Beruflich Dokumente
Kultur Dokumente
PROJECT ON:
STUDY
PART 2 (SEM 3)
(2016-2017)
Submitted:
In Partial Fulfillment of the requirements
For the Award of the Degree of
MASTERS OF COMMERCE
( BANKING & FINANCE )
BY
KHUSHBU V PESHAVARIA
ROLL NO : 40
1
DECLARATION
I KHUSHBU V PESHAVARIA
FINANCE) PART
(BANKING &
DATE:
PLACE: MUMBAI
SIGNATURE OF STUDENT
( KHUSHBU PESHAVARIA )
CERTIFICATE
This is to certify that MISS KHUSHBU V PESHAVARIA, studying in Mcom
(BANKING & FINANCE) PART 2 (SEM-III), ROLL NO. 40, academic year
2015-2016
at
S.K.SOMAIYA COLLEGE
OF ARTS,
SCIENCE
&
____________________
___________________
[PROJECT GUIDE]
[PRINCIPAL]
____________________
___________________
EXTERNAL EXAMINER
MR. RAVIKANT
[CO-ORDINATOR]
DECLARATION BY GUIDE
I, the undersigned Prof. has guided MISS KHUSHBU V PESHAVARIA ROLL
NO. 40 for her project. She has completed the project on STUDY OF
FOREIGN EXCHANGE MARKET. successfully.
I, hereby declare that information provided in this project is true as per the
best of my knowledge.
Prof.
Project Guide
ACKNOWLEDGEMENT
It gives me immense pleasure to present a project on STUDY OF FOREIGN
EXCHANGE MARKET. As a Mcom student it is a great honour to undergo a
project work at an graduate level and I would like to thank the University of
Mumbai for giving me such a golden opportunity.
I am eternally grateful to almighty god for giving me the spirit to put in my best
effort towards my project. I owe my sincere gratitude to DR. SANGEETA
KOHLI, the principal of our college. I am also thankful to my project guide MR.
PRAVIN MALU for his valuable guidance and for providing an insight to the
subject.
I am also obliged to the library staff of S.K..Somaiya College for the numerous
books made me available for the handy reference.
Although, I have taken every care to check mistake and misprint yet it is difficult
to claim perfection. Any error, omission and suggestion brought to my notice, will
be thankfully acknowledged by me.
INDEX
SR
NO
PAGE
NO
TITLE
1 INTRODUCTION
10
12
15
22
24
30
35
36
41
CONCLUSION
42
BIBLOGRAPHY
44
CHAPTER 1
INTRODUCTION
Being the main force driving the global economic market, currency is no doubt an essential
element for a country. However, in order for all the countries with different currencies to trade
with one another, a system of exchange rate between their currencies is needed; this system, is
formallyknownasforeignexchangeorcurrencyexchange.
In the early days, the system of currency exchange is supported solely by the gold amount held in
the vault of a country. However, this system is no longer appropriate now due to inflation and
hence, the value of ones currency nowadays is determined through the market forces alone. In
order to determine the value of a currencys exchange rate, two main types of system is used
whichisfloatingcurrencyandpeggedcurrency.
For floating exchange rate, its value is determined by the supply and demand of the global
market where the supply and demand is bound by all these factors such as foreign investment,
inflation and ratios of import and export. Normally, this system is adopted by most of the
advance countries like for example UK, US and Canada. All of these countries have a similarity
where their market is well developed and stable in economic terms. These countries choose to
practice this system due to the reason where floating exchange rate is proven to be much more
efficient compared to the pegged exchange rate. The reason behind this is because for floating
exchange rate, the market itself will re-adjust the exchange rate real-time in order to portray the
actual inflation and other economic forces. However, every system has its own flaw and so does
the floating exchange rate system. For instance, if a country suffers from economic instability
due to various reasons such as political issues, a floating exchange rate system will certainly
discourage investment due to the high risk of suffering from inflationary disaster or sudden slum
in exchangerate. Another form of exchange rate is known as pegged exchange rate. This is a
system where the value of the exchange rate is fixed by the government of a country and not the
supply and demand of the market. This system is called pegged exchange rate because the value
of a countrys currency is fixed to another countrys currency. As a result, the value of the pegged
7
currency will not fluctuate unlike the floating currency. The working principle behind this system
is slightly complicated where the government of a country will fixed the exchange rate of their
currency and when there is a demand for a certain currency resulting a rise in the exchange rate,
the government will have to release enough of that currency into the market in order to meet that
demand. However, there is a fatal flaw in this system where if the pegged exchange rate is not
controlled properly, panics may arise within the country and as a result of that, people will be
rushing to exchange their money into a more stable currency. When that happens, the sudden
overflow of that countrys currency into the market will decrease the value of their exchange rate
and in the end, their currency will be worthless. Due to this reason, only those under-developed
or developing countries will practice this method as a form to control the inflationrate. However,
the truth is, most of the countries do not fully practice the floating exchange rate or the pegged
exchange rate method in reality. Instead, they use a hybrid system known as floating peg.
