Beruflich Dokumente
Kultur Dokumente
Market
Prof. Shegorika
6/19/2009
Submitted by:
Mayank Agarwal
(46)
Sujay Kr. Tiwari
( )
Puneet Chaurasia
(59)
Gopal Saxena
(26)
Shishir Kumar
(71)
Shobhit Asthana
( )
Introduction
The Indian FOREX market owes its origin to the important
step that RBI took in 1978 to allow banks to undertake intra-
day trading in foreign exchange. As a consequence, the
stipulation of maintaining “Square” or “near square” position
was to be complied with only at the close of business each
day. During the period 1975-1992, the exchange rate of rupee
was officially determined by the RBI in terms of a weighted
basket of currencies of India’s major trading partners and
there were significant restrictions on the current account
transactions.
The initiation of economic reforms in July 1991 saw
significant two-step downward adjustment in the exchange
rate of the rupee on July 1 and 3, 1991 with a view to placing
it at an appropriate level in line with the inflation differential
to maintain the competitiveness of exports. Subsequently,
following the recommendations of the High Level Committee
on Balance of Payments (Chairman:Dr C. Rangarajan) the
Liberalised Exchange Rate Management System(LERMS)
involving dual exchange rate mechanism was instituted in
March 1992 which was followed by the ultimate convergence
of the dual rates effective from March 1, 1993(christened
modified LERMS). The unification of the exchange rate of the
rupee marks the beginning of the era of market determined
exchange rate regime of rupee, based on demand and supply
in the forex market. It is also an important step in the progress
towards current account convertibility, which was finally
achieved in August 1994 by accepting Article VIII of the
Articles of Agreement of the International Monetary Fund.
Exchange Rate
Exchange Rate is the price of one country's currency
expressed in another country's currency. In other words, the
rate at which one currency can be exchanged for another. e.g.
Rs. 48.50 per one USD.
1. DIRECT QUOTATION:
Direct quotation: 1 foreign currency unit = x home currency units
“Price of one Unit of Domestic Currency in terms of Foreign Currency”
Five Currencies are quoted in Direct Terms
) Pound Sterling
2) Euro
3) Australian Dollar
4) New Zealand Dollar
5) Irish Punt
2. IN-DIRECT QUOTATION:
“Price of one Unit of Foreign Currency in terms of Domestic
Currency”
Indirect quotation: 1 home currency unit = x foreign currency
units
In the international market, almost all currencies are quoted indirectly.
Note that, using direct quotation, if the home currency is
strengthening (i.e., appreciating, or becoming more valuable) then the
exchange rate number decreases. Conversely if the foreign currency is
strengthening, the exchange rate number increases and the home
currency is depreciating.
Market convention from the early 1980s to 2006 was that most
currency pairs were quoted to 4 decimal places for spot transactions
and up to 6 decimal places for forward outrights or swaps. (The fourth
decimal place is usually referred to as a "pip.") An exception to this
was exchange rates with a value of less than 1.000 which were usually
quoted to 5 or 6 decimal places. Although there is no fixed rule,
exchange rates with a value greater than around 20 were usually
quoted to 3 decimal places and currencies with a value greater than 80
were quoted to 2 decimal places. Currencies over 5000 were usually
quoted with no decimal places (e.g. the former Turkish Lira). e.g.
(GBPOMR : 0.765432 - EURUSD : 1.5877 - GBPBEF : 58.234 -
EURJPY : 165.29). In other words, quotes are given with 5 digits.
Where rates are below 1, quotes frequently include 5 decimal places.
In 2005 Barclays Capital broke with convention by offering spot
exchange rates with 5 or 6 decimal places on their electronic dealing
platform. The contraction of spreads (the difference between the bid
and offer rates) arguably necessitated finer pricing and gave the banks
the ability to try and win transaction on multibank trading platforms
where all banks may otherwise have been quoting the same price. A
number of other banks have now followed this.
Risk Management and Settlement of Transactions in the Foreign
Exchange Market
➢ The foreign exchange market is characterized by constant changes
and rapid innovations in trading methods and products. While the
innovative products and ways of trading create new possibilities for
profit, they also pose various kinds of risks to the market. Central
banks all over the world, therefore, have become increasingly
concerned of the scale of foreign exchange settlement risk and the
importance of risk mitigation measures. Behind this growing
awareness are several events in the past in which foreign exchange
settlement risk might have resulted in systemic risk in global
financial markets, including the failure of Bankhaus Herstatt in
1974 and the closure of BCCI SA in 1991.
➢ The foreign exchange settlement risk arises because the delivery of
the two currencies involved in a trade usually occurs in two
different countries, which, in many cases are located in different
time zones. This risk is of particular concern to the central banks
given the large values involved in settling foreign exchange
transactions and the resulting potential for systemic risk. Most of
the banks in the EMEs use some form of methodology for
measuring the foreign exchange settlement exposure. Many of
these banks use the single day method, in which the exposure is
measured as being equal to all foreign exchange receipts that are
due on the day. Some institutions use a multiple day approach for
measuring risk. Most of the banks in EMEs use some form of
individual counterparty limit to manage their exposures. These
limits are often applied to the global operations of the institution.
These limits are sometimes monitored by banks on a regular basis.
In certain cases, there are separate limits for foreign exchange
settlement exposures, while in other cases, limits for aggregate
settlement exposures are created through a range of instruments.
Bilateral obligation netting, in jurisdictions where it is legally
certain, is an important way for trade counterparties to mitigate the
foreign exchange settlement risk. This process allows trade
counterparties to offset their gross settlement obligations to each
other in the currencies they have traded and settle these obligations
with the payment of a single net amount in each currency.