Final Report Main (Repaired) on Forex

8/12/2019 Final Report Main (Repaired) on Forex

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CHAPTER-I

INTRODUCTION

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1. INTRODUCTION

1.1 FOREX MARKET:

The foreign exchange market or Currency market is a global, worldwide

decentralized over the-counter financial market for trading currencies. Financial

centers around the world function as anchors of trading between a wide range of

different tyes of buyers and sellers around the clock, with the excetion of

weekends.

The foreign exchange market determines the relative values of different

currencies. The rimary urose of the foreign exchange is to assist international

trade and investment, by allowing businesses to convert one currency to another

currency. For examle, it ermits a !" business to imort #ritish goods and ay

$ound "terling, even though the business%s income is in !" dollars.

The foreign exchange market or Currency market is a global, worldwide

decentralized over the-counter financial market for trading currencies. Financial

centers around the world function as anchors of trading between a wide range of

different tyes of buyers and sellers around the clock, with the excetion of

weekends. The foreign exchange market determines the relative values of differentcurrencies. The rimary urose of the foreign exchange is to assist international

trade and investment, by allowing businesses to convert one currency to another

currency.

For examle, it ermits a !" business to imort #ritish goods and ay

$ound "terling, even though the business&s income is in !" dollars. 't also suorts

direct seculation in the value of currencies, and the carry trade, seculation on the

change in interest rates in two currencies. 'n a tyical foreign exchange transaction, a

arty urchases a (uantity of one currency by aying a (uantity of another currency.

The modern foreign exchange market began forming during the 1)*+s after three

decades of government restrictions on foreign exchange transactions the #retton

oods system of monetary management established the rules for commercial and

financial relations among the world%s maor industrial states after orld ar ''/,

when countries gradually switched to floating exchange rates from the revious

exchange rate regime, which remained fixed as er the #retton oods system.

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1.2 FOREX MARKET IN INDIA:

The Foreign xchange market, also referred to as the 2Forex2 or 2FX2

market is the largest financial market in the world, with a daily average turnover ofUS$1.9 triio!3 4+ times larger than the combined volume of all !.". e(uity

markets and the daily average turnover in foreign exchange market in 'ndia declined

around 4+ er cent to 50*.6 billion in 7ril 0+16 from 548.6 billion in 7ril 0+11.

'nterestingly, the daily average turnover in !"9:';< air in 0+16 is

higher at $"# iio!. "ince not all the trading in foreign exchange market in 'ndia is

in !"9:';< air alone, it can be assumed that more than 04 er cent of the trading in

the !"9:';< air takes lace overseas.

=arket share of 04 emerging market currencies increased to 16 er cent in

7ril 0+16 from 10.4 in the same month three years ago. >argest increases in

emerging market currencies were in Turkish lira, ?orean won, #razilian real and

"ingaore dollar. @Foreign xchange2 is the simultaneous buying of one currency

and selling of another. Currencies are traded in airs, for examle uro:!" 9ollar

!ondon, and ;ew Bork. !nlike any other financial market, investors can

resond to currency fluctuations caused by economic, social and olitical events at

the time they occur - day or night.

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The FE market is considered an ver the Counter TC/ or &interbank&

market, due to the fact that transactions are conducted between two counterarts over

the telehone or via an electronic network. Trading is not centralized on an exchange,

as with the stock and futures markets.

1." SI%NIFICANCE OF THE STUD&

The world nations are increasingly becoming more interrelated global trade, and

global investment. These international result in cross country flow of world nations.

Countries hold currencies of other countries and that a market, dealing of foreign

exchange results.

Foreign exchange means reserves of foreign currencies. =ore atly, foreign

exchange refers to claim to foreign money balances. Foreign exchange gives resident

of one country a financial claim on other country or countries. 7ll deosits, credits

and balances ayable in foreign currency and any drafts, travelers% che(ues, letters of

credit and bills of exchange ayable in foreign currency constitute foreign exchange.

Foreign exchange market is the market where money denominated in one currency is

bought and sold with money denominated in another currency.

Transactions in currencies of countries, arties to these transactions, rates at

which one currency is exchanged for other or others, ramification in these rates,

derivatives to the currencies and dealing in them and related asects constitute the

foreign exchange in short, forex/ market.