Floating peg is the combination of the two main systems where one country will normally fixed
their exchange rate to the US Dollars and after that, they will constantly review their peg rate in
order
to
stay
in
line
with
the
actual
market
value.
The Foreign exchange market, or commonly known as FOREX, is the largest and most prolific
financial market because each day, more than 1 trillion worth of currency exchange takes place
between investors, speculators and countries. From this, we can deduce that the actual
mechanism behind the world of foreign exchange is far more complicated than what we may
already know, and that, the information mentioned earlier is just the tip of an iceberg.
HISTORY
The foreign exchange market (fx or forex) as we know it today originated in 1973. However,
money has been around in one form or another since the time of Pharaohs. The Babylonians are
credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were
the first currency traders who exchanged coins from one culture to another. During the middle
ages, the need for another form of currency besides coins emerged as the method of choice.
These paper bills represented transferable third-party payments of funds, making foreign
currency exchange trading much easier for merchants and traders and causing these regional
economies to flourish.
From the infantile stages of forex during the Middle Ages to WWI, the forex markets were
relatively stable and without much speculative activity. After WWI, the forex markets became
very volatile and speculative activity increased tenfold. Speculation in the forex market was not
looked on as favorable by most institutions and the public in general. The Great Depression and
the removal of the gold standard in 1931 created a serious lull in forex market activity. From
1931 until 1973, the forex market went through a series of changes. These changes greatly
affected the global economies at the time and speculation in the forex markets during these times
was little, if any.
1944 Bretton Woods Accord is established to help stabilize the global economy after World
War II.
1971 Smithsonian Agreement established to allow for greater fluctuation band for currencies.
1972 European Joint Float established as the European community tried to move away from its
dependency on the U.S. dollar.
1973 Smithsonian Agreement and European Joint Float failed and signified the official switch to
a free-floating system.
1978 The European Monetary System was introduced so other countries could try to gain
independence from the U.S. dollar.
1978 Free-floating system officially mandated by the IMF.
1993 European Monetary System fails making way for a world-wide free-floating system.
CHAPTER 2
TYPES & FUNCTIONS OF FOREIGN EXCHANGE
MARKET
10
buy and sell those currencies in which they specialize by maintaining an inventory position in
those currencies.
Minimizing Foreign Exchange Risk: The foreign exchange market provides "hedging"
facilities for transferring foreign exchange risk to someone else.
CHAPTER 3
ADVANTAGES & DISADVANTAGES OF FOREIGN
EXCHANGE MARKET.
ADVANTAGES
AND
DISADVANTAGES
OF
The forex market is extremely liquid, hence its rapidly growing popularity. Currencies
may be converted when bought or sold without causing too much movement in the price
and keeping losses to a minimum.
As there is no central bank, trading can take place anywhere in the world and operates on
a 24-hour basis apart from weekends.
An investor needs only small amounts of capital compared with other investments. Forex
trading is outstanding in this regard.
In common with futures, forex is traded using a good faith deposit rather than a loan.
The interest rate spread is an attractive advantage.
12
Disadvantages
The major risk is that one counterparty fails to deliver the currency involved in a very
large transaction. In theory at least, such a failure could bring ruin to the forex market asa
whole.
