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Foreign exchangemarket

presented byAyushi ojhaArti palBBA IV SEM

presented toMr. manish Sharmaasst.professor

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Foreign exchange

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Meaning of Foreign Exchange

he term Foreign exchange implies t!o things" a#foreigncurrency and b# exchange rate

Foreign exchange generally refers to foreign currency$ egfor India it is dollar$ euro$ yen$ etc% &

the other part of foreign exchange is exchange rate!hich is the price of one currency in terms of the othercurrency.

Foreign exchange is the international mar'et for the freetrade of currencies. raders place orders to buy onecurrency !ith another currency.

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forex cntd%

According to Hartly Withers, Foreign exchange is the artand science of international monetary exchange

The foreign exchange market is the worlds largestfinancial market. Oer !" trillion dollars worth ofc#rrency are traded each day. The amo#nt of moneytraded in a week is $igger than the entire ann#al %&' ofthe (nited )tates*

The main c#rrency #sed for foreign exchange trading isthe () dollar.

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Foreign exchange mar'et

Foreign exchange mar'et is that mar'et in !hichnational currencies are traded for one another..

he major participants in this mar'et are commercialban's$ foreign exchange bro'ers$ and authori(ed dealersand the monetary authorities.

Besides$ transfer of funds form one country to another $speculation is an important dimension of foreignexchange mar'et.

Its !here money in one currency is exchanged foranother

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Ad)antages of Forex mar'et

It*s already the !orld*s largest mar'et and it*s stillgro!ing +uic'ly

It ma'es extensi)e use of information technology ,ma'ing it a)ailable to e)eryone

raders can profit from both strong and !ea' economies

he mar'et is not regulated

Bro'erage commissions are )ery lo! or non-existent

he mar'et is open / hours a day during !ee'days

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Exchange rate

According to haines, Exchange rate is the price of thecurrency of a country can be exchanged for the numberof units of currency of another country.

Exchange rate is that rate at !hich one unit of currencyof a country can be exchanged for the number of unitsof currency of another country.

It*s the the price for !hich one currency is exchanged for

another

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Factors influencing Exchange 0ates

As !ith any mar'et$ the foreign exchange mar'et is dri)en by supplyand demand"

If buyers exceed sellers$ prices go up

If sellers outnumber buyers$ prices go do!n

he follo!ing factors can influence exchange rates"

1ational economic performance 2entral ban' policy

Interest rates

rade balances , imports and exports

3olitical factors , such as elections and policy changes

Mar'et sentiment , expectations and rumors

4nforeseen e)ents , terrorism and natural disasters

5espite all these factors$ the global foreign exchange mar'et is morestable than stoc' mar'ets6 exchange rates change slo!ly and bysmall amounts.

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ypes of exchange rate

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5irect and indirect

exchange rates 5irect method - 4nder this$ a gi)en number of units of

local currency per unit of foreign currency is +uoted.

hey are designated as direct8certain rates because therupee cost of single foreign currency unit can beobtained directly. 5irect +uotation is also called homecurrency +uotation.

Indirect method , 4nder this$ a gi)en number of unitsof foreign currency per unit of local currency is +uoted.

Indirect +uotation is also called foreign currency+uotation

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Buying and selling

Exchange rates are +uoted as t!o !ay+uotes ,

for purchase

and for sale

transactions by the Ban'

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Spot and for!ard

he deli)ery under a foreign exchange transaction can besettled in one of the follo!ing !ays

0eady or cash , o be settled on the same day

om , o be settled on the day next to the date oftransaction

Spot , o be settled on the second !or'ing day fromthe date of contract

For!ard , o be settled at a date farther than the spot

date

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heories of exchange ratedetermination

Meaning"

heories !hich determine the prices of forex rateconsidering inflation$ interest rate$ and elasticity of priceetc..

Methods"

a# 9ong run theory

b# Short run theory

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9ong 0un heory of Exchange rate5etermination"

his are the theories !hich predominately ta'e into accountthe fundamental changes of economy.

:ere fundamental changes refers to the change !hich aregoing to change the economic performance of the economy

3urchasing po!er all times to come.

Ty+es of theory3urchasing po!er parity.

;# Absolute purchasing po!er parity.# 0elati)e purchasing po!er parity.

Interest 0ate parity

;# 2o)ered Interest 0ate parity

# 4nco)ered Interest 0ate parity

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Short 0un theory of exchangerate determination

his theories are based more on current information orimmediate performance of economic )ariables.

his theories try to ta'e into account the short run factor!hich may be eliminated in the long run.

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3urchasing po!er parity theory

Founder ,S!edish economist 7usta) 2assel in ;

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Absolute form of 333 heory

If the la! of one price !ere to hold good for each ande)ery commodity then the theory is termed as Absoluteform of 333 heory.

his theory describes the lin' bet!een the spotexchange rate and price le)els at a particular point of

time

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0elati)e form of 333

his theory describes the lin' bet!een the changes inspot exchange rate and in the price le)els o)er a period

of time. According to this theory $changes in spot rates o)er a

period of time reflect the changes in the price le)el o)erthe same period in the concerned economies.

his theory relaxes three assumptions of 333 i.e

Absences of transportation cost $transaction costs andtariffs.

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Interest 0ate 3arity heory

5efinition "

he process that ensures that the annuali(ed for!ard

premium or discount e+uals the interest rate differential one+ui)alent securities in t!o currencies.

International Fisher effect"

Expected 0ate of change > Interest rate of the exchangerate differential

Interest 0ate > 0eal Interest Expected 5ifferential 0ate? inflation rate

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Modern theory" demand & supplytheory

he most satisfactory explanation of the determinationof the rate of exchange is that a free exchange ratetends to be such as to e+uate the demand and supply offoreign exchange..

he intersection of supply cur)e and demand cur)e gi)esthe e+uilibrium price

Modern theory also called balance of payments theory of

foreign exchange

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Foreign Exchange 0is'

Exposure to exchange rate mo)ement.

Any sale or purchase of foreign currency

entails foreign exchange ris'. Foreign exchange transaction affects the

net asset or net liability position of thebuyer8seller.

2arrying net assets or net liability positionin any currency gi)es rise to exchangeris'.

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0is' management

2ontrolling losses

@ou could control your losses$ by mental stop or hardstop. Mental stop means that you already set you limit

of your loss. A hard stop is your initiati)e to stop !henyou thin' you must to stop it.

4sing correct lot si(e

As a beginning just use smaller lots you could stayflexible and logic than emotions !hile you trade.

he bottom line rading is about opportunities$ you must ta'e action

!hile the opportunities arise.

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Thank -o#***