01 - session 1 forex
TRANSCRIPT
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Welcome to the Exiting
World of Forex
Happy Morning & all the
best
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Welcome to the ExitingWorld of Forex
While welcoming you all, to the exiting Worldof Forex, let us try to understand the variousfeatures of the Forex operations.Some of the FAQs are:
< What is a foreign exchange transaction?> Who are the players in Forex Markets?< Which products are traded in Forex Markets?> What are the various types of forex
transactions?< How the exchange rates are fixed?> What are the risks involved in Forex?
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Introduction to Forex World
Forex markets operate on 24x7 basis
A driving force behind the vibrantglobalised economies.
Sensitive to various factors that drivesthe market movements,especially theexchange rates/interest rates, exposedto various kinds of risks
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Overview of Forex
> Foreign Exchange, a medium of exchange of twodifferent currencies, is in existence for a number ofcenturies. One of the significant milestones in theforex activities was, when the Gold Standard wasintroduced in 1880.
> Under the Gold Standard, each currency wasconvertible into gold at a fixed exchange rate, thelevel of gold reserves in a country thereforedetermined the amount of currency that could be incirculated.
> The outbreak of World war II in 1939 made thesituation worse, forcing nearly all countries tointroduce exchange controls.
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The Bretton Woods System - 1
Bretton Woods system:> The next significant event was the Bretton Woods
conference. In July 1944 representatives of the Worlds major
economies met in Bretton Woods, New Hampshire,
and adopted a proposal known as The Bretton WoodsSystem.> The International Monetary Fund, was established to
monitor the new system, whose aim was to eliminateexchange controls, implement convertibility of all
currencies and establish stable exchange rates.
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The Bretton Woods System - 2
> Fixed exchange rate : An exchange ratewhich is pegged to a predetermined value ofanother currency.
> After Loss of confidence in the US Dollar in
1971, it ceased to be convertible into goldand the main currencies were allowed tofloat.
> By the end of 1973 The Bretton WoodsSystem broke down due to speculative
movements of international capital forcedcentral banks to resort once more to floatingtheir currencies.
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Basket of Currencies
> Many developing Countries, resorted to ManagedFloat by linking their units to Basket of currenciesto keep fluctuations in exchange rates underreasonable control.
> INR was also linked to a basket of currencies in
September 1975.The external value ofINR wasdetermined by the market value of currencies in thebasket. RBI announced the external value of rupeesin terms of Pound Sterling. Sterling was retained asthe intervention currency for purely historicalreasons.
> Due to various factors and the wild and volatilefluctuations in the world foreign exchange marketsnecessitated frequent changes in the external valueof rupee. On March 1st, 1992 the INR becamepartially convertible. The US Dollar became theofficial intervention currency.
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What is Foreign Exchange ?
Foreign Exchange is an integral part ofthe world financial system. Foreign Exchange Transaction is a
contract to exchange funds in onecurrency for funds in another currencyat an agreed rate and for delivery of funds at an agreed date.
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Foreign Exchange Transaction-1
Foreign exchange (Forex) is the process ofconversion of one currency into anothercurrency.
e.g.,AnIndian exporter receives payment in
Cad $ and converts the Cad $ into IndianRupees.
A Non ResidentIndian remits EUR and
instructs his banker to convert the EUR to
Indian Rupees, to be credited in his NRE
account
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Foreign Exchange Transaction-2
When, US$ is converted into IndianRupees, for India it becomes moneyand a legal tender. For USA the
transaction, becomes the value of acommodity.
Foreign exchange transaction involves
exchange of two different currencies
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Major Participants in ForeignExchange
Major Participants in Foreign Exchange ParticipantsRoleCentral Banks (eg. RBI)Managing
their reserves and smoothening our fluctuations inthe value of their currency.Commercial, Investmentand Merchant BanksHedging and investing on theirown and their clients fund, but also for providing themedium of exchange for international tradeForeignExchange BrokersActing as middlemen between otherparticipantsCorporationsMoving funds between unitsin different countries, trade related transactions and
hedging exchange risks Investment FundsMovingFunds from one currency and Investment vehicle toanother.
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Major Participants -1
Participants in
Forex
CENTRAL
BANKS
TRADERS/
CORPORATES
Investors/Investment
Banks
COMMERCIAL/MERCHANT
BANKS
FOREXBROKERS
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Major Participants - 2
Role/functions of Major Participants in Foreign Exchange Central Banks (eg. RBI): To Manage the Reserves and to
smoothen/monitor the fluctuations in the value of their currency. Commercial/ Merchant Banks: To Hedge and invest their own funds and their clients fund.