Investors need a lot of capital to make good profits because the profit margins on smallscale trades are very low.
13
Foreign exchange market has member from all the countries, each country has differentgeo
graphical positions so forex operates all around the clock on working days (i.e.) Mondayto
Friday every week. Because the time in Australia is different than in European countries, this
kind of 24 hours operation, free from any time is an ideal environment for investors.
For instance, a trader may buy the Japanese Yen in the morning at the New York market, and in
the night if the Japanese Yen rises in the Hong Kong market, the trader can sell in the HongKong
market. more number of opportunities are available for the forex traders. In FOREX market most
trading takes place in only a few currencies; the U.S. Dollar ($), European
Currency Unit (), Japanese Yen (), British Pound Sterling (), Swiss Franc (Sf), Canadian
Dollar (Can$), and to a lesser extent, the Australian and New Zealand Dollars
14
CHAPTER 4
VARIOUS PARTICIPANTS & PLAYERS OF FOREIGN
EXCHANGE MARKET.
VARIOUS PARTICIPANTS OF FOREIGN EXCHANGE
MARKET
Governments: Governments have requirements for foreign currency, such as paying
staff salaries and local bills for embassies abroad, or for arraigning a foreign currency credit line,
most often in dollars, for industrial or agricultural development in the third world, interest on
which ,as well as the capital sum, must periodically be paid. Foreign exchange rates concern
governments because changes affect the value of product and financial instruments, whichaffects
the health of a nations markets and financial systems.
Banks: There are different types of banks, all of which engage in the foreign exchange market to
greater or lesser extent. Some work to signal desired movement in the market without causing
overt change, while some aggressively manage their reserves by making speculative risks. The
vast majority, however, use their knowledge and expertise is assessing market trends for
speculative gain for their clients
Brokering Houses: These exist primarily to bring buyer and seller together at a mutually agreed
price. The broker is not allowed to take a position and must act purely as a liaison. Brokers
receive a commission from both sides of the transaction, which varies according to currency
handled. The use of human brokers has decreased due mostly to the rise of the interbank
electronic brokerage systems
International Monetary Market: The International Monetary Market (IMM) in Chicago trades
currencies for relatively small contract amounts for only four specific maturities a year.
15
Originally designed for the small investor, the IMM has grown since the early 1970s, and the
major banks, who once dismissed the IMM, have found that it pays to keep in touch with its
developments, as it is often a market leader
Money Managers: These tend to be large New York commission houses that are often very
aggressive players in the foreign exchange market. While they act on behalf of their clients, they
also deal on their own account and are not limited to one time zone, but deal around the world
through their agents.6. Corporations: Corporations are the actual end-users of the foreign
exchange market. With the exception only of the central banks, corporate players are the ones
who affect supply and demand. Since the corporations come to the market to offset currency
exposure they permanently change the liquidity of the currencies being dealt with.
Retail Clients: This includes smaller companies, hedge funds, companies specializing in
investment services linked by foreign currency funds or equities, fixed income brokers, the
financing of aid programs by registered worldwide charities and private individuals. Retail
investors trade foreign exchange using highly leveraged margin accounts. The amount of their
trading in total volume and in individual trade amounts is dwarfed by the corporations andinter
bank markets.
Central Bank
External value of the domestic currency is controlled and assigned by central bank of
everycounty. Each country has a central or apex bank. For example In India Reserve Bank of
Indiais the central Bank
Commercial Bank
Commercial banks are the one which has the most number of branches. With its wide
branchnetwork the Commercial banks buy the foreign exchange and sell it to the importers.
These banks are the most active among the market players and also provide services like
convertingcurrency from one to another.
16
Exchange Brokers
Services of brokers are used to some extent, Forex market has some practices and
traditiondepending on this the residing in other countries are utilised.Local brokers canconduct
Forex transactions as per the rules and regulations of the Forex governing body of their
respective country.
Overseas Forex market
:The Forexmarket operates all around the clock and the market day initiates with Tokyo
andfollowed by Bahrain Singapore, India, Frankfurt, Paris, London, New York, and
Sydney before things are back with Tokyo the next day
Speculators
In order to make profit on the account of favourable exchange rate, speculators buy foreign
currency if it is expected to appreciate and sell foreign currency if it is expected to depreciate.