Foreign exchange transactions take lace whenever a country imorts goods and

services, eole of a country undertake visits to other counties, citizens of a country

remit money abroad for whatever urose, business units set u foreign subsidiaries

and so on. 'n all these cases the nation concerned buys relevant and re(uired foreign

exchange, in exchange of its currency, or draws from foreign exchange reserves built.

n the other hand, when a country exorts goods and services to another country,

when eole of other countries visit the country, when citizens of the country settled

abroad remit money homewards, when foreign citizens, firms and institutions invest

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in the country and when the country or its business community raises funds from

abroad, the country%s currency is bought by others, giving foreign exchange, in

exchange. =ultinational firms oerate in more than one country and their oerations

involve multile foreign currencies. Their oerations are influenced by olitics andthe laws of the counties where they oerate. Thus, they face higher degree of risk as

comared to domestic firms.

7 matter of great concern for the international firms is to analyze the

imlications of the changes in interest rates, inflation rates and exchange rates on

their decisions and minimize the foreign exchange risk. The imortance of the study

is to know the features of foreign exchange and the factors creating risk in foreign

exchange transactions and the techni(ues used for managing that risk


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1.' INDUSTR& PROFI(E

T)e I!*i+! ,+!i! E!/iro!0e!t

=odern banking in 'ndia started in the early 18th century1. Today, banks are among

the main articiants of the financial system in 'ndia.

,ANKIN% STRUCTURE

The commercial banking structure in 'ndia consists ofG "cheduled Commercial #anksH !nscheduled #anks, with the


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Reio!+ Rr+ ,+!3:These banks were established as er the rovisions of the


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1.7 STRUCTURE OF FOREX MARKET

M+i! P+rtii5+!t3 I! Forei! Ex)+!e M+ret3

There are four levels of articiants in the foreign exchange market.

7t the 6ir3t e/eare tourists, imorters, exorters, investors, and so on. These are the

immediate users and suliers of foreign currencies. 7t the 3eo!* e/e are the

commercial banks, which act as clearing houses between users and earners of foreign

exchange. 7t the t)ir* e/eare foreign exchange brokers through whom the nation%s

)

Forei! Ex)+!e M+ret

I!ter+!

,+! +o!t or

*e5o3it3

S5ot Deri/+ti/e38Ftre3 o5tio!3

et.

Ce!tr+

,+!

Diret

;)oe3+e

,+! +!* 0o!e< )+!er3

8Crre!ie3 +! !ote )e=e

Ret+i

I!*iret

8T)ro) roer3

For>+r*

8Otri)t ? S>+53

Mer)+!*i3e No!-0er)+!*i3e

8Aritr+e )e*e5e+tio!


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commercial banks even out their foreign exchange inflows and outflows among

themselves. Finally at the 6ort)and the highest level is the nation%s central bank,

which acts as the lender or buyer of last resort when the nation%s total foreign

exchange earnings and exenditure are une(ual. The central then either draws downits foreign reserves or adds to them.

1.# PARTICIPANTS

CUSTOMERS

The customers who are engaged in foreign trade articiate in foreign exchange

markets by availing of the services of banks. xorters re(uire converting the dollars

into ruee and imorters re(uire converting ruee into the dollars as they have to ayin dollars for the goods : services they have imorted. "imilar tyes of services may

be re(uired for setting any international obligation i.e., ayment of technical know-

how fees or reayment of foreign debt, etc.

COMMERCIA( ,ANKS

They are most active layers in the forex market. Commercial banks dealing with

international transactions offer services for conversation of one currency into another.

These banks are secialised in international trade and other transactions. They have

wide network of branches. Jenerally, commercial banks act as intermediary between

exorter and imorter who are situated in different countries. This action of bank

may trigger a sate of buying and selling of foreign exchange in the market.

Commercial banks have following o@eti/e3 for being active in the foreign

exchange marketG

They render better service by offering cometitive rates to their customers

engaged in international trade.

They are in a better osition to manage risks arising out of exchange rate

fluctuations.

Foreign exchange business is a rofitable activity and thus such banks are in a

osition to generate more rofits for themselves.

They can manage their integrated treasury in a more efficient manner.

CENTRA( ,ANKS

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'n most of the countries central banks have been charged with the resonsibility of

maintaining the external value of the domestic currency. 'f the country is following a

fixed exchange rate system, the central bank has to take necessary stes to maintain

the arity, i.e., the rate so fixed. ven under floating exchange rate system, thecentral bank has to ensure orderliness in the movement of exchange rates. Jenerally

this is achieved by the intervention of the bank. "ometimes this becomes a concerted

effort of central banks of more than one country.

7art from this central banks deal in the foreign exchange market for the following

urosesG

Ex)+!e r+te 0+!+e0e!t:

Though sometimes this is achieved through intervention, yet where a central

bank is re(uired to maintain external rate of domestic currency at a level or in a band

so fixed, they deal in the market to achieve the desired obective

Re3er/e 0+!+e0e!t:

Central bank of the country is mainly concerned with the investment of the

countries foreign exchange reserve in a stable roortion in range of currencies and

in a range of assets in each currency. These roortions are, inter alias, influenced by

the structure of official external assets:liabilities. For this bank has involved certain

amount of switching between currencies.