Also provide a platform for the medium of exchange for InternationalTrade & Finance.
Foreign Exchange Brokers: To act as middlemen between differentparticipants.
Traders/Corporates: To facilitate the Forex markets,to bevibrant through their EXIM activities and also to move fundsbetween units in different countries. To hedge the exchange risksthrough different investment opportunities.
Investors/Investment Banks: To provide opportunity for creation ofmarket for movement of funds
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Foreign RatesFundamental Factors
Balance of Payments - Surplus leads to strongercurrency, while a deficit weakens a currency
Economic Growth Rate - Rise in Imports leads to fallin the currency
Fiscal Policy - eg. Lower taxes can lead to highereconomic growth rate.
Monetary Policy The way a central bank attemptsto influence and control interest rates and moneysupply.
Interest Rates - High interest rate attracts overseascapital and appreciates currency in the short term, Inthe longer term, however, high interest rates slowthe economy down, thus weakening the currency.
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Foreign RatesTechnical Factors
Government Controls - can lead to an unrealistic value ofcurrency resulting in violent exchange rate movements.
Speculation Speculative forces can have a major effect on exchange rates. Example :
There are expectations that a currency will be devalued. Speculator will start selling the currency in preparation for
buying it back later at a cheaper rate, hence selling pressurefrom speculators extends to other market participants.
This activity creates liquidity in the Foreign Exchange Market.
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Foreign Exchange
Foreign Exchange
Deposits/Credits
Balance payable inany foreign
currency
Rupee DDs,TCs,
Bills of ExchangeL/Cs
Payable in any foreign
currency
DDs,TCs,
Bills of Exchange
L/Cs issued bybanks outside India
but payable in
Indian currency
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Foreign Exchange Markets
Sydney
Middle
East
Europe
Tokyo
Hongkong
Singapore
Mumbai
London
Newyork
Toronto
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Forex Markets - Products
Letters of Credit
Bank Guarantees
Negotiable Instruments (Promissory Notes
Bills of Exchanges/Cheques/DemandDrafts/Traveller Cheques)
Credit cards
Derivative Products like Forward ExchangeContracts,Interest Rate Swaps,
Futures and Options
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Forex Types of Deals
Cash
Forward
Spot
Forex
Deals
Tom
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Forex Types of Deals
Types of Forex
deals
Purchases Sales
Exports ImportsInward
Remittances
Outward
Remittances
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Forex Rates 1
Forex markets operate on two way pricing
system
Direct Rates: When exchange rates are
quoted as a number of units of domesticcurrency against per unit of foreign currency
e.g., US$1 = 40.00.
This type of quotation is also known asHome currency quotation
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Forex Rates 2
Indirect Rates:
When exchange rates are quoted as anumber of units of foreign currency per
unit of domestic currencye.g., Rs.100 = US$ 2.5000
This type of quotation is also known as
Foreign currency quotation
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Forex Rates 3
Fixed Rates: In a country if theGovernment/Monetary
Authorities/Regulators fixes the value of
Currencies, as official rate it is called asfixed rate
Floating Rates: When market forces(demand and supply factors) determinethe exchange rates, it is called asfloating rate.
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Forex Risks -1
What is Risk?A risk is an uncertain/unplanned event
which might result in a loss or reduced
earnings. Risk arises due to volatile movements
happening in the markets due tovarious
reasons
International Trade and Finance aresubject to many risks
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Forex Risks -2Types of Risks
Exchange
Rate Risk
Mismatch
Risk
Country
Risk
Credit
Risk
Liqudity
Risk
Interest
Rate
Risk
Operational
Risk
Reputation
Risk
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Dealing Room Operations-1
An Authorised Dealer (AD) in Forex,under takes the activities of buying andselling
of foreign currencies/exchange from/to the customers
(exporters/importers/banks
and others) in the inter bank market. To enable an AD to deal comfortably
Banks provide a place called dealing
room.
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Dealing Room Operations-2
Front Office Back Office
Forex
Dealing
Mid
Office
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ALL THE BEST & THANK YOU
T.M.C.VARADARAJAN
TEL : 022-25638965 (R)
9869134706 (M)
e.mail: [email protected]