Economic Project Praveen Patil (1)

8/18/2019 Economic Project Praveen Patil (1)

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INDEX

INTRODUCTION

CHARACTERISTIC

HISTORY

DIFFERENCE BETWEEN FOREX AND FUTURES

FAMOUS FOREX QUOTES

FOREIGN MARKET EXCHANGE

FOREX CHARTS

FOREX TRADING

FOREGIN EXCHANGE MARKET IN INDIAN CONCLUSION

REFERRENCE

INTRODUCTION

Being the main force driving the global economic market, currency is no

doubt an essential element for a country. However, in order for all the countries

with different currencies to trade with one another, a system of exchange rate

between their currencies is needed; this system is formally known as foreign

exchange or currency exchange.

In the early days, the system of currency exchange is supported solely by the

gold amount held in the vault of a country. However, this system is no longer

appropriate now due to inflation and hence, the value of one’s currency nowadays

is determined through the market forces alone. In order to determine the value of a


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currency’s exchange rate, two main types of system is used which is floating

currency and pegged currency.

or floating exchange rate, its value is determined by the supply and demand

of the global market where the supply and demand is bound by all these factors

such as foreign investment, inflation and ratios of import and export. !ormally,

this system is adopted by most of the advance countries like for example "#, "$

and %anada. &ll of these countries have a similarity where their market is well

developed and stable in economic terms. 'hese countries choose to practice this

system due to the reason where floating exchange rate is proven to be much more

efficient compared to the pegged exchange rate. 'he reason behind this is because

for floating exchange rate, the market itself will re(ad)ust the exchange rate real(

time in order to portray the actual inflation and other economic forces. However,

every system has its own flaw and so does the floating exchange rate system. or

instance, if a country suffers from economic instability due to various reasons such

as political issues, a floating exchange rate system will certainly discourage

investment due to the high risk of suffering from inflationary disaster or sudden

slump in exchange rate.&nother form of exchange rate is known as pegged


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exchange rate. 'his is a system where the value of the exchange rate is fixed by the

government of a country and not the supply and demand of the market. 'his

system is called pegged exchange rate because the value of a country’s currency is

fixed to another country’s currency. &s a result, the value of the pegged currency

will not fluctuate unlike the floating currency. 'he working principle behind this

system is slightly complicated where the government of a country will fixed the

exchange rate of their currency and when there is a demand for a certain currency

resulting a rise in the exchange rate, the government will have to release enough of

that currency into the market in order to meet that demand. However, there is a

fatal flaw in this system where if the pegged exchange rate is not controlled

properly, panics may arise within the country and as a result of that, people will be

rushing to exchange their money into a more stable currency. *hen that happens,

the sudden overflow of that country’s currency into the market will decrease the

value of their exchange rate and in the end, their currency will be worthless. +ue to

this reason, only those under(developed or developing countries will practice this

method as a form to control the inflation rate.However, the truth is, most of the

countries do not fully practice the floating exchange rate or the pegged exchange

rate method in reality. Instead, they use a hybrid system known as floating peg.

loating peg is the combination of the two main systems where one country will

normally fixed their exchange rate to the "$ +ollars and after that; they will

constantly review their peg rate in order to stay in line with the actual market

value.

'he oreign exchange market, or commonly known as -/, is the

largest and most prolific financial market because each day, more than 0 trillion

worth of currency exchange takes place between investors, speculators and

countries. rom this, we can deduce that the actual mechanism behind the world of


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foreign exchange is far more complicated than what we may already know, and

that, the information mentioned earlier is )ust the tip of an iceberg.

HISTORY

oreign exchange development history ( exchange market evolution foreign

exchange development history ( exchange market evolution gold remittance system

and Bretton woods agreement In 0123, a %hicago bank re)ected to provide pound

loan to a professor named 4ilton riedman, because his purposed was to use this

fund to sell short the British pound. 4r. riedman reali5ed excessively that the

price ratio from the British pound to "$ dollar at that time was high, he wanted

first to sell the British pound; after the British pound fell he buys back the British

pound to repay the bank again. 'his family bank re)ects the loan offer based on the

6Bretton woods &greement6 which was established 78 years ago. 'his agreement

has fixed the various countries9 currency to "$ dollar exchange rate, and the price

ratio between the ".$ dollar and the gold is also fixed to : "$ dollars to each

ounce of gold.

