FEMWHI

A
Project report
On

Foreign Exchange Market with
Hedging Instruments

In partial fulfillment of the requirements of
the Summer Internship of
Bachelor of Management Studies
Through
VIVA COLLEGE

under the guidance of

Prof.Rachana

Submitted by

Hemant Jain
PGDBM
Batch: 2014 2015.

ACKNOWLEDGEMENT

The present work is an effort to throw some light on Foreign Exchange market
with Hedging Instrument the work would not have been possible to come to the
present shape without the able guidance, supervision and help to me by number of
people.

With deep sense of gratitude I acknowledged the encouragement and guidance
received by Prof.RACHANA, for completion of my project report.

CERTIFICATE

This is to certify that Mr. Hemant Jain, a student of Viva College, of PGDBM III
bearing Roll No. 54 and specializing in Finance has successfully completed the
project titled

To study Foreign Exchange market with Hedging Instrument.

under the guidance of Prof.Rachana in partial fulfillment of the requirement of Post
Graduate Diploma in Business Management by Rizvi Academy of Management for
the academic year 2010 2012.

_______________
Prof. Rachana
Project Guide

_______________ _______________
Prof. Dr. Kalim Khan
Academic Coordinator Director

INDEX

CHAPTER
No.
PARTICULAR
PAGE
No.
1 FOREIGN EXCHANGE BACKGROUND 1
2 WHAT IS FOREIGN EXCHANGE MARKET 2
3
STRUCTURE OF FOREIGN EXCHANGE MARKETS IN
INDIA
8
4 TYPES OF FOREIGN EXCHANGE TRANSACTIONS 9
5
IMPORTANCE AND NEED OF THE FOREIGN
EXCHANGE MARKET
13
6
EXPORT, IMPORTS, REMITTANCES AND CAPITAL
FLOWS
17
7 DIFFERENT CURRENCY OF THE WORLD 25
8 FOREIGN EXCHANGE MANAGEMENT ACT, 1999 27
9 FEDAI FOREIGN EXCHANGE 31
10 TRADE PRACTICES 36
11 HEDGING FOREIGN EXCHANGE RISK 40
12 CASE STUDY 55
13 GLOBAL FOREX 59

EXECUTIVE SUMMARY

The project undertaken is based on the study of foreign exchange market and
hedging financial risk management in general as well as in the forex market.
Foreign exchange market is a market where foreign currencies are bought &
sold. Foreign exchange market is a system facilitating mechanism through which one
countrys currency can be exchanged for the currencies of another country. The
purpose of foreign exchange market is to permit transfers of purchasing power
denominated in one currency to another i.e. to trade one currency for another.
The project attempts to evaluate the various alternatives available to the Indian
corporate for hedging financial risks. The project covers various trading areas of forex
market such as, spot market, forward market, derivatives, currency futures, currency
swaps etc. It helps in understanding various trend patterns and trend lines. What
considerations are kept in mind while trading in forex market and why one should
enter such market is studied under this project. The project concludes that forwards
and options are preferred as short term hedging instruments while swaps are preferred
as long term hedging instruments.
The data used in this project has been collected from websites based on related topics
and various books of forex market. The information displayed may be limited, as each
and every aspect related with the project that is provided by the available sources
might not be complete in all respects.

INTRODUCTION

The gradual liberalization of Indian economy has resulted in substantial inflow
of foreign capital into India. Simultaneously dismantling of trade barriers has also
facilitated the integration of domestic economy with world economy. With the
globalization of trade and relatively free movement of financial assets, risk
management through derivatives products has become a necessity in India also, like in
other developed and developing countries. As Indian businesses become more global
in their approach, evolution of a broad based, active and liquid Forex derivatives
markets is required to provide them with a spectrum of hedging products for
effectively managing their foreign exchange exposures.
The global market for derivatives has grown substantially in the recent past.
The Foreign Exchange and Derivatives Market Activity survey conducted by Bank
for International Settlements (BIS) points to this increased activity. The turnover in
traditional foreign exchange markets declined substantially between 1998 and
2009.The increase in the world trade and lowering of capital controls have led to
tremendous growth in the foreign exchange markets over the years.

Foreign Exchange market with Hedging Instrument Page 1
Chapter 1
FOREIGN EXCHANGE MARKET BACKGROUND

Each nation has its own official currency, which is normally issued by the
central bank of that country. The official currency is used for the trade transactions
that happen within the country's geographical area. In todays world firms operate in
different countries often conduct trade with each other.
When goods are traded across boundaries, the selling and buying firms prefer
to receive/pay in a currency of their choice. When they trade or borrow internationally
multiple currencies come into play. Thus, there has to be a market that enables
participants to buy and sell currencies in such a way that can convert the inflow and
outflow into the currency of their choice. The market that facilitates such exchange of
currencies is the foreign exchange market. The foreign exchange market is that in
which currencies are bought and sold against each other. The Forex market is largely
an over -the -counter (OTC) market. This means that there is no single market place
or organized exchange, electronic or physical (like stock), and where all trades is
executed between exchange members.
The market spans all the time zones of the world and functions round the clock
enabling a trade to offset a position created in one market using another market. The
major market centres are London, New York and Tokyo. Other important centres are
Zurich, Frankfurt, Hong Kong and Singapore.

STRUCTURE OF THE FOREIGN EXCHANCE MARKET
The market for foreign exchange exists at the retail as well as the wholesale
level. In the retail market for foreign exchange, travellers and tourists exchange one
currency in the form of currency notes or travellers checks. The wholesale market is
often called interbank market. The participants in this market are commercial banks,
investment banks, Central Bank and corporation.
Chapter 2
WHAT IS FOREIGN EXCHANGE MARKET

The markets, in which participants are able to buy, sell exchange and speculate
on currencies. Foreign exchange markets are made up of banks, commercial
companies, central banks, investment management firms, hedge funds, and retail
forex brokers and investors. The forex market is considered to be the largest financial
market in the world. Because the currency markets are large and liquid, they are
believed to be the most efficient financial markets.
The simple sense of Forex (Foreign currency exchange, Foreign Exchange)
is simultaneous purchase and sale of the currency or the exchange of one country's
currency for the one of another country. The world currencies do not have a fixed
exchange rate and are always fluctuating, since each are traded in the currency pairs
like Euro/Dollar, Dollar/Yen and others. 85% of daily trades are taken by major
currencies trading. Investments usually deal with 4 major pairs: Euro against US
dollar, US dollar against Japanese yen, British pound against US dollar, and US dollar
against Swiss franc or EUR/USD, USD/JPY, GBP/USD, and USD/CHF used to sign
these pairs accordingly.
In case you have a forecast that one currency would get higher to another, you
can exchange the second one for the first one and wait for the profit. If you are lucky
to see the trades following your forecast you can make an opposite transaction and to
exchange currencies back gaining the profit.
Prices in the Forex market fluctuate without any dramatic changes unlike
stock market where considerable gaps are likely to be seen. There isn't any problems
entering and exit the market due to its daily turnover of about $2 to 4 trillion. Forex
market can never be forced to stop. The transactions were carried out even in 2001, on
September 11
th
.

ADVANTAGES FOREX
There are some Forex market advantages: liquidity, efficiency, cost,
quotations, unambiguity, and the margin size.

1. High liquidity
It is an opportunity of reception under the transaction of money, instead of the
goods. The market on which money are assets, have highest of all possible
liquidities. This circumstance is powerful attractive force for any investor since it
provides to him freedom to open and close a position of any volume. The forex
market with an average trading volume of over $1.5 trillion per day is the most
liquid market in the world. That means that a trader can enter or exit the market at
will in almost any market condition minimal execution barriers or risk and no
daily trading limit.

2. Efficiency (a 24-hour market)
The main advantage of the Forex market over the stock market and other
exchange-traded instruments is that the forex market is a true 24-hour market.
Whether it is 6pm or 6am, somewhere in the world there are always buyers and
sellers actively trading forex so that investors can respond to breaking news
immediately. In the currency markets, your portfolio will not be affected by
afterhours earning reports or analyst conference calls. Recently, after hours
trading has become available for U.S. stocks - with several limitations. These
ECNs (Electronic Communication Networks) exist to bring together buyers and
sellers when possible. However, there is no guarantee that every trade will be
executed, nor at a fair market price. Quite frequently, stock traders must wait until
the market opens the following day in order to receive a tighter spread. A trader
may take advantage of all profitable market conditions at any time; therefore, no
waiting for the 'opening bell'.

3. Cost. Forex market
Traditionally have no commission charges, except for a natural market
difference (spread) between the prices of a supply and demand. The retail
transaction cost (the bid/ask spread) is typically less than 0.1% (10 pips or points)
under normal market conditions. At larger dealers, the spread could be less than 5
pips, and may widen considerably in fast moving markets.

4. Quotations unambiguity
Because of high liquidity of the market, the sale of practically unlimited lot
can be executed on a uniform market price. It allows avoiding a problem of the
instability, existing in futures and other share investments where during one time
and for a determined price can be sold only the limited quantity of contracts.

5. The margin size
The size of credit "shoulder" (margin) in forex market is defined only by the
agreement between the client and that bank or broker firm which provides to him
an output on the market, and makes 1:33, 1:50 or 1:100, for example. On forex
market the traditional size of "shoulder" 1:100, i.e., having brought the mortgage
in 1000 dollars, the client can make transactions for the sum, equivalent 100
thousand dollars. Use of an opportunity of crediting, together with strong
variability of quotations of currencies, also does this market highly remunerative
and highly risky. A leverage ratio of up to 400 is typical compared to a leverage
ratio of 2 (50% margin requirement) in equity markets. Of course, this makes
trading in the cash/spot forex market a double-edged sword the high leverage
makes the risk of the down side loss much greater in the same way that it makes
the profit potential on the upside much more attractive

6. Always a bull market
A trade in the forex market involves selling or buying one currency against
another. Thus, a bull market or a bear market for a currency is defined in terms of
the outlook for its relative value against other currencies. If the outlook is positive,
we have a bull market in which a trader profits by buying the currency against
other currencies. Conversely, if the outlook is pessimistic, we have a bull market
for other currencies and a trader profits by selling the currency against other
currencies. In either case, there is always a bull market trading opportunity for a
trader.