Central banks are conservative in their aroach and they do not deal in foreign

exchange markets for making rofits. Kowever, there have been some aggressive

central banks but market has unished them very badly for their adventurism. 'n the

recent ast =alaysian Central bank, #ank ;egara lost billions of dollars in foreign

exchange transactions.

I!ter/e!tio! < Ce!tr+ ,+!

't is truly said that foreign exchange is as good as any other commodity. 'f a

country is following floating rate system and there are no controls on caital

transfers, then the exchange rate will be influenced by the economic law of demand

and suly. 'f suly of foreign exchange is more than demand during a articular

eriod then the foreign exchange will become cheaer. n the contrary, if the suly

is less than the demand during the articular eriod then the foreign exchange will

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become costlier. The exorters of goods and services mainly suly foreign exchange

to the market. 'f there are no control over foreign investors are also suliers of

foreign exchange.

9uring a articular eriod if demand for foreign exchange increases than the suly,it will raise the rice of foreign exchange, in terms of domestic currency, to an

unrealistic level. This will no doubt make the imorts costlier and thus rotect the

domestic industry but this also gives boost to the exorts. Kowever, in the short run it

can disturb the e(uilibrium and orderliness of the foreign exchange markets. T)e

e!tr+ +! >i t)e! 3te5 6or>+r* to 355< 6orei! ex)+!e to 0eet t)e

*e0+!* 6or t)e 3+0e. This will smoothen the market. The central bank achieves this

by selling the foreign exchange and buying or absorbing domestic currency. Thus

demand for domestic currency which, couled with suly of foreign exchange, will

maintain the rice of foreign currency at desired level. This is called i!ter/e!tio!

< e!tr+ +!B.

'f a country, as a matter of olicy, follows fixed exchange rate system, the central

bank is re(uired to maintain exchange rate generally within a well-defined narrow

band. henever the value of the domestic currency aroaches uer or lower limit

of such a band, the central bank intervenes to counteract the forces of demand and

suly through intervention.

'n 'ndia, the central bank of the country, the


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interbank market through forex brokers. 'n 'ndia as er F97' guidelines the 79%s

are free to deal directly among themselves without going through brokers. The forex

brokers are not allowed to deal on their own account all over the world and also in

'ndia. In India brokers commission is fixed by FEDAI.

SPECU(ATORS

"eculators lay a very active role in the foreign exchange markets. 'n fact maor

chunk of the foreign exchange dealings in forex markets in on account of seculators

and seculative activities.The seculators are the maor layers in the forex markets.

#anks dealing are the maor seculators in the forex markets with a view to

make rofit on account of favourable movement in exchange rate, take osition i.e., if

they feel the rate of articular currency is likely to go u in short term. They buy that

currency and sell it as soon as they are able to make a (uick rofit.

Cororations articularly =ultinational Cororations and Transnational

Cororations having business oerations beyond their national frontiers and on

account of their cash flows. #eing large and in multi-currencies get into foreign

exchange exosures. ith a view to take advantage of foreign rate movement in their

favour they either delay covering exosures or does not cover until cash flow

materialize.

%o/er!0e!t3 narrow or invest in foreign securities and delay coverage of the

exosure on account of such deals.

I!*i/i*+ like share dealings also undertake the activity of buying and selling of

foreign exchange for booking short-term rofits. They also buy foreign currency

stocks, bonds and other assets without covering the foreign exchange exosure risk.This also results in seculations.

Cor5or+te e!titie3 take ositions in commodities whose rices are exressed in

foreign currency. This also adds to seculative activity.

T)e 35e+tor3 or tr+*er3in the forex market cause significant swings in foreign

exchange rates. These swings, articular sudden swings, do not do any good either to

the national or international trade and can be detrimental not only to national

economy but global business also. Kowever, to be far to the seculators, they rovide

the much need li(uidity and deth to foreign exchange markets. This is necessary to

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kee bid-offer which sreads to the minimum. "imilarly, li(uidity also hels in

executing large or uni(ue orders without causing any riles in the foreign exchange

markets. ne of the views held is that seculative activity rovides much needed

efficiency to foreign exchange markets. Therefore we can say that 35e+tio! i3!ee33+r< e/i i! 6orex 0+ret3.

1. FOREX MARKETS 4S OTHER MARKETS

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ne consisen mar"in rae 06 hours a

day allows Forex traders to leverage their

caital more efficiently with as high as

1++-to-1 leverage.

