BY GROUP 6

SWADHA SINHA
SHAILJA SHARMA
SHIVANGI GUPTA
GARIMA GARG

FOREIGN EXCHANGE SOMYA SAKSHI

MARKET
 FOREX MARKET
The forex market is the market in which participants can buy, sell, exchange, and speculate on
currencies.
• The forex market is made up of :
1. Banks,
2. Commercial companies,
3. Central banks,
4. Investment management firms,
5. Hedge funds, and retail forex brokers and investors.
• The currency market is considered to be the largest financial market with over $5 trillion in
daily transactions, which is more than the futures and equity markets combined.
 BASICS OF FOREX MARKET

The foreign exchange The forex market is The interbank market The OTC market is
market is not made up of two is where large banks where individuals
dominated by a single levels; the interbank trade currencies for trade through online
market exchange, but market and the over- purposes such as platforms and brokers
a global network of the-counter (OTC) hedging, balance
computers and market sheet adjustments, and
brokers from around on behalf of clients
the world.
UNDERSTANDING FOREX MARKET

• Currencies are always traded in pairs, so the "value" of one

of the currencies in that pair is relative to the value of the
other
• This determines how much of country A's currency country
B can buy, and vice versa
• Establishing this relationship (price) for the global
markets is the main function of the foreign exchange
market
• This also greatly enhances liquidity in all other financial
markets, which is key to overall stability
 • A pip (an acronym for Point in Percentage) is
the name used to indicate the fourth decimal
place in a currency pair

POINT IN • When the price of the EUR/USD moves from

1.3600 to 1.3650, that's a 50-pip move; if
PERCENTAGE someone bought the pair at 1.3600 and sold it at
1.3650, they’d make a 50-pip profit
 Functions of Foreign Exchange Market

Transfer Provision of Credit Provision of Hedging

The Primary function of a The credit function Hedging refers to covering of

foreign exchange market is performed by foreign foreign trade risks, and it
the transfer of purchasing exchange markets also plays provides a mechanism to
power from one country to a very important role in the exporters and importers to
another and from one growth of foreign trade, for guard themselves against
currency to another. international trade depends to losses arising from
a great extent on credit fluctuations in exchange
facilities. Exporters may get rates.
pre shipment and post
shipment credit. The Euro
dollar market has emerged as
a major international credit
market.
 BRETTON WOOD AGREEMENT
• The United States held three-fourths of the world's supply of gold. No other
currency had enough gold to back it as a replacement. The dollar's value was 1/35
of an ounce of gold.
• Value of the dollar increased and so did the demand.
• If a country's currency value became too weak relative to the dollar, the bank
would buy up its currency in foreign exchange markets. That would lower the
currency's supply and raise its price.
• If its currency became too high, the bank would print more. That would increase
the supply and lower its price
 • In 1971, the United States was suffering from
massive stagflation.
• President Nixon started to deflate the dollar’s
value in gold.
• Since the collapse of the Bretton Woods system,
COLLAPSE OF IMF members have been free to choose any
AGREEMENT form of exchange arrangement.
• They could, for example, link its value to
another country's currency or a basket of
currencies or simply let it float freely and allow
market forces to determine its value relative to
other countries' currencies.
 EXCHANGE RATE
• Meaning:
o An exchange rate between two currencies is the rate at which one currency will be
exchanged for another.
o In other words, it is the value of one country’s currency in terms of another
currency.
o Also known as foreign exchange rate, forex rate or rate
• Example:
Inter bank exchange rate of 91( JPY, ¥) to the United States dollar (USD, US$)
means that ¥91 will be exchanged for each US$1 or that US$1 will be exchanged for
each ¥91.
Source: https://courses.lumenlearning.com/boundless-economics/chapter/exchange-rates/
 FOREIGN EXCHANGE REGIMES
• Foreign Exchange Rate can be classified as follows-
1. Fixed Exchange Rate:
Also known as “pegged” exchange rate linked to another currency or asset (often gold) to derive its
value.
Example: Denmark, Hong Kong, Bahamas.