They follow the practice of delaying covering exposures and not offering a cover till the time
cash flow is materialized.
Other financial institutions involved in the foreign exchange market include:
Stock brokers Commodity
Firms Insurance
Companies Charities
Private Institutions
Private Individuals
17
financial imbalance in the foreign exchange market. Central banks are also responsible for
stabilizing the forex market. They do this by balancing the country's foreign exchange reserves.
In addition, they also have official target rates for the currencies that they are handling. Because
of this role, central banks are sometimes jokingly referred to as circus performers because of the
daily balancing act that they have to perform. Their intervention in the foreign exchange market
is not to earn profit from foreign currency trading.
Commercial Banks
Traditionally known as a savings and lending institution, banks are certainly one of the major
players in forex market. They are the natural players in foreign exchange as all other participants
must deal with them. Foreign exchange currency trading began as an added service to deposits
and loans offered by commercial banks. Banks are usually involved in both large quantities of
speculative trading and also daily commercial turnover. The really big and well-established
banks trade in the billions of dollars in foreign currencies every day. Commercial banks provide
liquidity to the Forex market due to the trading volume they handle every day. Some of this
trading represents foreign currency conversions on behalf of customers' needs while some is
carried out by the banks' proprietary trading desk for speculative purpose. The profitability
of foreign exchange trading is a perfect characteristic for banks to be involved.
Financial Institutions
Financial institutions such as money managers, investment funds, pension funds and brokerage
companies trade foreign currencies as part of their obligations to seek the best investment
opportunities for their clients. For example, a manager of an international equity portfolio will
have to engage in currency trading in order to buy and sell foreign stocks.
19
20
Speculators
A person, who trades in currencies with a higher than average risk in return for higher than
average profit potential. These are the individuals or private investors who purchase and sell
foreign currencies and profit through fluctuations on their price. Speculators are a "hardy" bunch
simply because they are more adept at handling and maybe even sidestepping risks that
regular investors would prefer not to be involved with. Speculators take large risks, especially
with respect to anticipating future price movements, in the hope of making quick large gains.
Speculators are risk-taking investors with expertise in the market(s) in which they are trading and
will usually use highly leveraged investments such as futures and options.
21
CHAPTER 5
FINANCIAL INSTRUMENTS OF FOREIGN EXCHANGE
MARKET.
rate
23
CHAPTER 6
FACTORS AFFECTING MOVEMENT OF EXCHANGE
RATES
inflation typically see depreciation in their currency in relation to the currencies of their trading
partners. This is also usually accompanied by higher interest rates.
. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest
rates, central banks exert influence over both inflation and exchange rates, and changing interest
rates impact inflation and currency values. Higher interest rates offer lenders in an economy a
higher return relative to other countries. Therefore, higher interest rates attract foreign capital and
cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if
inflation in the country is much higher than in others, or if additional factors serve to drive the
currency down. The opposite relationship exists for decreasing interest rates - that is, lower
interest rates tend to decrease exchange rates.
Current-Account Deficits
The current account is the balance of trade between a country and its trading partners, reflecting
all payments between countries for goods, services, interest and dividends. A deficit in the
current account shows the country is spending more on foreign trade than it is earning, and that it
is borrowing capital from foreign sources to make up the deficit. In other words, the country
requires more foreign currency than it receives through sales of exports, and it supplies more of
its own currency than foreigners demand for its products. The excess demand for foreign
currency lowers the country's exchange rate until domestic goods and services are cheap enough
for foreigners, and foreign assets are too expensive to generate sales for domestic interests.
Public Debt
Countries will engage in large-scale deficit financing to pay for public sector project sand
governmental funding. While such activity stimulates the domestic economy ,nations with large
public deficits and debts are less attractive to foreign investors. The reason? A large debt
encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off
with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt, but
increasing the money supply inevitably causes inflation. Moreover, if a government is not able to
service its deficit through domestic means (selling domestic bonds, increasing the money
supply), then it must increase the supply of securities for sale to foreigners, thereby lowering
25
their prices. Finally, a large debt may prove worrisome to foreigners if they believe the country
risks defaulting on its obligations. Foreigners will be less willing to own securities denominated
in that currency if the risk of default is great. For this reason, the country's debt rating (as
determined by Moody's or Standard& Poor's, for example) is a crucial determinant of its
exchange rate
.