'he Bretton *oods &greement was signed in 01


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supply of the currency reduces, the interest rate raises, the economic activity will

start to decline until it reaches the recession limit. inally, the commodity price

falls to the valley, gradually attracts other countries to stream in, massively rushes

to purchase this country commodity. 'his will pour gold into this country, this will

increase this country currency supplies >uantity, and it will reduce the interest rate,

and will create the wealth. 'his is so called the 6the prosperity ( decline? pattern

and is the circulation of the gold remittance standard system, until the trade

circulation and the gold freedom was broken by the irst *orld *ar.&fter several

catastrophes wars, the Bretton *oods agreement has appeared. 'he countries

which signed the treaty agreed to maintain the domestic currency to "$ dollar

exchange rate, as well as the necessity of the corresponding ratio of the gold, and

only allow a small fluctuation. %ountries are prohibited to depreciate the currency

value for the gain trade benefit, only allows the country to depreciate not more than

08@. nters the 89s, the continuous growth of the international trade causes the

fund large(scale shift which produces because of the postwar reconstruction, this

causes Bretton *oods system which establishes the foreign exchange rate to lose

stability.

'his agreement was finally abolished in 0130; "$ dollar no longer could

convert to gold. "ntil 013:, each ma)or industriali5ed nation currency exchange

rate fluctuation has been more freely, mainly regulates by the foreign exchange

market through the currency supplies and demand >uantity. 'he business volume,

the transaction speed as well as the price variability, have achieved a

comprehensive growth in the 01389s, come along with the emerge of price ratio

fluctuation, the brand(new financial tool, then only the market liberali5ation and

the trade liberali5ation could be achieved.

In the 01=8s, along with the published of the computer and correlation technology,

the international capital has flow rapidly and strongly related the &sia, urope and


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&merica market oreign exchange business volume from =89s rises daily from 38

billion "$ dollars to 08 billion "$ dollars after 78 years.

European mare! "n#$a!"on

ne of the reasons why the foreign exchange developed rapidly was the

rapid development of the uro dollar market. In a uro dollar market, "$ dollar is

stored beyond the border of &merica banks. $imilarly, the uropean market is

refers to property depositing outside the currency rightful owner country market. &

uro dollar market was formed at first in the 89s, at that time -ussia deposited its

petroleum income beyond the "$ border, avoid being free5e by the "$

government. 'his has formed a large offshore "$ dollar national treasury which is

beyond the control of the "$ government. 'he &merican government has

formulated a law to prohibited "$ dollar from lending money for the foreigner.

Because the degree of freedom of the uro dollar market is bigger and the rate of

return is bigger, therefore it has large attraction. $tarting from the =89s, the

&merican company starts to borrow loan from the offshore market, they discovered

that the uropean market is a wealth center which consists of large amount of

floating capital which could provide short(term loan.

Aondon once was until now still isC one of the main offshore market. In the

=89s, the Bank of ngland in order to maintain its global finance industry center

dominant position, using "$ dollar as ngland pound substitution to make loan,

thus to become a uro dollar market center. Aondon9s convenient geographical

position is situated between &sian and &mericas marketC also helps to maintain

the uropean market as the dominant position.

CHARACTERISTICS

In recent years, the foreign exchange market could favor more and more

people, it becomes a favorite for the international investors, and this is strongly


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related to the characteristics of the orex market. 'he main characteristics of the

foreign exchange market areD

%&IT CONSISTS MARKET BUT NO TRADING FIELD

'he finance industry in the western countries consist two sets of systems,

namely the centralism business central operation and there is no fixed place for

such business network. $tock trading is being traded through stock exchange. Aike

the !ew Eork $tock xchange, the Aondon stock market, the 'okyo stock market,

respectively is &merican, nglish, the Fapanese stock main transaction place, it is a

centralism business financial commodity, its >uoted price, the transaction time and

hand over to the procedure all consist of unification the stipulation, and has

established the same business association, it has formulated the same business

rules. 'he investor could buy and sells the commodity through the broker

company; this is known as 6consist of trading market and trading field6.But foreign

exchange business is done without any unification operation market and business

network, it has no centralism unified place like the stock transaction. But, the

foreign currency trading network actually is globally, and it has formed a

organi5ation which has no formal organi5ation, the market is relied through an

approval way and the advanced information system, orex traders do not consist

any membership >ualification for any organi5ation, but must obtain colleague’s

trust and approval. 'his kind of orex market which has no trading field is known

as 6consist of market but no trading field6. ach day, the trading volume in the

global orex market involves billions of ".$ dollars, the so huge large amountfund, is being control under both the non(centralism place and non(central

governance system, plus it is settle based on non(government governance.