2. Floating exchange Rate:

Rate of a currency is determined by the market forces of demand and supply.
More preferable since it absorbs the shocks of a global crisis and automatically adjusts to arrive at
an equilibrium
 ADVANTAGES

FIXED EXCHANGE RATE FLOATING EXCHANGE RATE

1. Ensures the stability of the exchange rates
by linking it to a stable currency itself.
2. Is attractive to foreign investors who are
lured to invest in that country due to the
stability it offers.
3. Well protected against the rapid fluctuations
in inflation.
1. The rates under this system are determined
by a self-sufficient mechanism. Therefor
minimum government interference.
2. Imbalances in the balance of payments lead
to automatic changes in exchange rates.
3. Does not requires huge reserves of foreign
currencies.
 DISADVANATGES

FIXED EXCHANGE RATE FLOATING EXCHANGE RATE

1. Fear of devaluation. • Currencies change in value from day
In a situation of excess demand, central to day introduces a large element of
bank uses its reserves to maintain uncertainty into trade.
foreign exchange rate. But when • The uncertainty introduced by floating
reserves are exhausted and excess exchange rates may discourage direct
demand still persists, government is foreign investment
compelled to devalue domestic
currency.
If speculators believe that exchange rate
cannot be held for long, they buy
foreign exchange in massive amount
causing deficit in balance of payment.
This may lead to larger devaluation
Determination of
Exchange Rate
1. DD- Demand Curve, SS- Supply Curve
2. Point of intersection- Equilibrium,(EO-
Original)
3. At EO exchange rate is 1 $ equal to 5 Re.
4. When exchange rate is E1-
Demand< Supply, less demand for foreign
currency , Re appreciates
5. When exchange rate is E2-
Demand > Supply , excess foreign currency is
being demanded at E2 Re will depreciate
Differentials in Inflation: A
country with lower inflation will
have appreciation in the currency
value.
Current Account Deficits:
Current account deficit usually
means depletion of the country's
overall forex reserves. This means
foreign trade partners value their
currencies at higher exchange
rates than the deficit country's. It
leads to fall in currency value.
Differentials in Interest Rates:
Higher interest rates offer lenders
in an economy a higher return
relative to other countries.
Public Debt: 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.
 Terms of Trade: If the price
Strong Economic of a country's exports rises by
Performance: Country a greater rate than that of its
with such positive imports, its terms of trade
attributes will draw have favourably improved.
Increasing terms of trade
investment funds away shows' greater demand for the
from other countries country's exports. This, in
perceived to have more turn, results in rising revenues
political and economic from exports, which provides
risk. increased demand for the
country's currency
 Analysis is done in three ways:
1. Technical Analysis: This comes in manual and auto-mated
systems. A manual system typically means a trader is analyzing
technical indicators and interpreting that data into a buy or sell
decision. An automated trading analysis means that the trader is
"teaching" the software to look for certain signals and interpret
them into executing buy or sell decisions.

Forex 2. Fundamental Analysis: It is often used to analyze changes in

the forex market by monitoring figures, such as interest rates,
Analysis unemployment rates, gross domestic product (GDP), and other
types of economic data that come out of countries.

3. Sentimental Analysis: The market is not only driven by

fundamentals, but also short-term sentiments. Sentiment trading
by itself is quite risky, since it involves uninformed trades.
Uninformed traders may be moving the market prices away from
fundamental values.
1.Technical Analysis
 • Interest Rates:All other factors being equal, higher interest rates in
a country increase the value of that country's currency relative to
nations offering lower interest rates.

• Unemployment Rates: The overall impact of exchange

rate movements on employment also tends to be sector
2. specific. Exchange rate movements tend to have an impact on labour
demand through two main channels; a depreciation increases the
Fundamental competitiveness of the countries exports and hence the demand for
labour.

Analysis • GDP: According to some theories, there is a positive relationship

between GDP growth rate and exchange rate. Some of the exchange
rate determination theories, such as the monetary approach to
exchange rates, predict that higher growth rates in a country lead to
an appreciation of this country's currency.
 The Forex market sentiment
will show what the traders
are doing and where the
market will be going. Forex
sentiment refers to the
overall feeling
the market participants have
about the performance of
a currency pair. It is a useful
way of gauging the feeling or
tone of the market and then
making appropriate trade
decisions.

