Forein Exchange Market

8/6/2019 Forein Exchange Market

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FOREIGN EXCHANGE MARKET

Group 3


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FOREIGN EXCHANGE

The Currency Market where money denominatedin onecurrency is bought and sold with money

denominated in anothercurrency. Exchange rates are important becausetheyenable

us to translate differentcounties prices intocomparableterms.

Exchange rates are determined inthe same way asother asset prices.


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TIMELINE

1944 Bretton Woods Accord is established afterWorld War II to help

stabilizethe global economy.

1971 Smithsonian Agreement is established which provided greater

fluctuation bands forcurrencies.

1972

In aneffortto move away from the dependencytheEuropeancommunityhad acquired onthe U.S. dollar, theEuropean JointFloat was established.

1973

The official switchto a free floating currency system was madeafter boththeEuropean Joint Float and theSmithsonianAgreement failed.


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TIMELINE

1978

In a jointeffortto help othercountries gainindependence from the U.S. dollar, theEuropeanMonetarySystem was introduced to othercountries.

1978 The IMF officially mandated the free-floating currency

system.

1993 A worldwide free-floating currency system is established

whentheEuropean MonetarySystem failed.


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MARKET SIZE

COUNTRY TURNOVER TOTAL %

London US $ 1.36 trillion 34.1 %

New York US $ 0.66 trillion 16.6 %Tokyo US $ 0.24trillion 6 %

Dailyturnover in FOREX is US $ 3.98trillion.

FOREX futures is currently operational in developedcountries and is growing at7%. Foreignexchangetrading has increased by 38%between April 2005 and April 2006 and has morethandoubled since2001. Top 3 traders areDeutsche Bank 20.96%, UBS AG

14.58%, Barclays Capital 10.45%


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MARKET PARTICIPANTS

Banks

The interbank marketcaters for boththe majority ofcommercial turnover and large amounts ofspeculativetrading every day. A large bank maytrade billions of dollars daily.

Commercial companies

These arecompanies seeking foreignexchangetopay for goods or services.Theytrade fairly smallamounts compared to those of banks orspeculators, and theirtrades oftenhave little shortterm impact on market rates.


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MARKET PARTICIPANTS

Central Banks

National central banks play an important role intheforeignexchange markets.Theytryto control themoney supply, inflation, interest rates and oftenhave

official or unofficial target rates fortheircurrencies.

Hedge funds as speculators

70% to 90% of foreignexchangetransaction arespeculative


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MARKET PARTICIPANTS

Investment management firms

typically manage large accounts on behalf ofcustomerssuch as pension funds and endowments usethe foreignexchange marketto facilitatetransactions in foreign

securities Retail foreign exchange brokers

They participate indirectlythrough brokers or banks

Non-bank foreign exchange companies

Companies offercurrencyexchange and internationalpayments to private individuals and companies

Money transfer/remittance companies

They perform high-volume low-valuetransfers generally by

economic migrants back to theirhomecountry.


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CONVENTIONS AND STANDARDS

uoting

DirectMethod

SpotMarket

Forward

MarketIndirectMethod

Accounting AS11

Settlement

T + 1

T + 2


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SIX TYPES OF MARKETS

Spot

Forward

Future Swap

Option

Exchangetraded funds


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SPOT MARKET

Its given by all majornewspapers.

Majorcurrencies have4 different rates,

1) Spot price, 2) 30 days, 3)90 days and 4)180 days Bid-Ask Spread is used to calculatethe feecharged

by bank interms of largetransaction.

Bid = The price at whichthe bank is willing to buy

Ask = The price it will sell thecurrency

PercentageSpread Formula (PS) is used,

100x

Ask

BidAskPS

!


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FORWARD MARKET

An agreement between a bank and a customertodeliver a specified amount ofcurrency againstanothercurrency at a specified future date and at a

fixed exchange rate. The main purpose of forward market is Hedging

that is the act of reducing exchange rate risk.

Two Methods involved in Forward market are:

Outright Rate: Quoted to commercial customers.

Swap Rate: Quoted inthe interbank market as adiscount or premium.


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FORWARD MARKET

Calculating the forward Premium/Discount:

= F-S x 12 x 100S n

where F = The forward rate ofexchange

S = The spot rate of exchange

n = Thenumber of months inthe

forward contract


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Future Market

Exchangetraded forward transaction.Standard contract size and maturity date.

Interest inclusive and usually for 3 months.

Swap MarketMost prevalent market.

Two parties exchangecurrencies for a particularperiod and reversethe sametransaction at a pre

decided latter date.


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Option Market

It is a derivative wherethe ownerhas the right butnotthe obligationto exchange money from onecurrencyto another at a pre agreed rate and date.

It is the largest and most liquid market.

Exchange traded funds

They are openend investmentcompanies thatcan betraded anytimethroughoutthecourse ofthe day.


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FOREIGN EXCHANGE IN INDIA

Early years post independence 1947-1977:

Bretton Woods system

Devaluation in1966 & 1971

Eventual breakdown ofBretton Woods system


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Formative years 1978-1992:

Intra-daytrading

Daily announcement bythe RBI

High levels of regulations

Effects of FERA


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Post Liberalization Era 1992- present:

Market determined exchange rate

Restrictions oncurrent A/ctransactions wererelaxed

Internal Technical Group on FOREX Market(2005)set up by RBI made further recommendations forLiberalization


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NOSTRO & VOSTRO

NOSTRO A/c & VOSTRO A/c are accounting termsused to distinguish an accountyou hold for another

entity from an account anotherentityholds foryou.Theentities inquestion are almost always, butneed not be, banks.Speaking from the bank'spoint-of-view:

NOSTRO A/c is our account of our money, held byyou

VOSTRO A/c is our account ofyour money, heldby us


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RELATIONSHIP BETWEEN FOREIGN EXCHANGE

& STOCK MARKET

Theequity marketcan impactthecurrency marketsin many different ways.

The direct relation between foreignexchangemarket and the stock market.


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DIFFERENCE BETWEEN FOREIGN EXCHANGE

AND STOCK MARKET.

Greater leverage

No middlemen

Buy/Sell programs do notcontrol the Market Same price for broker assisted trades

Trade with real time profits


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Thank You

Documents

Forein Exchange Market