Terms of Trade
Trade of goods and services between countries is the major reason for the demand and supply of
foreign currencies. A ratio comparing export prices to import prices, the terms of trade is related
to current accounts and the balance of payments. If the price of a country's exports rises by a
greater rate than that of its imports, its terms of trade have favorably improved. Increasing terms
of trade shows greater demand for the country's exports. This, in turn, results in rising revenues
from exports, which provides increased demand for the country's currency (and an increase in the
currency's value). If the price of exports rises by a smaller rate than that of its imports, the
currency's value will decrease in relation to its trading partners. This is a typical case for
underdeveloped countries which rely on imports for development needs. The current account
balance(deficit or surplus) thus reflects the strength and weakness of the domestic currency.
6. Fundamental Factors viz. Political Stability and Economic Performance
Fundamental factors include all such events that affect the basic economic and fiscal policies of
the concerned government. These factors normally affect the long-term exchange rates of any
currency. On short-term basis on many occasions, these factors are found to be rather inactive
unless the market attention has turned to fundamentals. However, in the long run exchange rates
of all the currencies are linked to fundamental causes. The fundamental factors are basic
economic policies followed by the government in relation to inflation, balance of payment
position, unemployment ,capacity utilization, trends in import and export, etc. Normally, other
things remaining constant the currencies of the countries that follow the sound economic policies
will always be stronger. Similar for the countries which are having balance of payment surplus,
the exchange rate will always be favourable. Conversely, for countries facing balance of payment
deficit, the exchange rate will be adverse. Continuous and ever growing deficit in balance of
payment indicates over valuation of the currency concerned and the dis-equilibrium created can
be remedied through devaluation. Foreign investors inevitably seek out stable countries with
26
strong economic performance in which to invest their capital. A country with such positive
attributes will draw investment funds away from other countries perceived to have more political
and economic risk. Political turmoil, for example, can cause a loss of confidence in a currency
and a movement of capital to the currencies of more stable countries.
27
the form of Foreign direct investment (FDI) and Foreign institutional investments (FII) have
become the most important factors affecting the
exchange rate in todays open world economy. Countries which attract large capital
inflows through foreign investments, will witness an appreciation in its domestic currency as its
demand rises. Outflow of capital would mean a depreciation of domestic currency.
Intervention
Exchange rates are also influenced in no small measure by expectation of changes in regulation
relating to exchange markets and official intervention. Official intervention can smoothen an
otherwise disorderly market but it is also the experience that if the authorities attempt halfheartedly to counter the market sentiments through intervention in the market, ultimately more
steep and sudden exchange rate swings can occur. In the second quarter of 1985 the movement of
exchange rates of major currencies reflected the change in the US policy in favour of coordinated exchange market intervention as a measure to bring down the value of dollar.
Stock Exchange Operations
Stock exchange operations in foreign securities, debentures, stocks and shares, influence the
demand and supply of related currencies, thus influencing their exchange rate
.
Political Factors
Political scenario of the country ultimately decides the strength of the country. Stable efficient
government at the centre will encourage positive development in the country, creating successf ul
investor confidence and a good image in the international market. An economy with a strong,
positive image will obviously have a strong domestic currency. This is the reason why
speculations rise considerably during the parliament elections, with various predictions of the
future government and its policies. In 1998,the Indian rupee depreciated against the dollar due to
the American sanctions after India conducted the Pokharan nuclear test
28
Others
The turnover of the market is not entirely trade related and hence the funds placed at the disposal
of foreign exchange dealers by various banks, the amount which the dealers can raise in various
ways, banks' attitude towards keeping open position during the course of a day, at the end of the
day, on the eve of weekends and holidays ,window dressing operations as at the end of the half
year to year, end of the month considerations to cover operations for the returns that the banks
have to submit the central monetary authorities etc. - all affect the exchange rate movement of
the currencies. Value of a currency is thus not a simple result of its demand and supply, but a
complex mix of multiple factors influencing the demand and supply.