Lar"e ca&ia! re$uiremens, high margin

rates, restrictions on shorting, very little

autonomy.

)o *esricions "hort selling and sto order resricions.

Forei! ex)+!e re3er/e3 also called Forex re3er/e3 or FX re3er/e3/ in a strict

sense are only the foreign currency deosits and bonds held by central banks and

monetary authorities. Kowever, the term in oular usage commonly includes foreign

exchange and gold, "9


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R+! Co!trimited and The ;ational "tock

xchange of 'ndia >imited. The #ank&s 7merican 9eository "hares 79"/ are listed on the ;ew Bork "tock

xchange ;B"/ under the symbol &K9#& and the #ank&s Jlobal 9eository


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roducts are backed by world-class service and delivered to customers through the growing branch network,

as well as through alternative delivery channels like 7T=s, $hone #anking, ;et

#anking and =obile #anking.

The K9FC #ank $referred rogram for high net worth individuals, the K9FC #ank $lus and the 'nvestment7dvisory "ervices rograms have been designed keeing in mind needs of customers who seek distinct

financial solutions, information and advice on various investment avenues. The #ank also has a wide

array of retail loan roducts including 7uto >oans, >oans against marketable securities, $ersonal >oans and

>oans for Two-wheelers. 't is also a leading rovider of 9eository $articiant 9$/ services for retail

customers, roviding customers the facility to hold their investments in electronic form. K9FC #ank

was the first bank in 'ndia to launch an 'nternational 9ebit Card in association with S'"7

S'"7 lectron/ and issues the =asterCard =aestro debit card as well. The #ank launched its

credit card business in late 0++1. #y =arch 0++), the bank had a total card base debit and credit cards/ of

over 14 million. The #ank is also one of the leading layers in the @merchant ac(uiring business with

over *+,+++ $oint-of-sale $"/ terminals for debit : credit cards accetance at merchant establishments.

The #ank is well ositioned as a leader in various net based #0C oortunities including a wide range

of internet banking services for Fixed 9eosits, >oans, #ill $ayments, etc.

Tre+3rocal Currency

=oney =arket H 9ebt "ecurities, and (uities. ith the liberalization of the financial markets in 'ndia,

cororates need more sohisticated risk management information, advice and roduct structures. These

and fine ricing on various treasury roducts are rovided through the bank&s Treasury team. To comly

with statutory reserve re(uirements, the bank is re(uired to hold 0D of its deosits in government securities.

The Treasury business is resonsible for managing the returns and market risk on this investment ortfolio

Cor5or+te %o/er!+!e:

The bank was among the first four comanies, which subected itself to a Cororate Jovernance and Salue

Creation JSC/ rating by the rating agency, The Credit imited C/.

The rating rovides an indeendent assessment of an entity&s current erformance and an exectation on its

2balanced value creation and cororate governance ractices2 in future. The bank has been assigned a

&C JSC >evel 1& rating, which indicates that the bank&s caability with resect to wealth creation for

all its stakeholders while adoting sound cororate governance ractices is the highest.

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>everage our technology latform and oen scalable systems to deliver more roducts to more customers

and to control oerating costs.

=aintain our current high standards for asset (uality through discilined credit risk management.

9evelo innovative roducts and services that attract our targeted customers and address inefficiencies in

the 'ndian financial sector.

Continue to develo roducts and services that reduce our cost of funds.

Focus on high earnings growth with low volatility.

K9FC #ank is head(uartered in =umbai. The #ank at resent has an enviable network of 1,*0 branchessread in **1 cities across 'ndia. 7ll branches are linked on an online real-time basis. Customers in over ++

locations are also serviced through Telehone #anking. The #ank&s exansion lans take into account the need

to have a resence in all maor industrial and commercial centres where its cororate customers are located as

well as the need to build a strong retail customer base for both deosits and loan roducts. #eing a clearing:

settlement bank to various leading stock exchanges, the #ank has branches in the centres where the ;":#"

have a strong and active member base.The #ank also has 4,8)8 networked 7T=s across these cities. =oreover,

network can be accessed by all domestic and international Sisa:=asterCard, Sisa lectron:=aestro, $lus:Cirrus and

7merican xress Credit:Charge cardholders.

AIMS:

Continuous effort to imroving the services.

valuating individual skill through training and motivations.

Total involvement through articiant%s management activities.

Creating healthy and safe environment.

"ocial develoment.

Cre*it R+ti!

The #ank has its deosit rograms rated by two rating agencies - Credit 7nalysis H imited C7


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Final Report Main (Repaired) on Forex

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