'&CIRCULATION WORK


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+ue to the different geographical position of the various financial centre, the

&sian market, the uropean market, the &mericas market because of the time

difference relations, it has become an entire day 7< hour continued operation whole

world foreign exchange market.

arly morning 8=:8 !ew Eork timeC !ew Eork market opens, 81:8

%hicago market opens, 0=:8 $ydney opens, 01:8 'okyo opens, 78:8 Hong #ong,

$ingapore open, before dawn 0


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another kind of monetary value increase. or instance in 77 years ago, 0 "$ dollar

exchanges :28 Fapanese Een, at present, 0 "$ dollar exchanges 008 Fapanese Een,

this explains the Fapanese Een currency value rise, but "$ dollar currency value

drops, in the end the value will not reduce or increase. 'herefore, some people

described the foreign currency trading is 65ero and the game6, exactly said is the

wealth shift.In recent years, investment foreign exchange market fund has

continuously increased, the exchange rate fluctuation expands day by day, urges

the wealth shift to be larger, the daily trading volume of the global foreign

exchange involves 08 billion "$ dollars, the rise or falls 0@, means that the 08

billion funds has been shifted. &lthough the foreign exchange rate change is very

big, but, any kind of currency will not become waste paper, even if some kind of

currency unceasingly falls, however, but generally it represents certain value, only

if such currency has been abolished.

Fun*!"on+ o# Fore",n E-*.an,e Mare!+

T.e #ore",n e-*.an,e mare! per#orm+ ma"n$/ !.ree #un*!"on+

• 'ransferring the purchasing powerD ( 'he most important function is the transfer

of purchasing power from one country to another and from one national

currency to another. 'he purchasing power is transferred through the use of

credit instruments. 'he main credit instrument is used for the transferring the

purchasing power is the telegraphic transfer ''C of the cabled order by one

bank in country &C to its correspondent abroad in country BC to pay B funds


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out of its deposit account to its designated account or order. 'he telegraphic

transfer is simply a sort of che>ue, which is wired or radioed rather than sent by

post. Gurchasing power may also be transferred through bank drafts.

• Grovision of credit for foreign tradeD( 'he foreign exchange market also

provides credit for foreign trade. Aike all the traders, international trade also

re>uires credit. It takes time to move the goods from seller to purchaser and

during this period, the transaction must be financed. *hen the exporter does not

need credit for the manufacture of export goods, credit is necessary for the

transit of goods. *hen the special credit facilities of the foreign exchange

market are used, the foreign exchange department of a bank or the bill market is

used; the foreign exchange department of the bank or the bill market of one

country or the other extends the credit facilities to finance the foreign trade.

• urnishing facilities for hedging foreign exchange risks 'he foreign exchange

market by providing facilities of buying and selling at spot or forward

exchange, enables the exporters and importers to hedge their exchange risks

arising from change in the foreign exchange rate. 'he forward market in

exchange also enables those banks, which are unlikely to run any considerable

exchange position to cover their commitments.

DIFFERENCE BETWEEN FOREX AND FUTURES

0.orex trader could trade more transaction compared to the futures market the

trading volume could be a times largerC, and the risk will be strictly under control.

'he trading volume of the orex market is


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transaction amount, for exampleD Eour account has :8,888, the basic transaction

unit is each 0,888 which transaction amount in 0.88, millionC, namely, so the

proportion of the margin of each transaction unit is 088D0.

7. 'he risk of the orex trader is under control, such margin call will not happen

compared to futures, through the orex trading system, your risk will receive the

strict limit, even if your margin if lower then the deposit re>uired, the orex

trading system will automatically settle your position, this means even if a orex

trader suffered losses, moreover if the market is suffering from a disaster

fluctuation, your loss could not surpass your account amount. In order to

understand the advantages, please apply for the demo account to carry on the

complete 5ero risk.

:.orex trader will receive a large limitation of li>uidation and a relatively fair

market because the trading volume of the orex market is large and it is also the

largest li>uidation market in the world. &t present the trading volume in the orex

market is 0


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0. If you get in on Fones’ tip; get out on Fones’ tip?. If you are riding another

person’s idea, ride it all the way.7. -un early or not at all. +on9t be an eleven o9clock bull or a five o9clock bear.:. *oodrow *ilson said, 6&government’s first priority is to organi5e the

common interest against special interests6. $uccessful traders seek out market

opportunities capitali5ing on the reality that government9s first priority is

rarely achieved.


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0


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pyramids and reduce the position back to base levels. 'he base position is then

li>uidated when it becomes apparent that the move has ended

FOREIGN MARKET EXCHANGE

Gresently, there are various kinds of financial market, it is divided intoD

$tock market, interest market including bond, commercial bill and so onC, gold

market including gold, platinum, silverC, futures market including grain, cotton

and kapok, oil and so onC, option market and foreign exchange market or forex

market and so on. 'he foreign exchange market is a place to trade foreign

exchange currency, or it is also a place for the transaction of all foreign currency.

'he foreign exchange market therefore is existence, because ofD

Tra0e an0 "n1e+!men!