Its a tight rope walk for any
country to maintain a strong, stable currency, with policies taking care of conflicting demands
like inflation and export promotion, welcoming foreign investments and avoiding an appreciation
of the domestic currency, all at the same time.
29
CHAPTER 7
FOREIGN EXCHANGE RISK
activities and differentiating its products in pursuit of greater inelasticity and less foreign
exchange risk exposure.
Translation exposure is largely dependent on the accounting standards of the home country and
the translation methods required by those standards. For example, the United States Federal
Accounting Standards Board specifies when and where to use certain methods such as the
temporal method and current rate method. Firms can manage translation exposure by performing
a balance sheet hedge. Since translation exposure arises from discrepancies between net assets
and net liabilities on a balance sheet solely from exchange rate differences. Following this logic,
a firm could acquire an appropriate amount of exposed assets or liabilities to balance any
outstanding discrepancy. Foreign exchange derivatives may also be used to hedge against
translation exposure.
MEASUREMENT
If foreign exchange markets are efficient such that purchasing power parity, interest rate parity,
and the international Fisher effect hold true, a firm or investor needn't protect against foreign
exchange risk due to an indifference toward international investment decisions. A deviation from
one or more of the three international parity conditions generally needs to occur for an exposure
to foreign exchange risk.
Financial risk is most commonly measured in terms of the variance or standard deviation of a
variable such as percentage returns or rates of change. In foreign exchange, a relevant factor
would be the rate of change of the spot exchange rate between currencies. Variance represents
exchange rate risk by the spread of exchange rates, whereas standard deviation represents
exchange rate risk by the amount exchange rates deviate, on average, from the mean exchange
rate in a probability distribution. A higher standard deviation would signal a greater currency
risk. Economists have criticized the accuracy of standard deviation as a risk indicator for its
uniform treatment of deviations, be they positive or negative, and for automatically squaring
deviation values. Alternatives such as average absolute deviation and semivariance have been
advanced for measuring financial risk.
VALUE AT RISK
31
Practitioners have advanced and regulators have accepted a financial risk management technique
called value at risk (VAR), which examines the tail end of a distribution of returns for changes in
exchange rates to highlight the outcomes with the worst returns. Banks in Europe have been
authorized by the Bank for International Settlements to employ VAR models of their own design
in establishing capital requirements for given levels of market risk. Using the VAR model helps
risk managers determine the amount that could be lost on an investment portfolio over a certain
period of time with a given probability of changes in exchange rates.
32
Translation Exposure
A firm's translation exposure is the extent to which its financial reporting is affected by exchange
rate movements. As all firms generally must prepare consolidated financial statements for
reporting purposes, the consolidation process for multinationals entails translating foreign assets
and liabilities or the financial statements of foreign subsidiary subsidiaries from foreign to
domestic currency. While translation exposure may not affect a firm's cash flows, it could have a
significant impact on a firm's reported earnings and therefore its stock price. Translation
exposure is distinguished from transaction risk as a result of income and losses from various
types of risk having different accounting treatments.
Contingent exposure
A firm has contingent exposure when bidding for foreign projects or negotiating other contracts
or foreign direct investments. Such an exposure arises from the potential for a firm to suddenly
face a transactional or economic foreign exchange risk, contingent on the outcome of some
contract or negotiation. For example, a firm could be waiting for a project bid to be accepted by a
foreign business or government that if accepted would result in an immediate receivable. While
waiting, the firm faces a contingent exposure from the uncertainty as to whether or not that
receivable will happen. If the bid is accepted and a receivable is paid the firm then faces a
transaction exposure, so a firm may prefer to manage contingent exposures.
In a transaction classification, i.e. a purchase or sale, is always referred to the bank's point of view and
the item referred to is the foreign currency.
Purchase transaction means bank purchases/ acquires foreign currency & pays the home
currency.
Sale transaction means bank sells/ part with foreign currency & accepts/acquires the home
currency.
