Foreign exchange

market

presented to
Mr. manish Sharma
asst.professor

presented by
Ayushi ojha
Arti pal
BBA IV SEM

Foreign exchange

Meaning of Foreign Exchange

The term Foreign exchange implies two things: a)foreign
currency and b) exchange rate
Foreign exchange generally refers to foreign currency, eg
for India it is dollar, euro, yen, etc &
the other part of foreign exchange is exchange rate
which is the price of one currency in terms of the other
currency.
Foreign exchange is the international market for the free
trade of currencies. Traders place orders to buy one
currency with another currency.

forex cntd
According to Hartly Withers, Foreign exchange is the art
and science of international monetary exchange
The foreign exchange market is the worlds largest
financial market. Over $4 trillion dollars worth of
currency are traded each day. The amount of money
traded in a week is bigger than the entire annual GDP of
the United States!
The main currency used for foreign exchange trading is
the US dollar.

Foreign exchange market

Foreign exchange market is that market in which
national currencies are traded for one another..
The major participants in this market are commercial
banks, foreign exchange brokers, and authorized dealers
and the monetary authorities.
Besides, transfer of funds form one country to another ,
speculation is an important dimension of foreign
exchange market.
Its where money in one currency is exchanged for
another

Advantages of Forex market

Its already the worlds largest market and its still

growing quickly
It makes extensive use of information technology
making it available to everyone
Traders can profit from both strong and weak economies
The market is not regulated
Brokerage commissions are very low or non-existent
The market is open 24 hours a day during weekdays

Exchange rate
According to haines, Exchange rate is the price of the
currency of a country can be exchanged for the number
of units of currency of another country.
Exchange rate is that rate at which one unit of currency
of a country can be exchanged for the number of units
of currency of another country.
Its the the price for which one currency is exchanged for
another

Factors influencing Exchange Rates

As with any market, the foreign exchange market is driven by supply
and demand:
If buyers exceed sellers, prices go up
If sellers outnumber buyers, prices go down
The following factors can influence exchange rates:
National economic performance
Central bank policy
Interest rates
Trade balances imports and exports
Political factors such as elections and policy changes
Market sentiment expectations and rumors
Unforeseen events terrorism and natural disasters
Despite all these factors, the global foreign exchange market is more
stable than stock markets; exchange rates change slowly and by
small amounts.

Types of exchange rate

Fixed and Floating

exchange rates
Fixed exchange rate is the official rate set
by the monetary authorities of the
Governance for one or more currencies.
Under floating exchange rate, the value of
the currency is decided by supply and
demand factors

Direct and indirect

exchange rates
Direct method - Under this, a given number of units of
local currency per unit of foreign currency is quoted.
They are designated as direct/certain rates because the
rupee cost of single foreign currency unit can be
obtained directly. Direct quotation is also called home
currency quotation.
Indirect method Under this, a given number of units
of foreign currency per unit of local currency is quoted.
Indirect quotation is also called foreign currency
quotation

Buying and selling

Exchange rates are quoted as two way
quotes
for purchase
and for sale
transactions by the Bank

Spot and forward

The delivery under a foreign exchange transaction can be
settled in one of the following ways
Ready or cash To be settled on the same day
Tom To be settled on the day next to the date of
transaction
Spot To be settled on the second working day from
the date of contract
Forward To be settled at a date farther than the spot
date

Theories of exchange rate

determination

Meaning:
Theories which determine the prices of forex rate
considering inflation, interest rate, and elasticity of price
etc..
Methods:
a) Long run theory
b) Short run theory

Long Run Theory of Exchange rate

Determination:
This are the theories which predominately take into account
the fundamental changes of economy.
Here fundamental changes refers to the change which are
going to change the economic performance of the economy
Purchasing power all times to come.

Types of theory:
Purchasing power parity.
1) Absolute purchasing power parity.
2) Relative purchasing power parity.
Interest Rate parity
1) Covered Interest Rate parity
2) Uncovered Interest Rate parity

Short Run theory of exchange

rate determination

This theories are based more on current information or

immediate performance of economic variables.
This theories try to take into account the short run factor
which may be eliminated in the long run.

Purchasing power parity theory

Founder Swedish economist Gustav Cassel in 1918.

Meaning : According to this theory ,the price levels and
the changes in these price levels in different countries
determine the exchanges rates of these countries
currencies.
The basic principle of this theory is that the exchange
rates between various currencies reflect the purchasing
power of these currencies .This theory is based law of
one price.

Absolute form of PPP Theory

If the law of one price were to hold good for each and
every commodity then the theory is termed as Absolute
form of PPP Theory.
This theory describes the link between the spot
exchange rate and price levels at a particular point of
time

Relative form of PPP

This theory describes the link between the changes in

spot exchange rate and in the price levels over a period
of time.
According to this theory ,changes in spot rates over a
period of time reflect the changes in the price level over
the same period in the concerned economies.
This theory relaxes three assumptions of PPP i.e
Absences of transportation cost ,transaction costs and
tariffs.

Interest Rate Parity Theory

Definition :
The process that ensures that the annualized forward
premium or discount equals the interest rate differential on
equivalent securities in two currencies.
International Fisher effect:
Expected Rate of change = Interest rate of the exchange
rate differential
Interest Rate = Real Interest Expected Differential Rate
+ inflation rate

Modern theory: demand & supply

theory

The most satisfactory explanation of the determination

of the rate of exchange is that a free exchange rate
tends to be such as to equate the demand and supply of
foreign exchange..
The intersection of supply curve and demand curve gives
the equilibrium price
Modern theory also called balance of payments theory of
foreign exchange

Foreign Exchange Risk

Exposure to exchange rate movement.
Any sale or purchase of foreign currency
entails foreign exchange risk.
Foreign exchange transaction affects the
net asset or net liability position of the
buyer/seller.
Carrying net assets or net liability position
in any currency gives rise to exchange
risk.

Risk management
Controlling losses
You could control your losses, by mental stop or hard
stop. Mental stop means that you already set you limit
of your loss. A hard stop is your initiative to stop when
you think you must to stop it.
Using correct lot size
As a beginning just use smaller lots you could stay
flexible and logic than emotions while you trade.
The bottom line
Trading is about opportunities, you must take action
while the opportunities arise.

Thank You!!!