Import and export business, people pays one kind of currency when doing

business, but when earns another kind of currency when receive the commodity.

'his means that, when settling account, business people will pay and receive

different currencies. 'herefore, they must convert the currencies that they received

into the currencies that they could buy commodities. *ith this similar, when

buying a foreign property a company must use the concerned country9s currency to


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make payment, therefore, it needs to convert the domestic currency is concerned

country’s currency.

Spe*u$a!"on

%urrencies exchange rates could fluctuate according to the demand and supply

between two currencies. & orex trader buys up one kind of currency in an

exchange rate, but up casts this currency in another more advantageous exchange

rate, he may gain. $peculation has occupied most of the orex market.

He0,"n,

+ue to the fluctuation between two currencies,

those companies who owns foreign asset for example factoryC, when these

companies convert these properties into cost country currencies, there consist of certain risks. *hen the value of a foreign asset which is estimated based on foreign

currencies remained unchanged, if the exchange rate changes, when converting this

property value according to the domestic currency, there could be profit and loss.

'he company may eliminate such hidden risk through hedging. 'his carries out a


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foreign currency trading; its transaction result )ust counterbalances the foreign

currency property profit and loss which produces by the exchange rate change.

Fore- Mare! De1e$opmen!

'he history of the orex market as an international capital speculation

market is much shorter compared the stock, the gold, the stock, the interest market,

but it is developing in an astonishing speed. 'oday, the foreign exchange market

daily trading volume has amounted to 08 billion "$ dollars, it’s scale has gone far

beyond the stock, the stock and other finance commodity markets, it has became

the world9s most biggest sole finance market and the also the speculation market.

$ince the birth of the foreign exchange market, the fluctuation of the exchange rate

of the orex market is becoming bigger. In $eptember 01=, 0 "$ dollar

exchanged 778 Fapanese Een, but in 4ay 01=2, 0 "$ dollar only could exchange

028 Fapanese Een, in = months, the Fapanese Een has revalued 73@. In recent

years, the foreign exchange market wave amplitude has been bigger, on $eptember

=, 0117, 0 pound exchanged 7.8088 "$ dollars, on !ovember 08, 0 pound

exchanged 0.8=8 "$ dollars, in the short two months, the pound exchanged "$

dollar exchange rate to fall more than ,888, depreciated 7@. !ot only that,

presently, every day the fluctuation of the exchange rate of the orex market

enlarges unceasingly, within a day the rise and drop 7@ to :@ is commonly seen.

n $eptember 02, 0117, the pound exchanged "$ dollar from 0.=3 to fall to

0.3=8, the pound on first lowers @. +ue to the large fluctuation of the orex

market, it has created more opportunities for the investor, attracted more and moreinvestors to )oin this ranks.

FOREX CHARTS

orex charts assist the investor by providing a visual representation of

exchange rate fluctuations. 4any variables affect currency exchange rates, such as


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interest rates, bank policies, geopolitics, and even the time of day may affect

exchange rates.In order to help the investor attempt to predict when or in what

direction a rate may change, advisors provide forex charts. Muality forex websites

provide subscribers with a daily newsletter that includes a forex chart, forex signals

and a forex forecast.

'here are a variety of forex charts available for the investor to use and study.

$ome are very simple using only a couple of forex signals or indicators and are

ideal for beginners. thers include :8 or uickly and

accurately.In order to make an accurate forex forecast, it would seem that the more

indicators, the better, but some analysts prefer a simpler system. 'he idea behind

studying forex charts is that history repeats itself. Instead of trying to see the

future?, a forex forecast evaluates the past. 'hat is to say that the analyst who is

responsible for attempting to predict future currency moves analy5es what

happened to an exchange rate yesterday, last week, last month or last year and uses

this knowledge to the best degree he knows how. $ome people trade short term,some intermediate term, and some long term. &ll three types of traders may benefit

from the use of forex charts, )ust adapted to their own trading time frame.Investors

also create their own forex charts to evaluate their own performance. %reating a

forex strategy for oneself is the goal of many investors. Instead of looking to a

professional to analy5e forex signals, these investors choose to create their own

forex forecast.thers, however, create their own strategy but also follow the

opinions of professional currency traders at the same time. It all depends on your

personal preferences.

'here are other forex charts that deal with known correlations between two

currency pairs, that is, how they move in relation to each other. $ome exchange

rates are known to affect other exchange rates, either by moving in the same or the


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opposite direction depending on the correlation. %harts are available that explain

these correlations in detail and show which pairs have strong correlations or strong

negative correlations, so that an investor can use the movement of the exchange

rate of one currency as a signal to trade another currency.