HOW A FOREIGN EXCHANGE TRANSACTION IS CONDUCTED
CHAPTER 8
34
its huge trading volume representing the largest asset class in the world leading tohigh
liquidity;
its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT
onSunday until 22:00 GMT Friday;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account size.
As such, it has been referred to as the market closest to the ideal of perfect
competition,notwithstanding currency intervention by central banks. According to the
Bank for InternationalSettlements,as of April 2010, average dailyturnoverin global
foreign exchange markets isestimated at $3.98 trillion, a growth of approximately 20%
over the $3.21 trillion daily volumeas of April 2007. Some firms specializing on foreign
exchange market had put the average dailyturnover in excess of US$4 trillion.
CHAPTER 9
35
Control
Department.
At
the
same
time,
Foreign
Exchange
Dealers
Association(voluntary association) also provides some help in regulating the market. The
Authorized Dealers (Authorized by the RBI) and the accredited brokers are eligible to participate
in the foreign Exchange market in India. When the foreign exchange trade is going on between
Authorized Dealers and RBI or between the Authorized Dealers and the Overseas banks, the
brokers have no role to play.
36
.Apart from the Authorized Dealers and brokers, there are some others who are provided with
there stricted rights to accept the foreign currency or travelers cheque. Among these, there are the
authorized money changers, travel agents, certain hotels and government shops. The IDBI and
Exim bank are also permitted conditionally to hold foreign currency.
The whole foreign exchange market in India is regulated by the Foreign Exchange Management
Act, 1999 or FEMA. Before this act was introduced, the market was regulated by the FERA or
Foreign Exchange Regulation Act ,1947. After independence, FERA was introduced as a
temporary measure to regulate the inflow of the foreign capital. But with the economic and
industrial development, the need for conservation of foreign currency was felt and on there
commendation of the Public Accounts Committee, the Indian government passed the Foreign
Exchange Regulation Act,1973 and gradually, this act became famous as FEMA.
37
market witnessed major activities only after 1990s with the floating of the currency in March
1993, following the recommendations of Rangarajan committee.
38
The bond market is a loosely connected system in which buyers and sellers trade fixed income
assets and securities. Bond and other fixed income assets are traded informally in the over-thecounter market. The worldwide bond market is valued at $45 trillion.
Key differences from Forex Market
The bond market has the worlds largest investment sector.
The bond market has lower volatility and risk.
The bond market has limited trading hours.
The bond market is a decentralized market without a common exchange.
The Commodities Market
The commodities market is an exchange where raw goods or products are traded. Like the stock
market, there are commodities markets around the world. Commodities from apples to zinc are
sold in commodities exchanges.
Key differences from Commodities Market
The commodities market has lower leverage (10:1 vs. 100:1 in Forex).
The commodities market has lower liquidity.
The commodities market tends to have longer trends.
The commodities market has limited trading hours.
The commodities market has more errors and slippage (misquoted prices).
These four markets are operating simultaneously. Each has its own advantages and challenges.
Many Forex traders will study how these markets work together, which is called Intermarket
Analysis.
Other markets Forex markets Available trading hours are dictated by the trading schedule of the
exchange floor and the local time-zone. This limits market
open times. The forex market is open 24 hours a
decentralized clearing of trades and overlap of major financial markets throughout the world, the
39
forex market remains open, thus creating trading volume throughout the day and overnight.
Liquidity can be greatly diminished after market hours, or when many market participants limit
their trading or move to markets that are more popular.
Forex is the most liquid market in the world, eclipsing all others in comparison.
Because currency is the basis of all world commerce, exchange activities are constant. Liquidity
particularly in the majors often does not dry up during "slow times." Traders are charged
multiple fees, such as commissions, clearing fees, exchange fees and government fees as well as
platform and charting fees.
All you pay is the spread, which is built into the buy and sell prices although
market makers like GFT are compensated by revenues from their activities as a
currency dealer. Trading restricted by large minimum capital requirements sometimes as One
consistent margin rate 24 hours a day allows forex traders to leverage their high as $50,000
and high margin rates. Capital, as much as 100:1. In fact, GFT green accounts allow traders to
begin with
as little as $200 and 100:1 leverage. It is important to know that without appropriate use of risk
management, a high degree of leverage can lead to large losses as well as gains.
