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Detailed presentation on Foreign Exchange Dynamics
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FOREX
What is it• The Foreign Exchange or Forex market refers to the
market for currencies.
• Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another.
• The largest and most liquid financial market of the world.
Size of the Market
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
Major Players• Country: UK(London) controls maximum share in
global trading (31.3% in Apr 2008)
• Company: 73 % trading volume controlled by 10 most active traders including Deutsche Bank, UBS, Barclays and Citi.
• Currency: Major transaction currencies are USD, EUR, JPY and GBP
SOURCE: IFSL and Wall Street Journal Europe
Most traded currenciesCurrency distribution of reported FX market turnover
Rank Currencycode
(Symbol) % daily share
(April 2007)
1 United States dollar USD ($) 86.3%
2 Euro EUR (€) 37.0%
3 Japanese yen JPY (¥) 16.5%
4 Pound sterling GBP (£) 15.0%
5 Swiss franc CHF (Fr) 6.8%
6 Australian dollar AUD ($) 6.7%
7 Canadian dollar CAD ($) 4.2%
8-9 Swedish krona SEK (kr) 2.8%
8-9 Hong Kong dollar HKD ($) 2.8%
10 Norwegian krone NOK (kr) 2.2%
11 New Zealand dollar NZD ($) 1.9%
12 Mexican peso MXN ($) 1.3%
Other 16.8%
Total 200%
Top 10 currency traders % of overall volume, May 2008
Rank Name Volume
1 Deutsche Bank 21.70%
2 UBS AG 15.80%
3 Barclays Capital 9.12%
4 Citi 7.49%
5Royal Bank of Scotland
7.30%
6 JPMorgan 4.19%
7 HSBC 4.10%
Major Market Participants
• Central Banks
• Investment Management Firms
• Retail Forex Brokers
FACTORS AFFECTING THE FOREX MARKET
• INTERSET RATES• ECONOMIC GROWTH• GEO- POLITICS• TRADE &CAPITAL FLOWS• MERGERS AND ACQUISITIONS
INTEREST RATES
• Methods to generate profit
• Interest Income: Buy high interest currency Financed by low interest rate currency
• Capital Appreciation: As interest rate increases, value of your currency increases.
ECONOMIC GROWTH
• Ripple Effect High growth
High interest rates High foreign investment High demand High currency value
GEO POLITICS
• Political stability
• Thumb rule of currency market- politics always trumps economics
TRADE AND CAPITAL FLOWS
• Trade Flows Income earned through trade Eg: Canada, Japan, Germany
• Capital Flows Investment from foreign countries Eg: US, UK
MERGERS AND ACQUISITIONS
• Least important factor
• Time sensitive not price sensitive
FOREX MARKET INSTRUMENTS
SPOT• Largest share by volume• 2 day delivery transaction• Involves cash rather than contract
FORWARD• Transaction occurs on a future date• Time duration can be days, month or years• Predetermined Exchange rate
FUTURE• Standard contract sizes • Average contract plan- 3 months• Eg: 5lakh British pounds for next Nov at an
agreed rate
SWAP• Exchange of currency for a certain length of
time and agrees to reverse the transaction at a later date.
• These contracts are not standardised and not traded through an exchange
OPTION• Owner has a right but no obligation• Deepest, largest and the most liquid market
Indian Market Size• US $258.415 Bn as on Oct 24 2008
Source: Reserve Bank of India
EXCHANGE RATES• 1 USD = 47.440 INR• 1 Pound Sterling= 80.26 INR• 1 Euro= 61.170 INR• 100 Japanese Yens= 47.8 INR
As on 6th Nov 2008
SOURCE: IFSL and Wall Street Journal Europe
SUPPLY AND DEMAND OF FOREIGN CURRENCY
SUPPLY• Exports• FDI• Income from abroad• Portfolio investment• Foreign tourists
DEMAND• Imports• Income send abroad• Indian branches sending
dividends back to parent companies
• Investments made abroad
THANK YOU