'hese correlations are also the basis for some forex forecasts. It can be

difficult and overwhelming to enter the world of forex trading alone. xperts

recommend education, practice with a demo account and advice from a reputable

broker who is backed by a >uality institution. Aearning to read forex charts and

evaluate forex signals is a skill that comes with time, skills that are essential when

an accurate forex forecast is the the goal.

FOREX TRADING

orex trading isn’t strange words for those who looking forward to make

>uick profit in the financial market. 4ost investors will have at least hear or read

about orex trading. If orex is a new term to you, please do read the Introduction

to the orex market before proceed reading this orex trading article.

orex trading is said to be the highest risk with highest return investment or

speculation game to be more accurateC in the financial market. 'he amount traded

in the orex market is much larger than any stock market or even combining few

stock markets. orex trading is simply a worldwide trading market running 7<

hours from 4onday to riday.

very day, there are new orex traders entering into trading orex. $ome of them

don’t even fully understand how orex is traded but have already trading orex.

'hey are not idiot who want to burn their hard earned money, it’s )ust because

orex market is simply too lucrative market to enter with extreme high return. &ny


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orex traders can easily make a double return )ust in few minutes time trading

orex.

orex trading is the trading of buying or selling certain currency. or

example, buying "$ +ollar, and then selling it later at a higher price to gain profit.

orex traders may also first sell "$ +ollar and later on buy it back at a lower price

with the same gaining profit. It’s simple strategy of selling price minus buying

price to make profit. In orex trading, we )ust treat currency as a good, buy it and

sell it.Eou might now think how can orex trading make huge profit )ust by selling

and buying currency orex is traded using margin, orex traders don’t need to full

amount to buy any currency. or example, orex traders )ust need 0888 +ollar to

buy up 088,888 +ollar. 'his allows any orex traders to make huge profit with

little money.

&nother important factor that any orex traders can make huge profit is the high

fluctuation for currency. very day every seconds, the currency exchange rate is

moving up and down, the orex exchange rate fluctuate more heavily whenever

there is any important economic data being released. orex trading is simply

sounds too easy for anyone to make profit in very short time. But before you

committed into orex trading, it is strongly advised to have full understanding in

orex trading. +o read up other orex trading articles in this website and share

orex trading knowledge in the orex forums.


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MARKET 2ARTICI2ANTS

"nlike a stock market, the foreign exchange market is divided into levels of

access. &t the top is the interbank market, which is made up of the largest

commercial banks and securities dealers. *ithin the interbank market, spreads,

which are the difference between the bids and ask prices, are ra5or sharp and not

known to players outside the inner circle. 'he difference between the bid and ask

prices widens for example from 8(0 pip to 0(7 pips for a currencies such as the

"-C as you go down the levels of access. 'his is due to volume. If a trader can

guarantee large numbers of transactions for large amounts, they can demand a

smaller difference between the bid and ask price, which is referred to as a better

spread. 'he levels of access that make up the foreign exchange market are

determined by the si5e of the 6line6 the amount of money with which they are

tradingC. 'he top(tier interbank market accounts for :1@ of all transactions. rom

there, smaller banks, followed by large multi(national corporations which need to


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hedge risk and pay employees in different countriesC, large hedge funds, and even

some of the retail market makers. &ccording to Nalati and 4elvin, Gension funds,

insurance companies, mutual funds, and other institutional investors have played

an increasingly important role in financial markets in general, and in / markets in

particular, since the early 7888s.? 788


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often have official or unofficial target rates for their currencies. 'hey can use their

often substantial foreign exchange reserves to stabili5e the market. !evertheless,

the effectiveness of central bank 6stabili5ing speculation6 is doubtful because

central banks do not go bankrupt if they make large losses, like other traders

would, and there is no convincing evidence that they do make a profit trading.

Fore",n e-*.an,e #"-"n,

oreign exchange fixing is the daily monetary exchange rate fixed by the

national bank of each country. 'he idea is that central banks use the fixing time and

exchange rate to evaluate behavior of their currency. ixing exchange rates reflects

the real value of e>uilibrium in the market. Banks, dealers and traders use fixing

rates as a trend indicator.'he mere expectation or rumor of a central bank foreign

exchange intervention might be enough to stabili5e a currency, but aggressive

intervention might be used several times each year in countries with a dirty float

currency regime. %entral banks do not always achieve their ob)ectives. 'he

combined resources of the market can easily overwhelm any central bank. $everalscenarios of this nature were seen in the 0117O1: uropean xchange -ate

4echanism collapse and in more recent times in &sia.

