Foreign+Exchange+Market

7/31/2019 Foreign+Exchange+Market

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FOREIGNEXCHANGEMARKET

By:Apoorva khirevinod kumar

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MEANING

The foreign exchange market is the "place" where currencies aretraded

A market for converting the currency of one country into thecurrency of another.

EXAMPLE- Re/$ 44.76 means 44.76=1USD

The foreign exchange market is a worldwide decentralizedfinancial market for the trading of currencies.

Open 24 hours a day

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FOREIGN EXCHANGEMARKETIN INDIA- ABRIEFBACKGROUND

The foreign exchange market in India started three decades ago when in1978 the government allowed banks to trade foreign exchange with one

another.

Trading is regulated by the Foreign Exchange Dealers Association of India

Clearing and settlement functions in the foreign exchange market are

largely carried out by the Clearing Corporation of India Limited .

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TYPESOFMARKET

Spot market

Future market

Forward market

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SPOTMARKET

Currencies are bought and sold according to the current price.

It is settled on the second working day

Saturday and Sunday are holiday

Ex: Spot rate: Rs./$40.35-41.36 supposing you have 124000 dollar

received on Thursday the bank will settle 124000*40.35=50,03,400

on the following Monday.

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FORWARDMARKET

Rate contracted today for exchange of currencies at aspecified future date.

It allows for more flexibility.

Determine the terms of the agreement between

themselves.

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FUTUREMARKET

These transactions involve future payment and futuredelivery at an agreed exchange rate

It bought and sold based upon a standard size andsettlement date on public commodities markets

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FUNCTIONS

Transfer purchasing power between countries

Obtain or provide credit for international tradetransactions

Minimize exposure to the risks of exchange ratechanges

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MARKET PARTICIPANTS

Bank and Nonbank Foreign Exchange Dealers

Individuals and Firms

Speculators and Arbitragers

Central Banks and Treasuries

Foreign Exchange Brokers9


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FACTORSAFFECTINGFOREIGNCURRENCY EXCHANGE RATES

Economic factor

International trade

Capital movements

Change in prices

Speculations

Political factors

Interest rate

Market psychology10


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1. ECONOMICFACTOR

Economic factors are the most basic things that create changesin a countrys currency.

The more prosperous a countrys economy is, the moreinvestors will be able to adhere to doing trade in a morepositive attitude.

If the economic fundamentals of a country are strong, theexchange rate of its domestic currency remains stable andstrong.

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2. INTERNATIONALTRADE

Trade of goods and services between countries is the major reason for the

demand and supply of foreign currencies.

The value or strength or weakness of a countries currency in terms of othercurrencies depends on its trade with those countries.

If a countrys imports are higher, the demand for foreign currency in this

country will be high

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3. CAPITALMOVEMENT

International investments in the form of Foreign direct

investment (FDI) and Foreign institutional investments (FII)

have become the most important factors affecting the

exchange rate in todays open world economy

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4. CHANGEINPRICE

Domestic inflation or deflation affects the exchange rate by

affecting the demand and supply of domestic currency in the

foreign exchange market.

Ex: if prices in India go up,

making Indian goods costlier, the demand for Indian goods

will go down. When exports go down, the demand for rupee

will fall, causing depreciation in its exchange value.

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5. SPECULATION

If the speculators expect a fall in the value of currency in

the near future, they will sell that currency and startbuying the other currency that they expect to appreciate.

The selling of the former currency will thus increase itssupply in the foreign exchange market and bring down its

value

The other currency appreciates as its demand increases.15


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6. POLITICALFACTORS

Political scenario of the country ultimately decides thestrength of the country.

Any events in a region can surely create negative orpositive interest among investors for a nations currency.

Stable efficient government at the centre will encouragepositive development in the country,

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7. INTERESTRATES

Difference in interest rates is an important factor for movements in

exchange rates. In this respect the growing integration of the

financial markets of major currencies, the revolution in

telecommunication facilities, the growth of specialized asset

managing agencies, the emergence of foreign exchange trading etc.

having accelerated the potential for exchange rates volatility.

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8. MARKETPSYCHOLOGY

The perception of traders and investors will greatly influence

the foreign exchange market in so many ways.

The market is highly dependent on whether or not people would

want to invest on a countrys economy in order to determine

whether currency prices will go up or down.

People or investors also invest based on what they have seen for

a long period and time.

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HOWA FOREIGN EXCHANGE TRANSACTIONIS CONDUCTED

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GLOBALINTERESTRATE

country Current (%) Previous (%) Last change

Canada 1 .75 Sep. 8, 2010

U.S .25 1 Dec. 16, 2008

Brazil 11.25 10.75 Jan. 24,2011

E.M.U 1 1.25 May 07, 2009

Iceland 4025 4.5 Feb. 02, 2011

Switzerland .25 .5 Mar. 12, 2009

U.K .5 1 Mar. 05, 2009

South Africa 6 6.5 Sep. 10, 2010

Australia 4.75 4.5 Nov. 02, 2010China 6.06 5.81 Feb. 08, 2011

India 6.5 6.25 Jan. 25, 2011

Japan .1 .3 Dec. 19, 200820


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MOSTTRADEDCURRENCIES

Rank Currency code(Symbol)

% daily share(April 2010)

1 United states dollar USD ($) 84.9%2 Euro EUR () 39.1%3 Japanese yen JPY () 19.0%4 Pound sterling GBP () 12.9%5 Australian dollar AUD ($) 7.6%6 Swiss franc CHF (Fr) 6.4%7 Canadian dollar CAD ($) 5.3%8 Hong kong dollar HKD ($) 2.4%9 Swedish krona SEK (kr) 2.2%

10 New zealand dollar NZD ($) 1.6%Other currencies 18.6%

Total 200%22


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KEYCURRENCYCROSS RATESTHURSDAY, MARCH 03, 2011

Dollar Euro Pound SFranc Peso Yen CdnDlr

Canada 0.9723 1.3573 1.5818 1.0434 0.0810 0.0118 ....

Japan 82.359 114.97 133.99 88.379 6.8646 .... 84.706

Mexico 11.998 16.749 19.519 12.875 .... 0.1457 12.340

Switzer

land0.9319 1.3009 1.5161 .... 0.0777 0.0113 0.9584

U.K. 0.6147 0.8581 .... 0.6596 0.0512 0.0075 0.6322

Euro 0.7163 .... 1.1654 0.7687 0.0597 0.0087 0.7367

U.S. .... 1.3960 1.6269 1.0731 0.0833 0.0121 1.028523


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Thus we can say that foreign exchange market is a

fluctuating one depending on various factors. A balance

between these factors can help in reducing the

uncertainty and gaining advantage of foreign exchange

market

CONCLUDINGNOTE

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