Presented by

Sai kiran B

(12NA1E0036)

Foreign Exchange Market

Foreign exchange is the mechanism by which

the currency of one country gets converted

into the currency of another country.

The conversion of currency is done by the

banks who deal in foreign exchange. These

banks maintain stocks of one currencies in the

form of balances with banks

WHAT IS FOREIGN EXCHANGE

Volatile, affected by hedger, arbitrager, speculator.

Affected by demand and supply.

Affected by rate of interest.

Affected by balance of payment surplus and deficit.

Affected inflation rate.

Spot and forward rates are different.

Affected by the economic stability of the country.

Affected by the fiscal policy of the government.

Affected by the political condition of the country.

It can be quoted directly or indirectly

Nature of foreign exchange

Foreign exchange market operates either as:-

Spot Market: (Current Market)

Spot market for foreign exchange is that market which handles

only spot transaction or current transactions.

Principle characteristics:-

Spot Market is of daily nature. It does not trade in future

deliveries.

Spot rate of exchange is that rate which happens to prevail at the

time when transactions are incurred.

Operation of foreign exchange market:

Forward Market:

Forward Market for foreign exchange is that market which handles

such transaction of foreign exchange as are meant for future

delivery.

Principles Characteristics:-

It only caters to forward transaction.

It determines forward exchange rate at which forward transaction

are to be honored.

►Fixed Exchange Rate System

Fixed rates provide greater certainty for

exporters and importers.

►Flexible Exchange Rate System

Flexible exchange rate or floating exchange

rates change freely and are determined by

trading in the forex market.

Exchange Rate

Foreign exchange history can be viewed as a

series of solutions that allowed countries to

issue their own currency and to conduct their

own monetary policy while also allowing

international trade to be conducted by

providing a means of exchanging one

currency for another according to the

exchange rate between them, which was

either agreed-upon or set by the market.

History of Foreign exchange

A reliable forecast or future spot rate is called

study of empirical patterns of exchange rate

fluctuation. It provides essential information

for an exchange rate exposure.

Exchange rate fluctuations

☻ Its huge trading volume representing the

largest asset class in the world leading to high

liquidity.

☻ Its geographical dispersion;

☻ Its continuous operation: 24 hours a day

except weekends, i.e., trading from 20:15

GMT on Sunday until 22:00 GMT Friday.

☻The use of leverage to enhance profit and

loss margins and with respect to account size.

Characteristics of foreign exchange

People may need to exchange currencies in

a number of situations.for Eg…

Fluctuations in exchange rates

A market based exchange rate will change

whenever the values of either of the two

component currencies change.

The higher a country's interest rates, the

greater will be the demand for that currency.

Retail Exchange Market

Central banks participate in the foreign exchange market to align currencies to their economic needs.

Commercial companies. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rate.

Central bankNational central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest ratesand often have official or unofficial target rates for their currencies.

Market Participants

Institutional Framework

Foreign Exchange Regulation Act (FERA),

1973 was replaced by the market friendly

Foreign Exchange Management Act (FEMA),

1999.

Money and Securities Markets set up by the

Reserve Bank in 1999 was expanded in 2004

to include foreign exchange markets

Measures Initiated to Develop the Foreign

Exchange Market in India

Market Segments

Foreign exchange market activity takes place onshore with

Many countries prohibiting onshore entities from undertaking the operations in offshore markets for their currencies. It is the central bank, or professional dealers association, which normally issues the code of conduct (Canales-Kriljenko, 2004).In auction markets, an auctioneer or auction mechanism allocates foreign exchange by matching supply and demand orders.

FOREIGN EXCHANGE MARKET STRUCTURE

Top 10 Currency Traders as on May 2014 are