are accounting termsused to distinguish an accountyou hold for another
entity from an account anotherentityholds foryou.Theentities inquestion are almost always, butneed not be, banks.Speaking from the bank'spoint-of-view:
NOSTRO A/c is our account of our money, held byyou
VOSTRO A/c is our account ofyour money, heldby us
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RELATIONSHIP BETWEEN FOREIGN EXCHANGE
& STOCK MARKET
Theequity marketcan impactthecurrency marketsin many different ways.
The direct relation between foreignexchangemarket and the stock market.
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DIFFERENCE BETWEEN FOREIGN EXCHANGE
AND STOCK MARKET.
Greater leverage
No middlemen
Buy/Sell programs do notcontrol the Market Same price for broker assisted trades
Trade with real time profits
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Thank You