7. Inter-bank market
The backbone of the forex market consists of a global network of dealers
(mainly major commercial banks) that communicate and trade with one another
and with their clients through electronic networks and telephones. There are no
organized exchanges serving as a central location to facilitate transactions the way
the New York Stock Exchange serves the equity markets. The forex market
operates in a manner similar to the way the NASDAQ market in the United States
operates, and thus it is also referred to as an 'over the counter' or OTC market.
8. No one can corner the market.
The forex market is so vast and has so many participants that no single entity,
even a central bank, can control the market price for an extended period. Even
interventions by mighty central banks are becoming increasingly ineffectual and
short-lived, and thus central banks are becoming less and less inclined to intervene
to manipulate market prices.

9. Unregulated.
The forex market is generally regarded as an unregulated market although the
operations of major dealers, such as commercial banks in money centres, are
regulated under the banking laws. The conduct and operation of retail forex
brokerages are not regulated under any laws or regulations specific to the forex
market, and in fact, many of such establishments in the United States do not even
report to the Internal Revenue Service (IRS). The currency futures and options
that are traded on exchanges such as Chicago Mercantile Exchange (CME) are
regulated in the way other exchange-traded derivatives are regulated.

10. Equal access to market information
Professional traders and analysts in the equity market have a definitive
competitive advantage by virtue of that fact that they have first access to
important corporate information, such as earnings estimates and press releases,
before it is released to the public. In contrast, in the forex market, pertinent
information is equally accessible; ensuring that all market participants can take
advantage of market-moving news as soon as it becomes available.

11. Profit potential in both rising and falling markets
In every open FX position, an investor is either long in one currency or short
in the other. A short position is one in which the trader sells a currency in
anticipation that it will depreciate. This means that potential exists in a rising as
well as a falling FX market. The ability to sell currencies without any limitations
is one distinct advantage over equity trading. It is much more difficult to establish
a short position in the US equity markets, where the Uptick rule prevents investors
from shorting stock unless the immediately preceding trade was equal to or lower
than the price of the short sale.

12. Most brokers have very good trade execution software
Only a handful of stockbrokers have execution platforms that offer order-
cancels-order type controls and other contingent orders. I have looked at several
forex-based platforms, and forex brokers place a premium on putting high levels
of functionality into traders hands. This makes business sense: if you find it
easier to execute your strategy, you are likely to trade more often. This is one area
where the equities world could learn a thing or two from their forex counterparts.

13. Trending nature of currencies
Major currencies are still dominated by central banks, national financial
policies and macro trends. This means that currency traders enjoy markets that
have a greater tendency to trend than most markets. I have seen some compelling
data on this trending characteristic of the currency markets.

Chapter 3
STRUCTURE OF FOREIGN EXCHANGE MARKETS IN INDIA

The foreign exchange market in India consists of three inter dependent segments or
tiers:
The first is an apex segment consisting of transactions between RBI and
Authorized Dealers (ADs). ADs are usually commercial banks authorised by the RBI
to deal in foreign exchange. Central banks also intervene in the markets from time to
time in order to move the market in a particular direction. The RBI is the rate setter as
well as the residual partner in respect of commercial transactions. Depending upon the
situation, the central bank absorbs the excess supply or makes good the shortage of
foreign exchange arising from merchant transactions. The RBI does not intervene in
the market to modulate interbank rates, although the rates at which it buys and sells
foreign currency against the rupee have a significant influence on interbank rates.
The second segment is the interbank market in which the ADs deal with each
other. Commercial banks are the market makers in this market. In other words, on
demand, they quote buying and selling rates for one currency against another and
express willingness to take either side of transaction. They also buy and sell on their
own account and carry inventories of currencies.
The third segment is the retail market in which the ADs deal with their
corporate clients and other retail customers. The retail market in currency notes and
travellers checks cater to tourists. All foreign exchange transaction of residents India
must take place through the channels of ADs. Moneychangers who are licensed to
deal in foreign currencies to cater to the needs of retail customers also operate in this
segment. In addition, there are other players, such as foreign exchange brokers, who
are essentially middlemen providing information to market-making banks about
prices and a counter party to transactions. Brokers do not buy or sell on their own
accounts; instead they pocket a commission on the deals that they have helped strike
between two market-making banks.

Chapter 4
TYPES OF FOREIGN EXCHANGE TRANSACTIONS

A very brief account of certain important types of transactions conducted in
the foreign exchange market is given below

Spot and Forward Exchanges

SPOT MARKET

The term spot exchange refers to the class of foreign exchange transaction
which requires the immediate delivery or exchange of currencies on the spot. In
practice the settlement takes place within two days in most markets. The rate of
exchange effective for the spot transaction is known as the spot rate and the market
for such transactions is known as the spot market. The exchange rate for spot delivery
is called Spot exchange rate ads is denoted by S (.). For example, S (Rs/USD) =Rs
45.10/USD is the relationship between rupees and dollars, which says that one dollar
is equivalent to Rs 45.10.
Transactions having delivery earlier than spot may be classified as cash or
tom. If the exchange of currencies takes place on the same day of transaction it is
known as cash deal. If the exchange of currencies takes place on the next working
day, i.e. tomorrow, it is known as tom deal. If the exchange of currencies takes place
on the second working day after the date of transaction it is known as spot deal.

FORWARD MARKET

The forward transactions is an agreement between two parties, requiring the
delivery at some specified future date of a specified amount of foreign currency by
one of the parties, against payment in domestic currency be the other party, at the
price agreed upon in the contract. The rate of exchange applicable to the forward
contract is called the forward exchange rate and the market for forward transactions is
known as the forward market. The foreign exchange regulations of various countries
generally regulate the forward exchange transactions with a view to curbing
speculation in the foreign exchanges market. In India, for example, commercial banks
are permitted to offer forward cover only with respect to genuine export and import
transactions. Forward exchange facilities, obviously, are of immense help to exporters
and importers as they can cover the risks arising out of exchange rate fluctuations be
entering into an appropriate forward exchange contract. With reference to its
relationship with spot rate, the forward rate may be at par, discount or premium. If
the forward exchange rate quoted is exact equivalent to the spot rate at the time of
making the contract the forward exchange rate is said to be at par.
The forward rate for a currency, say the dollar, is said to be at premium with
respect to the spot rate when one dollar buys more units of another currency, say
rupee, in the forward than in the spot rate on a per annum basis.
The forward rate for a currency, say the dollar, is said to be at discount with
respect to the spot rate when one dollar buys fewer rupees in the forward than in the
spot market. The discount is also usually expressed as a percentage deviation from the
spot rate on a per annum basis.
The forward exchange rate is determined mostly be the demand for and supply
of forward exchange. Naturally when the demand for forward exchange exceeds its
supply, the forward rate will be quoted at a premium and conversely, when the supply
of forward exchange exceeds the demand for it, the rate will be quoted at discount.
When the supply is equivalent to the demand for forward exchange, the forward rate
will tend to be at par.

FUTURES

While a futures contract is similar to a forward contract, there are several
differences between them. While a forward contract is tailor made for the client be his
international bank, a future contract has standardized features the contract size and
maturity dates are standardized. Futures cab traded only on an organized exchange
and they are traded competitively. Margins are not required in respect of a forward
contract but margins are required of all participants in the futures market an initial
margin must be deposited into a collateral account to establish a futures position.

OPTIONS

While the forward or futures contract protects the purchaser of the contract
from the adverse exchange rate movements, it eliminates the possibility of gaining a
windfall profit from favorable exchange rate movement. An option is a contract or
financial instrument that gives holder the right, but not the obligation, to sell or buy a
given quantity of an asset as a specified price at a specified future date. An option to
buy the underlying asset is known as a call option and an option to sell the underlying
asset is known as a put option. Buying or selling the underlying asset via the option
is known as exercising the option. The stated price paid (or received) is known as the
exercise or striking price. The buyer of an option is known as the long and the seller
of an option is known as the writer of the option, or the short. The price for the option
is known as premium.

Types of options

With reference to their exercise characteristics, there are two types of options,
American and European.

A European option cab is exercised only at the maturity or expiration date of
the contract, whereas an American option can be exercised at any time during the
contract.

SWAP OPERATION

Commercial banks who conduct forward exchange business may resort to a
swap operation to adjust their fund position. The term swap means simultaneous sale
of spot currency for the forward purchase of the same currency or the purchase of spot
for the forward sale of the same currency. The spot is swapped against forward.
Operations consisting of a simultaneous sale or purchase of spot currency
accompanies by a purchase or sale, respectively of the same currency for forward
delivery are technically known as swaps or double deals as the spot currency is
swapped against forward.

ARBITRAGE

Arbitrage is the simultaneous buying and selling of foreign currencies with
intention of making profits from the difference between the exchange rate prevailing
at the same time in different markets.

