Foreign Exchange Markets

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What is FOREX Market?

is an over the counter market.Through it we can convert one country’s currency into another.Forex markets are quite decentralized. Participants like market makers, brokers, corporate and individual customers are physically separated from each other.

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Forex Trading: what’s so unique about it?

A Forex trader can work from home or office at his chosen hours of workfirst session of the trade i.e. the Asian session, (Tokyo, Hong Kong, Singapore) starts on Sunday evening at around 7.00 p.m. EST (Eastern Standard Time)the second session begins in London at 2.00 a.m. EST third and final session in New York at 7.00 a.m. EST and ends at about 5.00 p.m. EST at Los Angeles.

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World Forex Markets

They are mostly centered around organized markets like New York, Tokyo, London, Zurich, Hong Kong, Singapore etc.they daily trade hundreds of billions of dollars worth of currencies of the world.Forex market is infact, an abstract concept for there is no such single location, say like the Mumbai stock exchange.It is merely an over the counter market.

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Major Forex CurrenciesUSD : US DollarEUR : EUROGBP : British PoundJPN : Japanese YenCHF : Swiss FrancAUD : Australian DollarCAD : Canadian Dollar

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Foreign Exchange Markets

Spot marketsForward marketsFutures markets (In India, yet not permissible)

Options marketsSwaps markets

Futures, options and swaps are called derivatives because they derive their value from the underlying exchange

rates.

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Spot Market

For Example: Current Price is USD/INR = 42.50 If a person wants to buy $1000 US

then he has to pay Rs.42,500/- to the seller.

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Forward Market

For Example: The current price for USD/CNY =

7.6650 Buy the forward of $100,000 @

7.6500 for 3 month period. Suppose, if CNY depreciates to

7.7500 after 3 months Then, sell it at 7.7500 and have the gain of CNY 10000 ($100000 X 0.1)

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Future Market

Just same as Forward Contract, but a regulatory, like any exchange is the intermediary in the Future contract.In India, CCI will be the regulatory for the Future Market.CCI is the Clearing Corporation of India, a RBI subsidiary.Currency Future will be permissible in India within 6 to 8 months.

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Option Market

Call Option: “Right to Buy” A person enters in the contract of a call

option, having option of 3 month with the price of 40Rs./USD.

After 3 months, if the spot price is higher than 40, say 42/USD.

then also the buyer has right to buy that lot at the rate of 40Rs./USD

By this way he can save 2Rs./USD.

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Option Market

Put Option: “Right to Sell” In previous example, after 3 month, if

Rupee appreciates and reach the level of 38Rs./USD

Then also that person can sell that lot at the rate of 40Rs/USD

Again, gain of 2Rs/USD!!

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Swap markets

Currency Swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped.For example:

A U.S. based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars.

These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange.

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Forex Market In IndiaIn India, the economic liberalization in the early nineties provided the economic rationale for the introduction of FX derivatives.India’s share in worldwide foreign exchange market turnover has grown to 0.9% this year, marking a three-fold jump from just 0.3% in 2006.This is the fastest increase in market share for any other country in the world, according to data compiled by Switzerland-based Bank for International Settlement (BIS).

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