Margin requirements can be as much as 50 percent of your capital in order to take a position. No
restrictions on short-selling (placing a sell order when you think the market will trend down),
because you are simultaneously buying one currency while NM selling another. Restrictions on
short selling and stop
orders. GFT offers multiple order types, including stop orders and trailing stop orders to help you
manage your trading equity, which you can use even when short selling.
CHAPTER 10
FUTURE OF THE FOREIGN EXCHANGE MARKET
40
It provides a comprehensive study of the key issues affecting the market including the dramatic
developments taking place in trading technology, the impact of the EMU and the opportunities
and threats posed by emerging markets.
The Future of the Foreign Exchange Markets discusses the new foreign exchange clearing
bank, the CLSS and considers its implications for the future
structure of the global foreign exchange market, specifically the reduction of settlement risk. It
reviews the emergence of Contracts for Differences (CFDs) which avoid the need for any
settlement. The expected effects of EMU on the size and structure of the market are analysed,
with issues such as the likely size and distribution of activity in the euro being specifically
addressed.
Structure and Scope
The Future of the Foreign Exchange Markets addresses the critical issues including:
Developments in the foreign exchange markets including the spot market, the forwards market
and foreign exchange options and derivatives market.
Trading Technology - in particular the development of electronic matching systems and their
new dominance of trading in the market.
Netting and Settlement systems, with particular reference to the new foreign exchange clearing
bank, CLSS. The rise of CFDs will also be considered.
EMU - a discussion on the size and structure of the market, both during the first year of its
implementation and once stage three of monetary union is completed.
Emerging Markets - considering the growing proportion of forex trading devoted to emerging
market currencies and whether this growth and development will continue in the face of the
turmoil in Asia and Russia.
CONCLUSION
The foreign monetary exchange market is the biggest financial market in the world. Bigger than
the New York Stock Exchange and Futures Market combined. And with reduced "buy-in" limits
41
now, even small-time players can join the Forex trading marketplace. That doesn't mean
everyone should join, however. Buying an auto-trading program sold to you with the promise of
making you millions probably won't. In fact, it may cost you everything you own. The only way
to win in Forex trading is the good, old-fashioned way - hard work
andasolidunderstandingofthemarket.
One has to be clued in to global developments, trends in world trade as well as economic
indicators of different countries. These include GDP growth, fiscal and monetary policies,
inflows and outflows of the currency, local stock market performance and interest rates.
The currency derivatives market is highly leveraged. In the stock futures market, a 20% margin
gains a five-fold leverage. In forex futures, the margin payable is just 3%, so the leverage is 33
times. This means that even a 1% change can wipe out a third of the investment. However, the
Indian currency markets are well-regulated and there is almost no counter-party risk. Investors
should start small and gradually invest more.
One has to be clued in to global developments, trends in world trade as well as economic
indicators of different countries. These include GDP growth, fiscal and monetary policies,
inflows and outflows of the currency, local stock market performance and interest rates.
The currency derivatives market is highly leveraged. In the stock futures market, a 20% margin
gains a five-fold leverage. In forex futures, the margin payable is just 3%, so the leverage is 33
times. This means that even a 1% change can wipe out a third of the investment. However, the
Indian currency markets are well-regulated and there is almost no counter-party risk. Investors
should start small and gradually invest more.
Liberalization has transformed Indias external sector and a direct beneficiary of this has been the
foreign exchange market in India. From a foreign exchange-starved, control-ridden economy,
India has moved on to a position of $150 billion plus in international reserves with a confident
rupee and drastically reduced foreign exchange control. As foreign trade and cross-border capital
flows continue to grow, and the country moves towards capital account convertibility, the foreign
42
exchange market is poised to play an even greater role in the economy, but is unlikely to be
completely free of RBI interventions any time soon.
REFERENCES
43
http://www.slashdocs.com/kvuttx/fem.htm
http://www.travelspk.com/forex/Forex-Development-History.htm
http://www.global-view.com/forex-education/forex-learning/gftfxhist.html
http://en.wikipedia.org/wiki/Foreign_exchange_risk
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