Chapter 5
IMPORTANCE AND NEED OF THE FOREIGN EXCHANGE
MARKET

The foreign exchange (FX) market has a volume of $1 to 3 trillion-per-day,
surpasses stocks and bonds as the largest market in the world. Foreign exchange
markets are critical for setting exchange rates between countries.
1. Liquidity
In terms of international trade, liquidity is the ease in which foreign currency
is converted into domestic currency.
2. Rates
Buyers and sellers set prices using the auction method in the FX market.
Sellers try to earn the highest "ask" price possible, and buyers try to purchase
currency at the lowest "bid." Buyers and sellers meet at the "spot" price, the
current value and exchange rate for a particular currency against others.
3. Reserves
International governments enter the FX market to build and manage foreign
exchange reserves. They build the reserves to make official payments and
influence domestic currency values.
4. International Trade
Businesses rely on FX markets to buy currency that is spent to obtain overseas
goods. Corporations will also look to FX markets to convert international earnings
back into the domestic currency.
5. Hedging
Traders use foreign exchange derivatives, which "derive" their valuations and
costs from the spot market. Options and futures contracts effectively lock in
exchange rates for a set period, to hedge against the risks of currency fluctuations.
NEED AND IMPORTANT FOREIGN EXCHANGE TO INDIVIDUAL

There was a time in human civilization that money, whether in coins or in paper,
didn't exist. When you needed something, you would have to give up one of your
possessions for another's. For example, if a farmer sees a travelling merchant visiting
their community to sell some precious and delicate china porcelains, he would have to
exchange a portion of his rice for the merchant's china. Such an agreement is called
barter where one thing is exchanged for another that was believed to be of the same
value.
Money has become an effective tool to make businesses and ultimately, our daily
lives, easy and simple. When you need a commodity or service, all you need to do is
to have the right amount of money in order to have that thing you desire. Because of
globalization and with more countries opening up to the world, it is inevitable that we
become more involved with each other. The Americans travel all the time to France
and Italy to see the latest fashion and the great landmarks. The Africans are selling
their nicely-crafted home designs to the Europeans.
All of these are indicative as to how we are all connected, one way or another.
However, when you travel, you cannot bring your nation's money alone and expect to
live on a foreign land. This is where foreign exchange becomes important to you.
Each nation is represented by its own national currency. The US has the American
dollar while the Japanese has the yen, just to name a few. When an American travels
to Japan, he would need to exchange his dollars to yen in order to buy things in that
country. This is called foreign exchange. In order for him to have a benchmark as to
how many yen his dollars could buy, he would need to know the current exchange
rate in local banks or money exchange. If it says 1 dollar = 101 yen, it means that his
dollar is highly valued and could already buy 101 yen. If the exchange rate the
following day changes and becomes 1 dollar = 100 yen, his dollar had depreciated
against the yen and now could buy one yen less than the other day. A depreciation and
appreciation of a currency indicates the strength of that particular currency and is
always in reference to another currency. Multiple countries are also doing business
with each other and this is another situation where foreign exchange becomes
important.
NEED AND IMPORTANT OF FOREIGN EXCHANGE TO NATION

It is an important exercise since it helps in the conversion of one countrys
currency to another. This will eventually lead to international trade especially for
buying and selling of goods and services or even if one wishes to transfer money from
one country to another it would be easier. Taking an example of the agricultural
sector, exporting earns a country a lot of money. For example, in the US, the
agricultural sector mainly depends on the overseas markets in its economy. 50 percent
of its wheat is exported to foreign lands thus boosting its economy. It would be so
difficult for the USA to trade if there was no currency converter system. In the other
hand, it helps individual countries to be in a position to compare prices of items in
various countries and so make a decision on where it wishes to purchase goods in that
country or in another.
Foreign Exchange is an important factor contributing to competitiveness in the
market since trading countries will be able to compare prices and therefore learn of
strategies of attracting more customers to themselves. For example, in case the US
dollar goes up in value, it will force those who import goods to pay more in order to
purchase US goods and vice versa. When the value of a dollar is high it will therefore
decrease the demand of the countrys goods abroad since most countries might not
afford thus will look for affordable markets. On the other hand also, if the dollars
value is high the US citizens will be in a position to purchase goods at a cheaper
exchange prices. Apart from the business benefits, it is also important for those
travelling abroad because it would be very difficult for them to undertake any money
transaction while out of their countries.
Foreign Exchange Market is not only important to individual business people but
also to a nation. It will be able to determine the amount of imports and exports it can
advocate for basing on the rates in the market. If the currency of that particular
country becomes higher, then its goods will be expensive in the outside market and
vice versa. China as a country is very competitive unlike USA it has never allowed its
Yuan to appreciate. It has received much pressure from the USA but it has never
altered its rates. In case a country has its exports in demand it leads to rise in the value
of its currency therefore making more profits. The currency exchange also helps
indirectly in the international unity through trading. Countries are able to attend
international meetings probably political or business oriented as a result of easier
accessibility. It would be difficult to come together if the currencies were
unconvertible. The Foreign exchange market is very important in the business world.

Chapter 6
EXPORT, IMPORTS, REMITTANCES AND CAPITAL FLOWS

FOREIGN EXCHANGE MANAGEMENT (EXPORT AND IMPORT OF
CURRENCY) REGULATIONS, 2000
In exercise of the powers conferred by clause (g) of sub-section (3) of Section 6,
subsection (2) of Section 47 of the Foreign Exchange Management Act, 1999 (42 of
1999), the Reserve Bank makes the following regulations for export from and import
into, India of currency or currency notes, namely :-

1. Short title & commencement.
i. These regulations may be called as Foreign Exchange Management (Export
and Import of Currency) Regulations, 2000.
ii. They shall come into effect on 1st day of June, 2000.

2. Definitions.
In these regulations, unless the context requires otherwise, -
i. 'Act' means Foreign Exchange Management Act, 1999 (42 of 1999);
ii. the words and expressions used and not defined in these regulations but
defined in the Act have meanings respectively assigned to them in the Act.

3. Export and Import of Indian currency and currency notes.
i. Save as otherwise provided in these regulations, any person resident in India,
a. may take outside India (other than to Nepal and Bhutan) currency
notes of Government of India and Reserve Bank of India notes upto an
amount not exceeding Rs. 7,500 (Rupees seven thousand five hundred
only) per person;
b. may take or send outside India (other than to Nepal and Bhutan)
commemorative coins not exceeding two coins each.
Explanation - 'Commemorative Coin' includes coin issued by Government of India
Mint to commemorate any specific occasion or event and expressed in Indian
currency;
c. who had gone out of India on a temporary visit, may bring into India at
the time of his return from any place outside India (other than from
Nepal and Bhutan), currency notes of Government of India and
Reserve Bank of India notes upto an amount not exceeding Rs. 7,500
(Rupees seven thousand five hundred only) per person.

ii. Without prejudice to the provisions of sub-regulation (1), Reserve Bank may,
on application made to it and on being satisfied that it is necessary to do so,
allow a person to take or send out of India or bring into India currency notes of
Government of India and/or of Reserve Bank of India subject to such terms
and conditions as the Bank may stipulate.

4. Prohibition on Export of Indian coins.
No person shall take or send out of India the Indian coins which are covered
by the Antique and Art Treasure Act, 1972.

5. Prohibition on export and import of foreign currency.
Except as otherwise provided in these regulations, no person shall, without the
general or special permission of the Reserve Bank, export or send out of India, or
import or bring into India, any foreign currency.


6. Import of foreign exchange into India.
A person may -
i. send into India without limit foreign exchange in any form other than currency
notes, bank notes and travelers cheques;
ii. bring into India from any place outside India without limit foreign exchange
(other than unissued notes);
provided that bringing of foreign exchange into India under clause (b) shall be
subject to the condition that such person makes, on arrival in India, a
declaration to the Custom authorities in Currency Declaration annexed to these
Regulations;
provided further that it shall not be necessary to make such declaration where
the aggregate value of the foreign exchange in the form of currency notes,
bank notes or travelers cheques brought in by such person at any one time
does not exceed US$10,000 (US Dollars ten thousands) or its equivalent
and/or the aggregate value of foreign currency notes brought in by such person
at any one time does not exceed US$ 5,000 (US Dollars five thousands) or its
equivalent.

7. Export of foreign exchange and currency notes.
i. An authorised person may send out of India foreign currency acquired in
normal course of business,
ii. any person may take or send out of India, -
a. Cheques drawn on foreign currency account maintained in accordance
with Foreign Exchange Management (Foreign Currency Accounts by a
person resident in India) Regulations, 2000;
b. foreign exchange obtained by him by drawal from an authorised person
in accordance with the provisions of the Act or the rules or regulations
or directions made or issued there under;
c. currency in the safes of vessels or aircrafts which has been brought into
India or which has been taken on board a vessel or aircraft with the
permission of the Reserve Bank ;
iii. any person may take out of India, -
a. foreign exchange possessed by him in accordance with the Foreign
Exchange Management (Possession and Retention of Foreign
Currency) Regulations, 2000;
b. unspent foreign exchange brought back by him to India while returning
from travel abroad and retained in accordance with the Foreign
Exchange Management (Possession and Retention of Foreign
Currency) Regulations, 2000 ;
iv. any person resident outside India may take out of India unspent foreign
exchange not exceeding the amount brought in by him and declared in
accordance with the proviso to clause (b) of Regulation 6, on his arrival in
India.

8. Export and import of currency to or from Nepal and Bhutan.
Notwithstanding anything contained in these regulations, a person may
i. take or send out of India to Nepal or Bhutan, currency notes of Government of
India and Reserve Bank of India notes (other than notes of denominations of
above Rs.100 in either case) ;
ii. bring into India from Nepal or Bhutan, currency notes of Government of India
and Reserve Bank of India notes (other than notes of denominations of above
Rs.100 in either case) ;
take out of India to Nepal or Bhutan, or bring into India from Nepal or Bhutan,
currency notes being the currency of Nepal or Bhutan.