He0,e #un0+ a+ +pe*u$a!or+

&bout 38@ to 18@ of the foreign exchange transactions are speculative. In

other words, the person or institution that bought or sold the currency has no planto actually take delivery of the currency in the end; rather, they were solely

speculating on the movement of that particular currency. Hedge funds have gained

a reputation for aggressive currency speculation since 0112. 'hey control billions

of dollars of e>uity and may borrow billions more, and thus may overwhelm


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intervention by central banks to support almost any currency, if the economic

fundamentals are in the hedge funds9 favor.

In1e+!men! mana,emen! #"rm+

Investment management firms who typically manage large accounts on

behalf of customers such as pension funds and endowmentsC use the foreign

exchange market to facilitate transactions in foreign securities. or example, an

investment manager bearing an international e>uity portfolio needs to purchase and

sell several pairs of foreign currencies to pay for foreign securities purchases.

$ome investment management firms also have more speculative specialist currency

overlay operations, which manage clients9 currency exposures with the aim of

generating profits as well as limiting risk. *hile the number of this type of

specialist firms is >uite small, many have a large value of assets under

managementC and, hence, can generate large trades.

Re!a"$ #ore",n e-*.an,e !ra0er+

Individual -etail speculative traders constitute a growing segment of this

market with the advent of retail foreign exchange platforms, both in si5e and

importance. %urrently, they participate indirectly through brokers or banks. -etail

brokers, while largely controlled and regulated in the "$& by the %ommodity

utures 'rading %ommission and !ational utures &ssociation have in the past

been sub)ected to periodic oreign exchange fraud. 'o deal with the issue, in 7808the !& re>uired its members that deal in the orex markets to register as such

I.e., orex %'& instead of a %'&C. 'hose !& members that would traditionally

be sub)ect to minimum net capital re>uirements, %4s and IBs, are sub)ect to

greater minimum net capital re>uirements if they deal in orex. & number of the

foreign exchange brokers operate from the "# under inancial $ervices &uthority


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regulations where foreign exchange trading using margin is part of the wider over(

the(counter derivatives trading industry that includes %ontract for differences and

financial spread betting.'here are two main types of retail / brokers offering the

opportunity for speculative currency tradingD brokers and dealers or market

makers. Brokers serve as an agent of the customer in the broader / market, by

seeking the best price in the market for a retail order and dealing on behalf of the

retail customer. 'hey charge a commission or mark(up in addition to the price

obtained in the market. Dealers or market makers, by contrast, typically act as

principal in the transaction versus the retail customer, and >uote a price they are

willing to deal at.

Non54an #ore",n e-*.an,e *ompan"e+

!on(bank foreign exchange companies offer currency exchange andinternational payments to private individuals and companies. 'hese are also known

as foreign exchange brokers but are distinct in that they do not offer speculative

trading but rather currency exchange with payments i.e., there is usually a

physical delivery of currency to a bank accountC.

It is estimated that in the "#, 0


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4oney transfer companiesPremittance companies perform high(volume low(

value transfers generally by economic migrants back to their home country. In

7883, the &ite Nroup estimated that there were :21 billion of remittances an

increase of =@ on the previous yearC. 'he four largest markets India, %hina,

4exico and the GhilippinesC receive 1 billion. 'he largest and best known

provider is *estern "nion with :


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investors. 'he average daily turnover in the global foreign exchange and related

markets is continuously growing. &ccording to the 7808 'riennial %entral Bank

$urvey, coordinated by the Bank for International $ettlements, average daily

turnover was "$:.1= trillion in &pril 7808 vs 0.3 trillion in 011=C f this :.1=

trillion, 0. trillion was spot transactions and 7. trillion was traded in outright

forwards, swaps and other derivatives.

'rading in the "nited #ingdom accounted for :2.3@ of the total, making it

by far the most important center for foreign exchange trading. 'rading in the

"nited $tates accounted for 03.1@, and Fapan accounted for 2.7@.

'urnover of exchange(traded foreign exchange futures and options have grown

rapidly in recent years, reaching 022 billion in &pril 7808 double the turnover

recorded in &pril 7883C. xchange(traded currency derivatives represent


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oreign exchange trading increased by 78@ between &pril 7883 and &pril 7808

and has more than doubled since 788uidity, and attracted greater participation from many customer types. In

particular, electronic trading via online portals has made it easier for retail traders

to trade in the foreign exchange market. By 7808, retail trading is estimated to

account for up to 08@ of spot turnover, or 08 billion per day see retail foreign

exchange platformC.

Top %7 *urren*/ !ra0er+

@ of overall volume, 4ay 7807

Ran Name Mare! +.are

0 +eutsche Bank 0


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oreign exchange is an over(the(counter market where brokersPdealers

negotiate directly with one another, so there is no central exchange or clearing

house. 'he biggest geographic trading center is the "nited #ingdom, primarily

Aondon, which according to 'he%ity"# estimates has increased its share of global

turnover in traditional transactions from :uoted

price is usually the Aondon market price. or instance, when the International

4onetary und calculates the value of its special drawing rights every day, they

use the Aondon market prices at noon that day.

