2. INDEX Introduction forex exchange. Forex market in India.
Characteristics of Forex market. Exchange rate. Factors influencing
exchange rate. Types of exchange rate. Market participants.
Government control on Forex market. Function of forex market.
Depreciation of Indian rupee. Reasons for depreciation. Positive
and Negative Impact of Depreciation. Conclusion and
Recommendation.
3. INTRODUCTION TO FOREIGN EXCHANGE The term Foreign exchange
implies two things: a)Foreign currency. b) Exchange rate
4. FOREX MARKET Forex is the international market for the free
trade of currencies. Traders place orders to buy one currency with
another currency. According to Hartly Withers, Foreign exchange is
the art and science of international monetary exchange The forex
market is the worlds largest financial market. Over $4 trillion
dollars worth of currency are traded each day. The amount of money
traded in a week is bigger than the entire annual GDP of the United
States! The main currency used for forex trading is the US
dollar.
5. FOREX MARKET IN INDIA Largest financial market in existence.
The phenomenon that has dramatically changed Indias foreign
exchange market was liberalization of economy started during early
90s. Major participants :buyers, sellers, market mediators and the
authorities. Regulated by FERA, 1947 which is replaced by FEMA,
1999. Introduced currency futures in 2009 for growth. The growth
rates of developed countries are much lower as compared to
India.
7. EXCHANGE RATE According to Haines, Exchange rate is the
price of the currency of a country can be exchanged for the number
of units of currency of another country. Exchange rate is that rate
at which one unit of currency of a country can be exchanged for the
number of units of currency of another country.
8. FACTORS AFFECTING EXCHANGE RATES As with any market, the
forex market is driven by supply and demand: If buyers exceed
sellers, prices go up If sellers outnumber buyers, prices go down
The following factors can influence exchange rates: National
economic performance. Central bank policy. Interest rates. Trade
balances imports and exports. Political factors. Market sentiment
expectations and rumours. Unforeseen events terrorism and natural
disasters Despite all these factors, the global forex market is
more stable than stock markets; exchange rates change slowly and by
small amounts.
9. TYPES OF EXCHANGE:- Fixed and Floating exchange rate. Buying
and selling.
10. MARKET PARTICIPANTS
11. How does government control exchange rate ? In fixed or
hybrid exchange rate regime where government controls exchange
rate, control is exercised by actively participating in
international currency market through its central bank RBI also
allows market to determine the exchange rate whenever it is
necessary Example: INR v/s USD
12. OPERATION OF FOREX MARKET Spot Market: (Current Market).
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. Forward Market: Principles Characteristics:- It only
caters to forward transaction. It determines forward exchange rate
at which forward transaction are to be honoured.
13. FUNCTIONS OF FOREX MARKET Two main function: 1. Determine
price of currencies 2. Transfer currency risk To maintain this
function following steps are taken: Transfer function Credit
function Hedging
14. FACTORS AFFECTING FOREX MARKET 1. Balance of payment. 2.
Monetary policy &fiscal policy. 3. Domestic financial market.
4. RBI intervention in forex market. 5. Interest rate. 6.
Inflation. 7. Business environment 8. GDP growth and phases of
business cycle 9. Global economic situation and financial crisis
10. Political factors
15. FOREX MARKET RISK :- Exposure to exchange rate movement.
Any sale or purchase of foreign currency entails foreign exchange
risk. Foreign exchange transaction affects the net asset or net
liability position of the buyer/seller. Carrying net assets or net
liability position in any currency gives rise to exchange
risk.
16. RISK MANAGEMENT Controlling losses You could control your
losses, by mental stop or hard stop. Mental stop means that you
already set you limit of your loss. A hard stop is your initiative
to stop when you think you must to stop it. Using correct lot size
As a beginning just use smaller lots you could stay flexible and
logic than emotions while you trade. Tracking overall exposure
sample: you go to short on EUR/USD and long on USD/CHF, you exposed
two times for USD in the same direction. If USD goes down , you
have a double dose of pain. So, keep your overall exposure limited,
it keeps you for the long haul for trading The bottom line Trading
is about opportunities, you must take action while the
opportunities arise.
17. Devaluation vs. Depreciation Devaluation Devaluation occurs
when a country purposefully lowers the value of its currency as it
applies to its exchange rate with currencies from other countries
around the world. Depreciation Depreciation is the decline in a
value of a currency based on market factors like supply and
demand.
18. Huge trade deficit. Lower capital inflows. Huge current
account deficit. Devaluation pressure. Low growth and inflation.
Rupee speculation. Withdrawal of investments. Gold price rise.
Policy inaction. Low forex exchange reserves. Dependence on foreign
money. Recovery in the US. Capital controls.
19. Impact on exports Tourism sector Higher import bills Fiscal
slippage Increased burden on borrowers
20. CONCLUSION The value of the rupee in terms of dollars will
depend highly on the performance of Indian economy. Further
depreciation will only worsen the situation. If taken care, there
are still chances of reviving the rupee.
21. Recommendations:- Controlling fiscal deficit. Controlling
current account deficit. Adding to the reserves. Reviving the
investment cycle. Capitalise the public sector banks. Reap the
benefit of the good monsoon. Encourage manufacturing. Encourage
exports. Controlling Imports