REMITTANCES

Introduction
Remittances are not a new phenomenon in the world, being a normal
concomitant to migration which has ever been a part of human history.The process of
sending money to remove an obligation. This is most often done through an electronic
network, wire transfer or mail is known as remittances. The term also refers to the
amount of money being sent to remove the obligation.
Remittances are playing an increasingly large role in the economies of many
countries, contributing to economic growth and to the livelihoods of less prosperous
people (though generally not the poorest of the poor). According to World Bank
estimates, remittances totalled US$414 billion in 2009, of which US$316 billion went
to developing countries that involved 192 million migrant workers. For some
individual recipient countries, remittances can be as high as a third of their GDP.
Money sent home by migrants constitutes the second largest financial inflow
too many developing countries, exceeding international aid. Estimates of remittances
to developing countries vary from International Fund for Agricultural Development's
US$301 billion (including informal flows) to the World Bank's US$250 billion for
2006 (excluding informal flows). Remittances contribute to economic growth and to
the livelihoods of people worldwide. Moreover, remittance transfers can also promote
access to financial services for the sender and recipient, thereby increasing financial
and social inclusion. Remittances also foster, in the receiving countries, a further
economic dependence on the global economy instead of building sustainable, local
economies.

Application for Remittances in Foreign Currency
i. A person, firm or bank may apply to an Authorized Dealer for remittances in
any foreign currency to a beneficiary abroad.
ii. Application should be made in FORM -A1, if the purpose of remittance is
import of goods into India.
Recipient of remittance by India

2006 2007 2008 2009 2010
India
$26.9
billion
$27
billion
$45
billion
$55.06
billion
$55
billion

CAPITAL FLOW
Capital flows encompass all of the money moving between countries as a result of
investment flows into and out of countries around the world. Here instead of money
flowing between countries to buy each others goods and services, we are talking
about money flowing into and out of the stock and bond markets of countries around
the world, as well as things such as real estate and cross border mergers and
acquisitions.
Just as the importing or exporting of goods shifts the supply demand balance for a
particular country, so do the flows of money coming into and out of the country as a
result of capital flows. As the barriers to investing in foreign countries have come
down as a result of the internet and other factors, it is much easier for fund managers
and other investors to take advantage of opportunities not only in their domestic
markets, but anywhere in the world. As this is the case, when a market in a particular
country is showing above average returns, foreign investors will often flood the
market with capital, buying up the assets of that country looking to earn above
average returns as well. When this happens it not only affects the markets of that
country, but also the value of its currency, as foreign capital must be converted into
local currency in order to participate in the markets there.
While most people are more familiar with the equities markets, an important thing
to note here is that the bond markets in most countries are much larger than the
equities markets, and therefore can have a greater affect on the currency. When the
interest rates being paid for the bonds in a particular country are high, this tends to
attract capital to that country from foreign investors seeking to take advantage of that
higher yield, creating a demand for the local currency here as well.
Lastly, cross border mergers and acquisitions are also part of the capital flows
category and when they happen on large levels can move the market as well. As an
example, if Deutsche bank (a large German bank) were to buy Washington Mutual
here in the United States, this would create a large demand for dollars and increase the
supply of Euros on the market as Deutsche Bank sold Euros for dollars in order to
complete the transaction.
As you can probably imagine there are a myriad of factors that can affect both
trade and capital flows for a particular country, and therefore its currency. As
currency traders it is our responsibility to know what to expect in terms of a reaction
in the FX market when different things happen, so always think of things in terms of
how something affects the supply demand relationship. Once you understand this it is
next important to understand whether that effect fits into the trade flow or capital flow
category since, some countries are affected more by trade flows than capital flows and
vice versa.

Chapter 7
DIFFERENT CURRENCY OF THE WORLD

The foreign exchange market is the world's largest financial market with over
$2 trillion in daily trading volume. Despite its sheer size, only a few currencies make
up most of its transactions. Almost 85% of transactions in the forex market involve
seven major currencies. These currencies are the US Dollar, the Euro, the Japanese
Yen, the Swiss Franc, the Canadian Dollar, the British Pound and the Australian
Dollar.
To get the most out of forex trading and maximize profits, one must trade
using these major currencies. These currencies are known for their liquidity. The
countries of these currencies have low inflation rates, respectable central banks and
politically-stable governments. These major currencies are less volatile and risky than
the minor currencies. As a forex trader, one must understand the concepts of "long"
and "short" positions. A long position is taken when a forex trader buys a certain
currency to sell it later at a higher price. A short position, on the other hand, is taken
when a trader sells a currency expecting a decrease in the exchange rate.
Currencies are traded in pairs, or what is termed as a currency pair. The US
Dollar and the Euro (USD-EUR) is one of the most popular currency pairs in forex. A
trader buys one currency in exchange for another currency, and then sells this
currency later on when there is a favorable change in the exchange rate. In technical
terms, a trader goes long in one currency and short in another. The major currency
pairs are preferred by most traders because of political and economic factors.
Economic determinants such as inflation and interest rates can affect the value of a
currency. Those countries with favorable and stable economic and political conditions
have currencies preferred by most traders.
Aside from political and economic factors, there are also other conditions that
may affect currency rates, such as extremely large orders. Some other factors are
circumstantial in nature and are unknown to most traders. The scope of the forex
market makes it virtually impossible for any trader to substantially influence the forex
market rates. Fluctuations in the exchange rates are the results of a combination of
many factors. Forex analysis can either be technical or fundamental. Traders who rely
on technical analysis use support and resistance levels, trend lines, mathematical
analysis and other data to identify and predict future trends. Those who follow
fundamental analysis rely on economic figures to come up with price expectations. It
is best to trade in major currency pairs to lessen the impact of unfavorable economic
and political events that may spoil an otherwise profitable trade.

Chapter 8
FOREIGN EXCHANGE MANAGEMENT ACT, 1999

Introduction
The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign
Exchange Regulation Act (FERA). FERA was introduced in 1974 to consolidate and
amend the then existing law relating to foreign exchange. FERA was amended in
1993 to bring about certain changes, as a result of introduction of economic reforms
and liberalization of Indian Economy. But it was soon realized that FERA had by and
large outlived its utility in the changed economic scenario and therefore replaced by
FEMA in 1999.

Meaning
FEMA was introduced by the Finance Minister in Lok Sabha on August 4,
1998. The Bill aims to consolidate and amend the law relating to foreign exchange
with the objective of facilitating external trade and payments and for promoting the
orderly development and maintenance of foreign exchange market India. It was
adopted by the parliament in 1999 and is known as the Foreign Exchange
Management Act, 1999. This Act extends to the whole of India and shall also apply to
all branches, offices and agencies outside India owned or by a person resident in
India.

Objectives and Reasons for enactment of FEMA
FEMA was enacted to consolidate and amend the law relating to foreign
exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in
India (Preamble). The statement of objects and reasons set the tone of the enactment
of new legislation:
The Foreign Exchange Regulation Act, 1973, was reviewed in 1993. The
Report of the High Level Committee on Balance of Payments (Chairman: Dr. C.
Rangarajan, 1993) set the broad agenda in this regard. The Committee recommended
the following:
1. The introduction of a market-determined exchange rate regime within
limits
2. Liberalization of current account transactions leading to current
account convertibility;
3. Compositional shift in capital flows away from debt to non debt
creating flows;
4. Strict regulation of external commercial borrowings, especially short-
term debt;
5. Discouraging volatile elements of flows from non-resident Indians; full
freedom for outflows associated with inflows (i.e., principal, interest,
dividend, profit and sale proceeds) and gradual liberalization of other
outflows;
6. Dissociation of Government in the intermediation of flow of external
assistance, as in the 1980s, receipts on capital account and external
financing were confined to external assistance through multilateral and
bilateral sources.
It was subsequently felt that a better course would be to repeal the existing
Foreign Exchange Regulation Act and enact a new legislation.
Significant developments have been taking place since 1993 such as substantial
increase in foreign exchange reserves, growth in foreign trade, rationalization of
tariffs, current account convertibility, liberalization of Indian investments abroad,
increased access to external borrowings by Indian corporate and participation of
Foreign investors in the stock markets.

Capital Account liberalization approach
Globalization of the world economy is a reality that makes opening up of the
capital account and integration with global economy an unavoidable process. Today
capital account liberalization is not a choice. The capital account liberalization
primarily aims at liberalizing controls that hinder the international integration and
diversification of domestic savings in a portfolio of home assets and foreign assets
and allows agents to reap the advantages of diversification of assets in the financial
and real sector. However, the benefits of capital mobility come with certain risks
which should be categorized and managed through a combination of administrative
measures, gradual opening up of prudential restrictions and safeguards to contain
these risks.

Salient Features of FEMA
FEMA extends to whole of India. It shall also apply to all branches, offices
and agencies outside India, owned or controlled by a person resident in India and also
to any contravention there under committed outside India by any person to whom the
Act applies. Therefore joint ventures or wholly owned subsidiaries, though outside
India, but controlled from India are intended to be covered by the Act. The new Act is
meant to be user friendly with the object to facilitate external trade and payments for
promoting the orderly development of foreign exchange in India.
Under the new law, the emphasis for determining the residential status is on
the actual period of stay in India, whereas under FEMA, the emphasis was on the
intention of the person. Under the new law, it is not necessary that the person should
be continuously and physically present in India. It will be sufficient the total of stay in
India is 182 days or more during the year. The central government may from time to
time give general or special directions to the Reserve Bank and Reserve Bank shall
comply with such directions.
Applicability of the Act
The act extends to the whole of India. Also, it applies to all the branches,
offices and agencies outside agencies outside India owned or controlled by a person
resident in India and also to any contravention there under committed outside India by
person to whom this act appeals. The act has come into force with effect from June 1,
2000.