FOREGIN EXCHANGE MARKET IN INDIAN

+uring 788:(8< the average monthly turnover in the Indian foreign

exchange market touched about 03 billion "$ dollars. %ompare this with the

monthly trading volume of about 078 billion "$ dollars for all cash, derivatives

and debt instruments put together in the country, and the sheer si5e of the foreign

exchange market becomes evident. $ince then, the foreign exchange market

activity has more than doubled with the average monthly turnover reaching :1

billion "$+ in 788(7882, over ten times the daily turnover of the Bombay $tock

xchange. &s in the rest of the world, in India too, foreign exchange constitutes the

largest financial market by far.


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Aiberali5ation has radically changed India’s foreign exchange sector. Indeed

the liberali5ation process itself was sparked by a severe Balance of Gayments and

foreign exchange crisis. $ince 0110, the rigid, four(decade old, fixed exchange rate

system replete with severe import and foreign exchange controls and a thriving

black market is being replaced with a less regulated, market driven? arrangement.

*hile the rupee is still far from being fully floating? many studies indicate that

the effective pegging is no less marked after the reforms than beforeC, the nature of

intervention and range of independence tolerated have both undergone significant

changes. *ith an overabundance of foreign exchange reserves, imports are no

longer viewed with fear and skepticism. 'he -eserve Bank of India and its allies

now intervene occasionally in the foreign exchange markets not always to support

the rupee but often to avoid an appreciation in its value. ull convertibility of the

rupee is clearly visible in the hori5on. 'he effects of this development s are

palpable in the explosive growth in the foreign exchange market in India.

Fea!ure+ o# !.e For8ar0 prem"um on !.e In0"an rupee

'he Indian rupee has had an active forward market for some time now. 'he

forward premium or discount on the rupee vis(Q(vis the "$ dollar, for instanceC

reflects the market’s beliefs about future changes in its value. 'he strength of the

relationship of this forward premium with the interest rate differential between

India and the "$ O the %overed Interest Garity %IGC condition O gives us ameasure of India’s integration with global markets. 'he %IG is a no(arbitrage

relationship that ensures that one cannot borrow in a country, convert to and lend in

another currency, insure the returns in the original currency by selling his

anticipated proceeds in the forward market and make profits without risk through

this process.


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%hakrabarti 7882C reports that between late 0113 and mid(788< the average

discount on the rupee was about


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exchange markets fre>uently witness government intervention in one form or

another, to maintain the value of a currency at or near its desired? level.

Interventions can range from >uantitative restrictions on trade and cross(border

transfer of capital to periodic trades by the central bank of the country or its allies

and agents so as to move the exchange rate in the desired direction. In recent years

India has witnessed both kinds of intervention though liberali5ation has implied a

long(term policy push to reduce and ultimately remove the former kind. It is safe to

say that over the years since liberali5ation, India has allowed restricted capital

mobility and followed a managed float? type exchange rate policy.

+uring the early years of liberali5ation, the -angara)an committee

recommended that India’s exchange rate be flexible. fficially speaking, India

moved from a fixed exchange rate regime to market determined? exchange rate

system in 011:. 'he overt ob)ective of India’s exchange rate policy, according to

various policy pronouncements, has been to manage volatility? in exchange rates

without targeting any specific levels. 'his has been hard to do in practice.

'he Indian rupee has had a remarkably stable relationship with the "$

dollar. 4eanwhile the dollar appreciated against ma)or currencies in the late 18’s

and then went into an extended decline particularly during 788: and 788


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even closer to the fixed exchange rate system. & comparison of the sensitivity

betaC of the +ollar(rupee rate with the uro(rupee rate for a three year period

0111 through 7880C, indicates that India had a dollar beta of 0.80 O tenth highest

among the : countries considered. 4ore importantly, the "$ dollar(uro

exchange rate explained about 13@ of all movements in the Indian rupee(uro

exchange rate O highest among all the : countries considered. %learly the Indian

rupee has been an excellent tracker? of the "$ dollar.

