PRESENTED BY- PRASHANT, PRATIK,

PRIYANKA, RAHUL PANDEY

 1. WHAT IS FOREX MARKET ?
 A stock market in which the currencies of other countries are bought
and sold. It is to be distinguished from a financial market where
currencies are borrowed and lent.
 The foreign exchange market is an over-the-counter (OTC)
marketplace that determines the exchange rate for global currencies.
Participants are able to buy, sell, exchange and speculate on currencies.
 The structure of the foreign exchange market constitutes central banks,
commercial banks, brokers, exporters and importers, immigrants,
investors, tourists.
PLAYERS OF FOREX MARKET
2. HOW DOES THEY OPRATE ?
 SPOT MARKET
 If the operation is of daily nature, it is called spot
market or current market. It handles only spot
transactions or current transactions in foreign
exchange.
 The exchange rate that prevails in the spot market for
foreign exchange is called Spot Rate.
 Participants : commercial banks , brokers, customers
 FORWARD MARKET
 A market in which foreign exchange is bought and sold
for future delivery is known as Forward Market. It
deals with transactions (sale and purchase of foreign
exchange) which are contracted today but
implemented sometimes in future.
 Forward rate is the rate at which a future contract for
foreign currency is made.
 Participants : Traders, hedgers , speculators
3.
 TYPES OF FORIGEN
EXCHANGE RATES
 Floating exchange rate

 Fixed exchange rate

 Managed floating
Fixed exchange rate
 Floating exchange rate
 Advantages
Balance of payments stability.
No restrictions on foreign exchange and capital flows.
No need to keep large foreign currency reserves.
Protection against imported inflation.

 Disadvantages
High level of exposure to exchange rate volatility.
Lack of currency control can curtail economic recovery
or growth.
FINANCIAL AND ECONOMIC CRISIS
 A financial crisis is any of a broad variety of situations in
which some financial assets suddenly lose a large part of
their nominal value. In the 19th and early 20th centuries,
many financial crises were associated with banking panics
and many recession coincided with these panics. Other
situations that are often called financial crises include stock
market crashes and the bursting of other financial bubbles
and currency crises.

 A situation in which the economy of a country experiences a

sudden downturn brought on by a financial crisis.
An economy facing an economic crisis will most likely
experience a falling GDP, a drying up of liquidity and
rising/falling prices due to inflation/deflation
 What caused The Crisis ?
 An overvalued exchange rate.
 A generally large current account deficit.
 Lots of ‘Hot money’ flow into the financial accounts
which are balancing the current account deficit.
 Rising debts, either consumer, corporates or
governments debts.
 Flat or falling reserves.
 Mismatch on the balance sheet.
 Erosion of policy credibility and poor regulation.
 A shock or panic.
 Guaranteed
repayment in
USD

Short Denominated
Attracted
foreign Investor term in domestic
Currency.
Debts

NAFTA
 Violence
uprising in
Chiapas

Political
instability.

Assassination Increasing
of Luis
Donaldo the risk of
Colosio. Investors.
Buying Trade
of Peso deficit

Investment
in Forex
market
 Down
word
pressure
on Peso

Capital
outflow
to US

Disinvestment
 High
interest
rate
payment

Purchase of
Reserves
To Depletion
maintain
of bank
money
resources.
supply.
 Capital
flight