Current scenario
The main objectives in managing a stock of reserves for any developing
country, including India, are preserving their long-term value in terms of purchasing
power over goods and services, and minimizing risk and volatility in returns. After the
East Asian crises of 1997, India has followed a policy to build higher levels of
Foreign Exchange Reserves that take into account not only anticipated current
account deficits but also liquidity at risk arising from unanticipated capital
movements. Accordingly, the primary objectives of maintaining Foreign Exchange
Reserves in India are safety and liquidity; maximizing returns is considered
secondary. In India, reserves are held for precautionary and transaction motives to
provide confidence to the markets, those foreign obligations can always be met. The
Reserve Bank of India (RBI), in consultation with the Government of India, currently
manages Foreign Exchange Reserves. As the objectives of reserve management are
liquidity and safety, attention is paid to the currency composition and duration of
investment, so that a significant proportion can be converted into cash at short notice

Chapter 9
FEDAI IN FOREIGN EXCHANGE

Foreign Exchange Dealers Association of India (FEDAI) was set up in 1958
as an Association of banks dealing in foreign exchange in India (typically called
Authorised Dealers - ADs) as a self regulatory body and is incorporated under Section
25 of The Companies Act, 1956. It's major activities include framing of rules
governing the conduct of inter-bank foreign exchange business among banks vis--vis
public and liaison with RBI for reforms and development of forex market.
Presently some of the functions are as follows:
1. Guidelines and Rules for Forex Business.
2. Training of Bank Personnel in the areas of Foreign Exchange Business.
3. Accreditation of Forex Brokers
4. Advising/Assisting member banks in settling issues/matters in their dealings.
5. Represent member banks on Government/Reserve Bank of India/Other
Bodies.
6. Announcement of daily and periodical rates to member banks.
Due to continuing integration of the global financial markets and increased
pace of de-regulation, the role of self-regulatory organizations like FEDAI has also
transformed. In such an environment, FEDAI plays a catalytic role for smooth
functioning of the markets through closer co-ordination with the RBI, other
organizations like FIMMDA, the Forex Association of India and various market
participants. FEDAI also maximizes the benefits derived from synergies of member
banks through innovation in areas like new customized products, bench marking
against international standards on accounting, market practices, risk management
systems, etc.

Various rules of FEDAI
1. Rules No 1.of FEDAI deals with hours of business of banks which is the
normal banking hours of ADs. On Saturdays no commercial transaction in
foreign exchange will be conducted except purchase/sale of travellers
cheques and currency notes and transactions where exchange rates have been
already fixed.
2. Rules No.2 deals with export transactions export bills purchased/discounted
negotiation, export bills for collection export letters of credit, etc.

Application of Rates of Crystallization of Liabilities and Recovers
1. Foreign currency bill will be purchased/ negotiation / discounted at the
Authorized Dealers current bill purchase rate or at the contract rate.

2. Exporters are liable for the repatriation of proceeds of the export bills
negotiated/purchased/discounted sent for collection through the Authorized
Dealers. They would transfer the exchange risk to the exporter by
crystallizing, the foreign currency liability into Rupee liability on the 30th day
after the transit period in case of unpaid demand bills. In case of unpaid
usance bills crystallization will take place on the 30th day after notional due
date or actual due date. Notional due date is arrived at by adding transit period,
usance period and grace period if any to the date of purchase/discount/
negotiation. In case 30th day happens to be a holiday or Saturday, the export
bill will be crystallized on the next working day. For crystallization into rupee
liability the bank will apply the TT selling rate on the date of crystallization
the original buying rate whichever is higher. Normal Transit period comprises
usual time involved from negotiation/purchase/discount of documents till
receipt of proceeds thereof in the Nostro account. It is not, as is commonly
misunderstood, the time taken for the arrival of goods at the destination.

Crystallisation of Import Bills (Rules 30)
All foreign currency import bills drawn under letter of credit shall be
crystallized into Rupee liability on the 10th day from the date of c\receipt of
documents at the letter of credit opening bank in the case of demand bills and on the
due date in the case of usance bills. In case the 10th day or due date falls on a holiday
or Saturday the importers liability should be crystallized, into Rupee liability on the
next working day.

Interest on Export Bills/Normal Transit Period
Concessional rate of interest on export bills is linked to the concept of normal
transit period and notional due date. Normal transit period comprised the average
period normally in involved from the date of negotiation/purchase/discount till the
receipt of bill proceeds in the Nostro account of the bank. Normal Transit period is
not to be confused with the time taken for the arrival of goods at the destination.
In case of bills payable at sight or on demand basis Concessional rate of
interest AD directed by the RBI on export bill is applicable for the normal transit
period in case of all foreign currency bills.
In case of usance bills, Concessional rate of interest as directed by the RBI on
export bills is applicable for the normal transit period plus usance period. Thus a
foreign currency bill payable for example at 60 days after sight will be eligible for
Concessional interest rate for 60 days usance plus the normal transit period of 25
days, i.e., a total number of 85 days.

Interest on Import Bills
1. Bills negotiated under import letter of credit shall carry domestic commercial
rate of interest as applicable to advances prescribed by Reserve Bank of India
from time to time and shall be recovered from the date of debit to the ADs
Nostro account to the date of crystallization/retirement whichever earlier.

2. From the dates of crystallization up to the date of retirement the bills shall
carry the overdue rate of interest as specified by Reserve Bank of India from
time to time.

Exchange Contracts
Exchange contracts shall be for definite amount unless date of delivery is fixed
and indicated in the contract, the option period of delivery should be specified as.
1. The option of delivery shall not exceed beyond, one month. The merchant
whether a buyer or a seller will have the option of delivery.

i. Early delivery: If a bank accepts or gives early delivery the bank shall
recover/pay swap difference if any.
ii. Extension: forward contract either short term or long term contracts
where extension is sought by the customers (or as rolled over) shall be
cancelled (at TT selling or buying rate as on the date of cancellation)
and re book only at (current rate of exchange). The difference between
the contracted rate and the rate at which the contract is cancelled
should be recovered from/paid to be customer at the time of extension.
Such request for the extension should be made on or before the
maturity date of the contract.
iii. Cancellation: In the case of cancellation of a contract at the request of
the customer, the bank shall recover/pay as the case may be difference
between the contract rate and the rate at which the cancellation is
affected.

2. Rate at which cancellation to be effected.

i. Purchase contract shall be cancelled at the contracting banks spot TT
selling rate current on the date of cancellation.
ii. Sale contracts shall be cancelled at the contracting banks spot TT
buying rate current on the date of cancellation.
iii. Where the contract is cancelled before maturity the appropriate TT rate
shall be applied.

SWAP Cost:
1. If any shall be recovered from the customers under advise to him.

2. In the absence of any instruction from the customer contracts which have
matured shall on the 15th day from the date of maturity be automatically
cancelled. In case the 15th day falls on a Saturday or holiday the contract will
be cancelled on the succeeding working day.
In the above case the customer will not be entitles to the exchange different if
any since the contract is cancelled on account of his default.
In case of delivery subsequent to automatic cancellation the appropriate
current rate prevailing on such delivery date shall be applied.
Payment of SWAP gains to the customer will normally be made at the end of
the swap period.
Outlay and inflow of funds:
1. Interest at not below the prime lending rate of the respective bank on outlay of
funds by the bank for the purpose of covering the swap shall be recovered in
addition to be swap cost, in case early delivery of purchase or sale contracts
and early realization do export bill negotiated. The amount of funds out laid
shall be arrived at by calculating the difference between the original
contracted rate and the rate at which swap could be arranged.

2. If such a swap leads to inflow of funds the amount shall be paid at the
discretion of banks to the customer at the appropriate rate applicable for the
term deposits the period for which the funds remained with the bank.

3. Banks will levy a minimum charge of Rs.250 for every request from a
customer for early delivery, extension or cancellation of a contract.
Chapter 10

TRADE PRACTICES
Experts will invariably sustain that one of the best ways to succeed in currency
trading is learning of and incorporating forex trading methods. Foreign exchange is
truly a systematic and intense investment avenue and there is the need to analyze and
truly comprehend such trading if you want to make your capital grow from it.

What are forex trading methods?
To begin with, such guidelines are special and are schematic skills or
techniques of trading that are designed and implemented with the principal aim of
generating higher revenue or income. Just like in any other form of trading, there is
also a need to know and implement proper and working approaches to make your
money double through currency trading. Thus, it would be of great benefit if you
would be familiar with several simple, yet proven effective forex trading methods.
There are several pluses in the Forex trading practice, like:

1. Powerful leverage of Forex market
The leverage is the point where Forex surpasses any other trading vehicle. For
instance, $1,000 deposit gives to investor a control of $100,000 equivalent of a
foreign currency.

2. No exchange fees
You pay no commissions as well as exchange fees by having a direct
electronic access to the market through online forex trading platform.

3. Limited risk
You have your risk reduced considerably. The highest amount of money you
can lose is the amount of currency in your forex account. So you will never face a
negative balance of equity. You can also manage your risk thanks to stop-loss orders
that all forex orders (up to $1 million amount) guarantee to a trader.

4. Guaranteed prices and Instantaneous Fills
You possess the possibility to have all your orders (up to $1 million size)
executed instantly at a certain price. This will provide your forex trading with real-
time and confident two-way quotes. Moreover, stop-loss and limit orders are insured
by this price guarantee as well.