It is instructive to consider the -upee(+ollar exchange rate in the light of the

purchasing power parity GGGC holding that the exchange rate between two

currencies should e>ual the ratio of price levels in two countries. In its dynamic

form GGG holds that that the rate of depreciation of a currency should e>ual the

excess of its inflation rate to that in the other country. ver a reasonably long

period of time, the devaluation in the

Indian -upee, vis(Q(vis the "$ dollar does seem to have an association with

the difference in the inflation rates in the two countries. Between 0110 and 788:,

the two variables have had visible co( movements with a correlation of about 8.3

%hakabarti 7882CC. 'his may be a result of Indo("$ trade flows dominating the

exchange rate markets but it is perhaps more likely that it reflects the exchange rate

management principles of the monetary authorities

'he -eserve Bank of India has used a varied mix of techni>ues in

intervening inthe foreign exchange market O indirect measures such as press

statements sometimescalled open mouth operations? in central bank speakC and,

in more extreme situations,monetary measures to affect the value of the rupee as

well as direct purchase and sale inthe foreign exchange market using spot, forward

and swap transactions see Nhosh7887CC. 'ill around 7887, the measures were

mostly in the nature of crisis managementof saving(the(rupee kind and sometimes

the direct deals would be repeated over severaldays till the desired outcome was


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accomplished. ther public sector banks, particularlythe $BI often aided or veiled

the intervention process.

'he exact details of the interventions are shrouded in mystery, not unusual

forcentral banks ever wary of disclosing too much of their hand to the currency

speculators.'he 'ara pore %ommittee report had urged more transparency in the

intervention processand recommended, in 0113, that a R4onitoring xchange -ate

Band’ of @ be usedaround an announced neutral real effective exchange rate

--C, with weeklypublication of relevant figures, something yet to be

implemented. In a recent survey onforeign exchange market intervention in

emerging markets, the Bank for International$ettlements BI$ 788bCC found that

out of 00 emerging market countries considered,India gave out most complete

information on intervention strategy along with threeothersC; no information on

actual interventions five others did the sameC and did notcover foreign exchange

intervention in annual reports like two other countriesC. n thewhole it ranked

fourth most opa>ue in matters of foreign exchange intervention amongthe eleven

countries compared.

Re,u$a!"on o# *ro++54or0er *urren*/ #$o8+3

& feature of the economy that is intricately related with the exchange rate

regimefollowed is the freedom of cross(border capital flows. 'his relationship

comes from theso(called impossible trinity? or trilemma? of international

finance, which essentiallystates that a country may have any two but not all of the

following three things O a fixedexchange rate, free flow of capital across its

borders and autonomy in its monetarypolicy. $ince liberali5ation, India has been

having close to a de facto peg to the dollar andsimultaneously has been liberali5ing

its foreign currency flow regime.


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%lose on the heels of the adoption of market determined exchange rate

withinlimitsC in 011: %ame current account convertibility in 011


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and cross(bordershort(term bank loans O usually the last item to be liberali5ed O are

the most volatile. It isgenerally held that it was, in fact, the lack of convertibility

that protected India fromcontamination during the &sian contagion in 0113(1=.

T.e D/nam"*+ o# S8e$$"n, Re+er1e+3

&n important corollary of India’s foreign exchange policy has been the >uick

andsignificant accumulation of foreign currency reserves in the past few years.

$tarting froma situation in 0118(10 with foreign exchange reserves level barely

enough to cover twoweeks of imports, and about :7 billion at the beginning of

7888, India’s foreignexchange position rocketed to one of the largest in the world

with over 0 billion inmid(7882. $ince 7888, this implies a compounded annual

growth rate of about 7=@ withthe years 788: and 788< having the most stunning

rises at


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0 "- 37.23 I!- "- S Indian -upee0 "- S 37.23 I!- 0 I!- S 8.80:= "-

7C "nited $tates +ollar vPs Indian -upee

0 "$+


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CONCLUSION

'he foreign exchange market is the world9s largest financial market, and it is

critical for global commerce. Grivate %iti5ens and business entities enter foreignexchange markets to make international payments and explore investment

opportunities. 'he foreign exchange market does not refer to one centrally

organi5ed financial exchange. Instead, it refers to a vast network of participants

that trade currencies with the help of information technology. oreign exchange

rates shift with the supply and demand dynamics of a particular currency. Aow

money supplies along with high demand for the currency support high exchange

rates. 'reasury officials sell government securities to the public for cash to reduce

the money supply available in circulation. 4eanwhile, economic growth and

stability improve currency demand. %urrency transactions are executed either at

spot rates or forward rates. $pot transactions trade currencies at current exchange

rates. orward negotiations are agreements to exchange currencies at set rates at a

later date. %onsumers may exploit high exchange rates to buy relatively cheap

overseas goods and investments. &lternatively, businesses benefit from weak

domestic exchange rates that add value to overseas profits when they are converted

back into the home currency.

REFERENCE


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888&,oo,$e&*om

888&8""pe0"a&*om

888&"4#-&*om
http://www.google.com/http://www.wikipedia.com/http://www.wikipedia.com/http://www.google.com/

Documents

Economic Project Praveen Patil (1)