Devaluation
of Peso Raised
Result in
Defaults interest
rate
Float Freely

Inflation of around 52%

Grants from Different

Organizations.
 Recession

Banks Unemployment
collapsed and poverty
raised

Aftermath
of Crisis
 Short term
debts

Aftermath of Political
Crisis instability

Float Freely
Mexico's/Tequila Investment in
Crisis 1994 forex market

Devaluation of
Disinvestment
Peso

Purchase of
Reserves
 INTRODUCTION
 Period of financial crisis – July 1997-1998
 Crisis started in Thailand , with the financial collapse
of thai baht after Thai govt. was forced to float the
baht due to lack of foreign currency to support its
currency peg to the U.S.D
 Affected countries – Thailand, Indonesia, Singapore,
South Korea, Malaysia, Philippines
 IMF provided $40 billion to stabilize the currencies
 PRE CRISIS SCENARIO
 Triggered economies { high economic growth }
 low interest rates
 Increased in exports
 High inflow of FDI
 Increased value of real estate, bolder corporate saving
and large public infrastructure
 Heavy borrowing from banks provided most of the
funding
 Easy lending lead to reduce investment
 Excess capacity
 CAUSES
A. Foreign debt-to-GDP ratios rose from 100% to
167%
B. Current account deficits
C. Fixed or semi-fixed exchange rates
D. Financial deregulation
E. Moral Hazard
F. Over-exuberance
REASONS FOR CURRRENCY CRISIS
 Current Account Deficit
(% of GDP)
1990-1995 1996
Asian Country: (average)
China 0.9 0.9
Hong Kong 3.3 -1.2
Korea -1.2 -4.8
Singapore 12.7 15.5
Taiwan 4.0 4.0
Indonesia -2.5 -3.7
Malaysia -5.9 -4.9
Philippines -3.8 -4.7
Thailand -6.7 -7.9
 IMPACT
During financial crisis the impacted countries
experienced a substantial loss of the value of their
currencies as well as value of their domestic stock
market.
 lead to lower demand for imported goods
 Lower rates of export
 Less government and private spending
 Reduced production
 Higher poverty rates
IMMEDIATE RESULTS OF CRISIS
 CURRENCY DEVALUATION
 COLLAPSE OF STOCK MARKETS { ALL
SOUTHEAST COUNTRIES }
 CALL FOR AN IMF RESCUE PLAN IN PHILIPPINES ,
THAILAND, INDONESIA AND SOUTH KOREA
 BANKRUPTCY AND FINANCIAL REFORMS { ALL
SOUTHEAST COUNTRIES }
 ROLE OF IMF
Provided 120$ billion as bailout package. Imposed
restrictive condition. The IMF actions generally called
for six key actions:

 Immediate bank closures

 Quick restoration of minimum capital inadequacy
standards
 Tight domestic credit
 High interest rates on central bank discount facilities
 Fiscal contraction
 Non -financial sector structural changes
EUROZONE CRISIS
 INTRODUCTION
The European debt crisis (often also referred to as
the eurozone crisis or the European sovereign debt
crisis) is a multi-year debt crisis that has been taking
place in the European Union since the end of 2009.
Several eurozone member states
(Greece, Portugal, Ireland, Spain and Cyprus) were
unable to repay or refinance their government debt or
to bail out over-indebted banks under their national
supervision without the assistance of third parties like
other eurozone countries, the European
CentraLBank (ECB), or the International Monetary
Fund(IMF).
 HISTORY OF THE CRISIS
 The debt crisis began in 2008 with the collapse of
Iceland's banking system, then spread primarily to
Portugal, Italy, Ireland, Greece, and Spain in 2009. It has
led to a loss of confidence in European businesses and
economies.
 The crisis was eventually controlled by the financial
guarantees of European countries, who feared the
collapse of the euro and financial contagion, and by the
International Monetary Fund (IMF).
 The crisis peaked between 2010 and 2012.
EURO ZONE DEBT CRISIS
 Also known as Euro zone sovereign debt crisis.
 The term indicates the financial woes caused due to
overspending by European countries.
 When a nation lives beyond its means by borrowing
heavily and spending freely, there comes a point when
it cannot manage its financial situation.
 When that currency faces insolvency.
 CAUSES
 The financial crisis of 2008 being a banking sector
crisis which originated from subprime crisis:
macroeconomic crisis (the default of poor households)
and the microeconomic crisis (the bankruptcy of a
financial institution), will spread to a significant part
of the financial system; affect the real sector of
economy which will totally change the stability of the
global financial system.
 CONSEQUENCES
The Euro-zone faces four major, and related,
economic challenges:
 First: high debt levels and public deficits in some
Euro-zone countries.
 Second: weaknesses in the European banking system.
 Third: economic recession21 and high unemployment
in some Euro-zone countries.
 Fourth and last persistent trade imbalances within the
Euro-zone.
IMPACT OF CRISIS IN FOREX
CONT…
WHICH OF THE EXCHANGE
RATE IS BEST ?
A fixed, or pegged, rate is a rate the government (central
bank) sets and maintains as the official exchange rate.
The reasons to peg a currency are linked to stability.
Especially in today's developing nations, a country may
decide to peg its currency to create a stable atmosphere for
foreign investment.
In reality, no currency is wholly fixed or floating. In a fixed
regime, market pressures can also influence changes in the
exchange rate. Sometimes, when a local currency reflects
its true value against its pegged currency, a "black market"
(which is more reflective of actual supply and demand)
may develop. A central bank will often then be forced to
revalue or devalue the official rate so that the rate is in line
with the unofficial one, thereby halting the activity of the
black market.