5. 24-hour market
Forex is a 24-hour-a-day market. Forex transactions occur throughout the
world following the sun around the Earth, from the United States of America to
Australia and New Zealand then moving to Hong Kong, the Far East, and Europe to
return to the U.S. later. Even governments have very low affection and control over
the direction of the forex market as far as there are a lot of various forex investors
involved in trades. Forex market seems to be the best one to trade due to its 24-hour
worldwide activity along with enormous liquidity. Forex is traded perfectly simple.
Broker firms are able to find provide you with everything you need to trade forex.

Forex Trading Practices
Both long-term hedge investors and short-term investors that seek quick
profits use FOREX. Trade reaches between 3 and 4 trillion US dollars per day.
Needless to say, FOREX is a very lucrative market. Many wonder how to gain the
most profits by trading with FOREX. There are a few simple trade practices that can
help any trader, either an amateur or a professional make significant profit from
FOREX.
The best traders firstly understand the intricacies of FOREX trading. In order
to be successful, one must understand how FOREX works. FOREX transactions are
not centred in an exchange, unlike the stock market. Many transactions can take place
at different times all over the world. This is important to note if one is going to invest
in FOREX. In order to trade, one must simply find a trader (there are many around the
world, some can even be found online), decide the currency to purchase, sell
currency, and make profit. However, if FOREX was this simple, everyone would do
it. In reality, most people have to gamble with FOREX because no currency is
completely stable, and there is always the risk for losing money.
There are different types of trade practices
1. Marginal Trading
2. Technical Analysis
3. Fundamental Analysis

1. Marginal Trading
One of the best FOREX practices, but also the most potential hazardous is
Marginal trading. Marginal trading is when an investor speculates on currency
prices by getting a credit line. This can lead to a vast gain, as well as a potential loss.
Because FOREX can be traded without real money, trading with borrowed capital
(marginal trading) can be very appealing. Using these techniques, an investor can
invest more money without having to deal with as many money transfer costs.
Marginal trading also allows bigger positions to be opened with a smaller amount of
actual capital. This trading practice is certainly for the short-term investor.

2. Technical Analysis
The best long-term practice with FOREX is Technical Analysis. It is a good
idea for small and medium sized investors to invest in technical analysis. Technical
Analysis assumes that all information about the market and future fluctuations of a
currency can be found in the price chain. In other words, technical analysis involves
looking at the past events in the market and assuming that these trends will continue.
This is a very good strategy because, quite simply, history has a habit of repeating
itself. This is also safer because it entails less guesswork than marginal trading, since
the investor assumes that history will continue and therefore makes a safe investment
in a strong currency that seems likely to continue a positive trend.

3. Fundamental Analysis
Another long-term practice with FOREX is Fundamental Analysis. It is the
process of considering the current situation of the country of the currency. Elements
such as a countries economy, political situation, and future must all be taken into
account in Fundamental Analysis. Investors then make investments based upon this
knowledge. The best investors not only analysis a countries current situation, but the
rest of the world's interpretation of that country. Like any stock market, the value of
the commodity is not merely based on exact numbers, but on perceptions of that
commodity. If a country is believe to be on a positive path economically, than its
currency will do well in FOREX.
However, the success of FOREX trading depends on the practices and
knowledge of the investor. It is important for any investor to analyze the market and
determine what exactly he or she wants to achieve in investing. Long-term gains and
short-term gains require different strategies. The best investors are always well
informed about the market, the world economy and have the best traders available.

Chapter 11
HEDGING FOREIGN EXCHANGE RISK

Introduction

The primary activities in the forex markets are to buying and selling of
currencies in the spot and forward markets.
Corporation, all over the world, tend to be exporters or importers, or
borrowers or investors in foreign currency. Their exposure to foreign currency leads
to foreign exchange risk.
For example, an Indian exporter to the US risks future depreciation of USD,
while an Indian importer from US risks future appreciation of USD. Borrowers in
foreign currency face similar risks.

HEDGING

Uncertainty in the value of receivables/payable denomination in foreign
currencies, due to exchange rate movement, generates exchange risk. Hedging in the
foreign exchange market is the avoidance or elimination of risk. The purpose of
hedging is loss minimization, not profit maximization. In other words, it is a non-
profit centered activity.
Hedging is achieved by avoiding open positions in foreign exchange, i.e. the
imbalances in assets and liabilities denominated in foreign currencies.
A long position arises when foreign currency assets exceed foreign currency
liabilities. A short position arises when foreign currency liabilities exceed foreign
currency assets. Both positions involve exchange risk, because these open positions
expose the holder of assets and liabilities to potential losses resulting from adverse
movement in foreign exchange rates.
A spot depreciation in foreign currency against domestic currency reduces the
value of assets or liabilities denominated in foreign currency. Similarly, an
appreciation of foreign currency increases their value.
Losses due to depreciation and appreciation can be avoided by hedging in the
foreign exchange market through a forward sale/purchase of these assets or liabilities.
For example, an Indian expects to receive GBP 2000 after 3 months. The
anticipated sum is Rs. 160,000 at the rate of GBP 1 = Rs. 80(spot rate). Suppose GBP
is expected to depreciate against rupees in 3 months to GBP 1 = Rs 75, he will lose
Rs. 10,000. But if the forward rate is Rs.78, and he buys a forward contract, i.e. he
hedges, then the loss is reduce to Rs.4,000. Moreover he eliminates the uncertainty of
cash flows totally. Whatever may be the spot rate after three months, he will be able
to convert GBP into INR at Rs.78 per GBP.

HEDGING INSTRUMENTS

Foreign exchange exposures may be created for a short term or long term.
Hence, hedging is done either short term or long term. The instruments of hedging are
different for each type.

Short Term Hedging

Hedging for short term duration can be done through:
i. Currency forwards
ii. Currency futures
iii. Currency option

Long Term Hedging

Hedging for long term duration can be done through:
i. Long term forward contract
ii. Currency swaps.
iii. Parallel loans.
iv. Leading and lagging payment.

SHORT TERM HEDGING

Introduction

As mentioned forward contracts for foreign currency have no secondary
market. You cannot get out of the commitment by simply selling the contract to
someone else. You have to go through with the contract irrespective of market
conditions unless, of course, you wish to be legally in default. A related consideration
therefore is the credit risk of the parties involved, which restricts individuals from
using the forward markets.
There are exchange traded currency derivatives, which are available on major
exchanges of the world.

i. CURRENCY FORWARDS

A forward contract in the forex market that locks in the price at which an
entity can buy or sell a currency on a future date, also known as "outright forward
currency transaction", "forward outright" or "FX forward". In finance, a forward
contract or simply a forward is a non-standardized contract between two parties to
buy or sell an asset at a specified future time at a price agreed today. This is in
contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs
nothing to enter a forward contract. The party agreeing to buy the underlying asset in
the future assumes a long position, and the party agreeing to sell the asset in the future
assumes a short position. The price agreed upon is called the delivery price, which is
equal to the forward price at the time the contract is entered into.
In currency forward contracts, the contract holders are obligated to buy or sell the
currency at a specified price, at a specified quantity and on a specified future date.
These contracts cannot be transferred.

Example of forward hedging

Suppose Microsoft has a European subsidiary that expects to send it 12
million in three months. When Microsoft receives the Euros, it will then convert them
to dollars. Thus, Microsoft is essentially long Euros because it will have to sell Euros,
or equivalently, it is short dollars because it will have to buy dollars. A currency
forward contract is especially useful in this situation, because it enables Microsoft to
lock in the rate at which it will sell Euros and buy dollars in three months. It can do
this by going short the forward contract, meaning that it goes short the euro and long
the dollar. This arrangement serves to offset its otherwise long-euro, short-dollar
position. In other words, it needs a forward contract to sell Euros and buy dollars.
For example, say Microsoft goes to JP Morgan Chase and asks for a quote on a
currency forward for 12 million in three months. JP Morgan Chase quotes a rate of
$0.925, which would enable Microsoft to sell Euros and buy dollars at a rate of
$0.925 in three months. Under this contract, Microsoft would know it could convert
its 12 million to 12,000,000 X $0.925 = $11,100,000. The contract would also
stipulate whether it will settle in cash or will call for Microsoft to actually deliver the
euros to the dealer and be paid $11,100,000. This simplified example is a currency
forward hedge, a transaction we explore more thoroughly in next posts.
Now let us say that three months later, the spot rate for Euros is $0.920. Microsoft is
quite pleased that it locked in a rate of $0.925. It simply delivers the Euros and
receives $11,100,000 at an exchange rate of $0.925. Had rates risen, however,
Microsoft would still have had to deliver the euros and accept a rate of $0.925.

ii. CURRENCY FUTURES

Futures contracts are a means for the user and producer of a particular
commodity to contract for delivery of the commodity at a future date at a specific
price. However, the futures markets are mainly used by producers and consumers to
hedge against adverse price risk and for speculation purposes.

