FX Lecture1
Transcript of FX Lecture1
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Course Objective
Familiarize students with conceptsrelated to Forex Management
Analyze the dynamics of the international
foreign exchange markets Understanding the mechanics,
mathematics and applications of thevarious FX Products
Interpret and quote FX spot & forward
rates Examine international market
conventions, ethics & trading terminologyused
Implement various FX risk takingconcepts and strategies
Understand how banks quote, sourceand cover positions.
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Need for Foreign
Exchange No country is self sufficient
Exchange of goods and
services not carried out onbarter basis
Every country has its ownsovereign currency
This currency is not legaltender outside its boundaries
Hence when goods are bought
and sold by people in differentcountries, currencies have tobe exchanged
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What is foreign
exchange?Section 2 of FERA 1973 states
Foreign Exchange means foreigncurrency and includes
all deposits, credits and balancespayable in any foreign currency andany drafts, travelers cheques, lettersof credit and bills of exchange,expressed or drawn in Indian currencybut payable in any foreign currency;
any instrument payable at the optionof the drawee or holder thereof or anyother party thereof or any other partythereto, either in Indian currency or inforeign currency or partly in one andpartly in the other. Thus Foreign Exchange means Foreign money and
near money instruments denominated in foreigncurrency
It includes notes, cheques, bills of exchange, bankbalances, and deposits in foreign currency.
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Forex Market Features
Global market
24 hour market
No geographical location
Dealers linked via telecomnetwork
Trust and confidentiality
Perfect market
Exporters, importers,
speculators, banks
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Participants
Customers both importers andexporters
Commercial banks buy foreign exchange
from exporters and sell it to importers andto meet requirements of their othercustomers as well as to earn profit
Central banks for Exchange rate management
Reserve management Exchange brokers
Overseas Foreign Exchangex markets
Speculators Banks to make profits
Corporates MNCs and TNCs with a view totake advantage of exchange rate movements
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Participants contd.
Governments who borrow orinvest in foreign securities and
delay coverage Individuals who buy and sell
foreign exchange for booking
short term profits. They alsobuy currencies, stocks, bondsetc.
Corporates take positions incommodities whose prices areexpressed in foreign currency
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Forex Transactions
Spot transactions
Spot Market
QuotationsCross exchange Rates
Forward transactions
Forward MarketPremium or discount on the
forward contract
Intermarket arbitrage
Measuring changes in spotexchange rates
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Types of dealings
Merchant transactions Buy / sell from / to Exporters / Importers
Transactions can be undertaken only on
account of genuine exposure of customers Speculation prohibited
Inter bank Transactions Banks deal with each other
Overseas transactions
Bank in India buys / sells foreign exchange inthe overseas market
Transactions between banks andReserve Bank of India RBI is not obliged to sell forex but buys forex
offered to it by Ads It intervenes as and when necessary
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THE TRADING DAY
TIME ZONE
0900 Tokyo almost
winding up Singapore, Hong
Kong live
1100 Middle East opens
1230 Europe opens
1700 India closing
1900 New York opening
Tokyo opening THE CYCLE CONTINUES NON
STOP
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Indian Scenario
Banks deal with each otherthrough Reuters Dealing
Systems etc. They are calledAuthorised dealers.
The main market is in Mumbaiwith markets also in Chennai,
Kolkatta, Hyderabad,Bangalore and Cochin.
The Authorised Dealers havealso been permitted by theReserve Bank of India to dealin foreign exchange marketsoverseas.
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Factors that have contributed
to growth of Indian Forex
Market Global Forex market has taken quantum jump and
India market has followedsuit The daily gross turnover in the international forex
market is more than a trillion US dollars. In contrast,the daily volume on the New York Stock Exchangeis only about US$ 20 billion, and the daily turnoverin the Indian FX market is a mere US$ 3 billion
Better communication network like telephones,telexes, swift, Reuters / telerate systems andother dealing systems
Rigid and tight exchange control regulations have
been relaxed More players have been added with opening of
the banking sector to the private sector Banks have been allowed to a small extent to
have foreign currency assets and liabilities Forex dealings have come of age in India.
Especially with the introduction of LERMS andfreedom given to corporates to book , cancel andrebook forward contracts.