The principal features of futures contracts are as follows:

a. Organized Exchange

Unlike forward contracts which are traded in the OTC market, futures
are traded on organized exchanges, either with a designated physical location
where trading takes place, i.e. the trading pit, or via computer screens. This
provides a ready, liquid market in which futures can be bought and sold at any
time during trading hours as in a stock market.

b. Standardization

In the case of a forward currency contract, the amount of the currency
to be delivered and the expiry date are negotiated between the buyer and the
seller and can be tailor-made to suit the requirements of either party. In a
futures contract, both these are standardized by an exchange on which the
contract is traded.

c. Clearinghouse

On the trading floor, a futures contract is agreed between two parties A
and B. When it is recorded by the exchange, the contract between A and B is
replaced by two contracts, one between A and the clearinghouse, and another
between B and the clearinghouse. This process is called as novation. Thus the
clearinghouse interposes itself in every deal, being buyer to every seller and seller
to every buyer. Further, the clearinghouse guarantees performance. This
eliminates the need for A and B to investigate each others credit worthiness and
ensure the financial integrity of the market. The exchange enforces delivery for
contracts held till maturity.

d. Margins

Only members of an exchange can trade in futures contracts on the
exchange. The other participants i.e. non-members use the members services as
brokers to trade on their behalf (of course, an exchange member firm can also
trade on its account). A non-clearinghouse member must clear all transactions
through a clearing member for a free. Thus, every transaction is between an
exchange member and the exchange clearinghouse.
There are two types of margins collected by the exchange from exchange
member for futures transactions:

INITIAL MARGIN: - This is collected when a futures position is
opened.
MAINTENANCE MARGIN: - This is the minimum balance to
be kept in margin account fill the futures position is open.

e. Marketing To Market

Marketing to market essentially means that, at the end of a trading session, all
outstanding contracts are re-priced at the settlement price of that session. Margin
accounts of those who made losses are debited and of those who gained are
credited. In a futures contract, even thought the overall gain/loss is the same, the
time profile of its accrual is different.

f. Actual Delivery

In most, if not all forward contracts, the exchange of currencies actually
takes place. Forwards contracts are usually entered into acquire or dispose off a
currency at a future date but at a price known today. In contrast, in most futures
market, actual delivery takes place in less than one percent of the contracts traded.
Futures are used as a hedging device against price risk and as a way of betting on
price movements rather than as a means of physical acquisition of the underlying
currency. Most of the contracts are extinguished before maturity by entering into a
matching contract in the opposite direction.

g. A Payoff Profile

If one holds a long position in forwards or futures and the underlying
currency value goes up (or down), a gain (or loss) will be realized. Thus the pay-
off is symmetrical. It has unlimited profit as well as unlimited loss potential. If
one wants unlimited profit potential and at the same time limited downside, then
options provide that alternative.
Investors use these futures contracts to hedge against foreign exchange
risk. If an investor will receive a cash flow denominated in a foreign currency on
some future date, that investor can lock in the current exchange rate by entering
into an offsetting currency futures position that expires on the date of the cash
flow.

Example of Future Hedging

Jane is a US-based investor who will receive 1,000,000 on December 1.
The current exchange rate implied by the futures is $1.2/. She can lock in this
exchange rate by selling 1,000,000 worth of futures contracts expiring on
December 1. That way, she is guaranteed an exchange rate of $1.2/ regardless of
exchange rate fluctuations in the meantime.

iii. CURRENCY OPTION

Options are unique financial instruments that confer upon the holder the
right to buy or sell the underlying asset without the obligation to do so. More
specifically, an option is a financial contract in which the buyer of the option has
the right to buy or sell an asset, at a pre specified price, on or up to a specified
date if he chooses to do so.
However, there is no obligation to do so. In other words, the option buyer
can simply let his right lapse by not exercising his option. The seller of the option
has an obligation to take the other side of the transaction if the buyer exercises his
option. Obviously, the option buyer has to pay the option seller a fee receiving
such a one sided privilege.
The two parties to an option contract are the option buyer and the option
seller, also called option writer. For exchangetrade options, as in the case of
future, once an agreement is reached between two traders, the exchange (the
clearinghouse) interposes itself between the two parties, Becoming buyer to every
seller and seller to every buyer. The clearinghouse guarantees performance of
every seller.

a. Call Option

A call option gives the buyer the right to purchase one currency against
another currency, at a stated price, on or before a stated date.

b. Put Option

A put option gives the option buyer the right to sell one currency against
another currency at a specified price on or before a specified date. The writer of a
put option must take delivery of and deliver if the option is exercised.

c. Strike Price

Strike price (also called as exercise price) is the price specified in the
option contract at which the option buyer can purchase the currency (call option)
or sell the currency (put option) against.

d. Maturity Date

Maturity or expiry date refers to the date on which the option contract
expires. Exchange traded option have standardized maturity dates.

e. American Option

This is an option, call or put, that can be exercised by the option buyer on
any business day from contract date to maturity.

f. European Option

This is an option that can be exercised only on the maturity date.

g. Premium (Option Price, Option Value)

This is the fee that the option buyer must pay the option writer upfront, i.e.
at the time the contract is initiated. If the option lapses unexercised, this amount
represents the maximum loss the buyer can suffer.

h. Time Value

The Value of an American option at any time before expiry must be at
least equal to its intrinsic value. In general, it is larger. This is because the spot
price may move further in favor of the option holder. The difference between the
value of an option at any time and its intrinsic value at the time is called the time
value of the option.

i. At The Money, In The Money And Out Of Money Option

A call option is said to be
i) At the time if S =K
ii) In the money if S>K
iii) Out of money if S<K.

For put options, the preceding consideration reverses.
Thus, an option is at the money if its intrinsic value is zero, in-the money
if it is positive, and out of money if negative.

j. Foreign Currency Options

Foreign Currency options have been made available in India since July
2003. This step was taken to develop the derivative market in India. These options
add to the spectrum of hedge products available to residents and non residents.
ADs are permitted to offer the product under the following terms and conditions:

Customers can purchase call or put option
Customers can also enter into packaged products involving cost
reduction structures provided the structure does not increase the
underlying risk and does not involve customers receiving premium.
Writing of option by customers is not permitted
ADs can obtain an undertaking from customers interested is using the product that
they have clearly understood the nature of the product and its inherent risks.

Example of Option hedging

An American importer may agree to buy some electronics from a Japanese
manufacturer at a future date. The transaction will be carried out in Japanese yen. The
American importer creates a hedge by purchasing currency options on the yen. Now,
the importer is protected if the yen gains value against the dollar.

Example of Put Option Hedging

In terms of a simple currency hedging strategy using options, consider the
situation of a mining goods exporter in Australia that has an anticipated, although not
yet certain, shipment of mining products intended to be sent for further refinement to
the United States where they will be sold for U.S. Dollars.
They could purchase an Aussie Dollar call option/U.S. Dollar put option in the
amount of the anticipated value of that shipment for which they would then pay a
premium in advance.
Furthermore, the maturity date chosen could correspond to when the shipment
was safely expected to be paid for in full and the strike price could either be at the
current market or at a level for the AUD/USD exchange rate where the shipment
would become unprofitable for the company.
Alternatively, to save on the cost of premium, the exporter could only buy an
option out to when any uncertainty about the shipment and its destination was likely
to be removed and its size was expected to become virtually assured. In this case, they
could then replace the option with a forward contract to sell U.S. Dollars and buy
Australian dollars in the now-known size of the deal.
In either case, when the mining producer's AUD Call/USD Put option expires or is
sold, any gains achieved on it should help to offset unfavorable changes in the price of
the underlying AUD/USD exchange rate.

LONG TERM HEDGING

i) LONG TERM FORWARD CONTRACT
The basic principles of forward rate calculation are unchanged irrespective of the
maturity the forward margin is derived from interest differentials between the two
currencies. However, in practice, a few different between relatively short (say up to 1
year) and long maturity forwards should be noted:
a. It is more difficult to find matching counterparties for long dated forwards.
b. The offshore bank deposit market is typically short-term; therefore, the
hedging and pricing of long-dated forwards have to be made on the basis of
bond market yields in the two currencies. This presents some problems, as
outlined below
c. The longer the maturity, the wider the bit offer spreads and higher the credit
risks.
In theory, pricing and hedging could be done by shorting a zero coupon bond in
the currency you are going to received, converting the proceeds to the currency to be
paid out under the contract, and buying a zero coupon bond of the required maturity in
that currency.
Therefore, only banks that have large assets and liabilities in both the currencies
will be able to offer long term forwards contracts. They do so through structuring the
flows in the two currencies in the respective asset/liability books, thus mimicking the
behaviour of a bond market transaction, which is the theoretical hedge.

ii) CURRENCY SWAP
In the case of currency swap, two parties exchange principal and interest
obligations on debt denominated in different currencies. At maturity the principal
amounts are re- exchanged, usually at a rate of exchange agreed upon in advance.
Currency swaps involve an exchange of cash flows in two different currencies.
Therefore, an exchange rate, generally the prevailing spot rate, is used to calculate the
amount of cash flows, apart from interest rates relevant to these two currencies.
Difference between Interest Rate and Currency Swaps
An interest rate swap involves only one currency whereas a currency swap
will involve two currencies.
In interest rate swap only the interest flows are exchanged but in currency
swaps the principal also gets exchanged.
Currency swaps can have fixed interest rates for the two different currencies,
which is not possible in interest rate swaps.
Currency Swap Markets In India
The currency swap market is also a small market in India averaging about
USD 140 million per day. For cross currency swap (without INR) the banks act as
intermediaries between international markets and corporate customer here, doing the
transactions on book on USD/INR swaps with certain limitations.

iii) PARALLEL LOANS
Parallel loans were an early precursor to foreign exchange hedging. Two
companies who required money in the domestic currency of each other would both
take a loan then provide the money to each other. This helped reduce the risk
exchange rates would cut into profits. It also presented beneficial tax arrangements.
Example
Company A operates in the Brazil and owns Bob's Coffee which needs to
purchase chocolate from Switzerland. Company B operates in Switzerland and owns
Jane's Chocolate which needs to purchase coffee from Brazil. Company A borrows
money from a Brazilian bank and then lends the money to Jane's Chocolate. Company
B borrows franc from a Swiss bank and loans the money to Bob's Coffee. When the
loans mature, the parent companies each receive the funds in return and pay off their
existing loans. The exchange does not occur at the bank level.
Modern Application
These loans originated in the 1970s, but they have been replaced with the
foreign currency market. Today, Company A and Company B would be more likely
to purchase options in each other's currencies to hedge against fluctuations than to
engage in a parallel loan structure.

iv) LEADING AND LAGGING PAYMENT
The alteration of normal payment or receipts in a foreign exchange transaction
because of an expected change in exchange rates. An expected increase in exchange
rates is likely to speed up payments, while an expected decrease in exchange rates
will probably slow them down.
In simple term the alteration of normal payment or receipts in a foreign
exchange transaction because of an expected change in exchange rates. An expected
increase in exchange rates is likely to speed up payments, while an expected decrease
in exchange rates will probably slow them down. Accelerating the transaction is
known as "leads", while slowing it down is known as "lags". Leads will result when
firms or individuals making payments expect an increase in the foreign-exchange rate,
while lags arise when the exchange rate is expected to fall. Leads and lags are used in
an attempt to improve profits.
It is worth emphasizing that it is the changes in leads and lags that affects
demand and supply and hence the exchange rate. (The position is similar to changes
in sundry creditors/debtors in a companys balance sheet becoming source/application
of funds, not their absolute values).
The changes in leads and lags also directly affect the demand for rupee funds
from the banking system. Consider imports, if a company were to import on six
month credit, its requirement of rupee funds would be clearly less than if it were to
import on sight basis.
The published Balance of Payment data do not seem to accurately reflect
Leads and Lags on the import side. The amounts involved are likely to be larger than
the corresponding entry on the export side, which is being reflected in the data.

Chapter 12
CASE STUDY

A Hedging Scenario
How Carry Spot Trading Guarantees Future Cost Certainty
The Scenario
Assume that a TATA Motors company enters into a contract to purchase a
100,000 euro machine from a German company with an expected delivery date in
eight months. The company would like to obtain cost certainty on this future amount,
to be paid in U.S. dollars.
A hedge is not about making money. A hedge is about obtaining certainty on
the cost of your German machine. Let's start with the cost of the machine today. A
(100,000) euro payable would cost 157,000 U.S. dollars today, assuming a current
EUR/USD exchange rate of 1.57000.
The Hedge
If you enter into a buy 100,000 EUR/USD carry spot trade on an online forex
brokers system, then you will receive cost certainty in eight months. Heres how:
When you enter into the Buy transaction for 100,000 EUR/USD carry spot
trade, you have bought 100,000 Euros and sold 157,000 USD on an online forex
brokers system.
1. If in the future, the EUR/USD price is 1.60 (up from 1.57 when first entered
into the deal), then you will have made $3,000 on your forex hedge trade.
When you make the payment to the German supplier, the 100,000 euro would
cost you 160,000 USD. So your net cost for the machine would be $157,000.
(The actual cash payment to the German supplier of $160,000, less the $3,000
made on the hedging trade.)

2. If in the future, the EUR/USD price is 1.50 (down from 1.57), then you will
have lost $(7,000) on your forex hedge trade. When you make the payment to
the German supplier, the 100,000 euro would cost you 150,000 USD. So your
net cost for the machine would still be $157,000. (The actual cash payment to
the German supplier of $150,000, plus the $7,000 lost on the hedging trade.)
The hedge trades win or loss is offset by the actual amount of money paid to
the German supplier. With a simple hedge, you have created cost certainty for your
company.
The hedging performance must be evaluated based on the overall result. (What
is the total machine cost when you make the final payment? This is the combination
of the actual USD amount needed to buy the 100,000 Euros in eight months and the
amount lost or gained on the hedge trade.)
The amounts in this scenario would equal the $157,000 USD, which was your
cost certainty objective. With a hedge, you do not need to be concerned with whether
you are making or losing money on currency fluctuations in the time period between
when you sign a purchase agreement and finally take possession of the German
machine.

Hedging Costs
A hedge will cost money, similar to an insurance cost. For example, with a
carry spot trade you will incur interest carry costs and hedge costs. The following cost
summaries use the above scenario,

Interest carries costs:
1. You will be earning interest on the 100,000 EUR you purchased, which will
be converted to U.S. dollars (that is, you will earn $4029.67 on interest,
assuming a current interest rate of 3.85% on 100,000 Euros multiplied at the
current exchange rate of 1.57).
2. You will be paying 3.90% on the 157,000 USD sold (a short position), for an
interest charge of $4082.
3. If current interest rates and exchange rates held for the next eight months, the
cost would be approximately $4029.67 - 4082 = (52.33), the difference
between the interest earned on the Euros purchased and the interest expense on
the US. Dollars sold).
Interest carry costs are minimal in this scenario, but this may not always be the
case depending on the interest rates being charged for the currencies bought and sold,
both now and in the future. Sometimes you will make money on the interest carry
costs and sometimes it will cost money. Actual interest carry costs will fluctuate with
changing interest rates and changing foreign exchange rates over time.

Hedge costs:
Hedge costs are the difference in price between buying and selling the hedge,
known as the spread. Assuming a spread of 4 pips, the cost would be $40.

Total cost to hedge:
If interest rates stay the same over the next eight months, the overall hedge
cost would be approximately $95 USD (the interest carry cost plus the hedge costs),
or 9.5 pips of the purchase price. This would be similar to a future or forward rate of
1.57095.
This $95 cost is the amount you pay to ensure that you obtain cost certainty on
the price of the German machine.

Maintaining Margins
If you use an online forex broker for carry spot trades, you need to deposit
margin dollars. (Retail forex brokers are not authorized by regulation to offer
customer credit, so margins are always required.)
A couple things to remember regarding margin accounts:
1. Maintain at least 8 to 10 percent margin coverage for future exchange rate
fluctuations. Exchange rates have been quite volatile recently, so a higher
amount of margin is recommended to handle swings in currency movements.
(In the above scenario, ten percent margin coverage would be approximately
$15,700 USD.)

2. You must monitor the margin account balance regularly. You may find that
you will need to add margin dollars to prevent a margin call or you may have
excess margin dollars in your account that you may withdraw. A margin call
on your trade would terminate your hedging position, thereby removing your
cost certainty. (The worst case for the above scenario would be a reduction in
the EUR/USD rate that triggers a margin call, then a rapid increase in the rate
after you no longer have your hedge. In this scenario, you would end up
paying more.)

3. Your margin amount will be returned to you when your hedge is finished
(plus/minus any money made/lost on the hedging trade, the interest carry costs
and the interest earned on the margin amount, of course). Because this is your
money, ensure your online forex broker is paying competitive interest on your
margin account and has competitive interest rates on the currencies bought and
sold. And make sure your funds are secureevaluate your counterparty risk.
Remember, hedging is not about making money on the hedge transaction. Hedging is
about creating cost or revenue certainty. You are locking in the future exchange rate
for a certain future forex transaction.
Chapter 13
GLOBAL FOREX

1. Global foreign exchange market turnover was 20% higher in April 2010 than
in April 2007, with average daily turnover of $4.0 trillion compared to $3.3
trillion.
2. The increase was driven by the 48% growth in turnover of spot transactions,
which represent 37% of foreign exchange market turnover. Spot turnover rose
to $1.5 trillion in April 2010 from $1.0 trillion in April 2007.
3. The increase in turnover of other foreign exchange instruments was more
modest at 7%, with average daily turnover of $2.5 trillion in April 2010.
Turnover in outright forwards and currency swaps grew strongly.
4. As regards counterparties, the higher global foreign exchange market turnover
is associated with the increased trading activity of "other financial institutions"
- a category that includes non-reporting banks, hedge funds, pension funds,
mutual funds, insurance companies and central banks, among others. Turnover
by this category grew by 42%, increasing to $1.9 trillion in April 2010 from
$1.3 trillion in April 2007.
5. Foreign exchange market activity became more global, with cross-border
transactions representing 65% of trading activity in April 2010, while local
transactions account for 35%.
6. The percentage share of the US dollar has continued its slow decline witnessed
since the April 2001 survey, while the euro and the Japanese yen gained
relative to April 2007. Among the 10 most actively traded currencies, the
Australian and Canadian dollars both increased market share, while the pound
sterling and the Swiss franc lost ground. The market share of emerging market
currencies increased, with the biggest gains for the Turkish lira and the Korean
won.
7. The relative ranking of foreign exchange trading centres has changed slightly
from the previous survey. Banks located in the United Kingdom accounted for
36.7%, against 34.6% in 2007, of all foreign exchange market turnovers,
followed by the United States (18%), Japan (6%), Singapore (5%),
Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

CONCLUSION
To conclude, the medium-term objective of developing an efficient and
vibrant forex market continues to be an important priority within the overall
framework of development of financial markets. Naturally, the pace and sequencing
have to be determined by both the domestic and international developments. In
particular, the unique features of Indian forex markets, legal, institutional and
technological factors, and developments related to macro-economic policies would
govern the path of moving towards the medium-term objective, without sacrificing
freedom in tactical measures to respond to unforeseen circumstances in the very short-
term.
Foreign exchange Trading is indispensable for the growth and expansion of an
economy. However increase complexity and risk involved in foreign exchange trading
creates a scenario of High Risk, High Reward.
As prevention is better than cure the market and the company should
manage the risk and companies should try to offset its impact on the bottom line of
the business. In the present situation, it is important for the companies to treat risk
management not as a profit center but as a service center supplementing the trading
objective that would enhance the efficiency of the business. This could be achieved by
well informed and balanced judgment and maturity and available service of
professionals to ensure competitive edge in the market.

BIBLIOGRAPHY

1. FOREIGN EXCHANGE MARKETS By Dun & Bradstreet
2. FOREIGN EXCHANGE INTERNATIONAL FINANCE RISK
MANAGEMENT By A.V.Rajwade
3. www.rbi.org.in
4. www.investopedia.com
5. www.eximguru.com
6. www.cbec.gov.in
7. www. fedai.org.in

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