Sentimental Analysis
Steps to take to trade
 Start the Trading Platform
 Open the Chart
 Add Indicators
 Place the order
 Set the Stop Loss and Take Profit Levels
 Order Confirmation
 The Waiting Period
 Trade Completion
Source: https://www.thebalance.com/making-your-first-forex-trade-1344921
ROLE OF RBI IN FOREIGN
EXCHANGE MARKET
• RBI has an important role to play in regulating & managing Foreign
Exchange of the country. It manages forex and gold reserves of the
nation.
• The RBI’s Financial Markets sales / purchases of foreign currency to
ease volatility in peri Department (FMD) participates in the foreign
exchange market by undertaking odds of excess demand for/supply of
foreign currency.
• Any transaction in foreign Exchange is governed by Foreign
Exchange Management ACT 1999.
• FEMA is a regulatory mechanism that enables the Reserve Bank of
India to pass regulations and the Central Government to pass rules
relating to foreign exchange in tune with the Foreign Trade policy of
India.
 FEMA 1999FEMA,1999
• The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of India "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“
• FEATURES
1. Payments made to any person outside India or receipts from them, along with the deals in foreign
exchange and foreign security is restricted.
2. Free transactions on current account subject to a reasonable restrictions that may be imposed.
3. Without permission of FEMA, MA restricts the transactions involving foreign exchange from outside the
country to India – the transactions only through an authorised person.
4. Deals in foreign exchange under the current account by an authorised person can be restricted by the
Central Government, based on public interest generally.
5. Residents of India will be permitted to carry out transactions in foreign exchange, foreign security or to
own or hold immovable property abroad if the currency, security or property was owned or acquired when
he/she was living outside India, or when it was inherited by him/her from someone living outside India.
TRANSACTIONS IN INTERBANK
MARKETS
The exchange rates quoted by banks to their customer are based on the
rates prevalent in the interbank market.

The big banks in the market are known as market makers, as they are
willing to buy or sell foreign currencies at the rates quoted by them up
to any extent.

When a banker approaches the market maker, it would not reveal its
intention to buy or sell the currency. This is done in order to get a fair
price from the market maker.
 1. Two Way Quotations
• It means the rate quoted by the market maker will indicate two
prices.
• One at which it is willing to buy the foreign currency, and the
other at which it is willing to sell the foreign currency.
• For example, a Mumbai bank may quote its rate for US dollar
as under USD 1 = Rs 48.1525/1650
• In the given quotation, one rate is Rs.48.1525 per dollar and the
TYPES OF other rate is Rs.48.1650. per dollar.

QUOTATIONS 2. Direct Quotation

• The exchange quotation which gives the price for the foreign
currency in terms of the domestic currency is known as direct
quotation.
• In a direct quotation, the quoting bank will apply the rule:
―Buy low; Sell high
 3. Indirect quotation
• This type of quotation which gives the quantity
of foreign currency per unit of domestic
currency is known as indirect quotation.
• For example, Mumbai bank quotes the rate for
dollar as:
TYPES OF Rs. 100 = USD 2.0762/0767.
In this case, the quoting bank will receive
QUOTATIONS USD 2.0767 per Rs.100 while buying dollars
and give away USD 2.0762 per Rs.100 while
selling dollars.
• In this case, he will apply the rule: ―Buy high:
Sell low.
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.

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
• The market for forward transactions is known as the forward market.
• Forward exchange facilities 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.

Types of transactions in the foreign Exchange

Market
FOREIGN EXCHANGE RISK
It is a financial risk that exists when a financial transaction is
denominated in a currency other than the domestic currency of the
company.

FX Risk

Transaction Translation Economic

Risk Risk Risk
TYPES OF RISK
Transaction risk: This is the risk that a company faces when it's buying a product from a
company located in another country. The price of the product will be denominated in the
selling company's currency. If the selling company's currency were to appreciate versus the
buying company's currency, then the company doing the buying will have to make a larger
payment in its base currency to meet the contracted price.

Translation risk: A parent company owning a subsidiary in another country could

face losses when the subsidiary's financial statements, which will be denominated in
that country's currency, have to be translated back to the parent company's currency.

Economic risk: Also called forecast risk, refers to when a company’s market
value is continuously impacted by an unavoidable exposure to currency fluctuations.
 • An American liquor company signs a contract to buy
a 100 cases of wine from a French retailer for €50 per
case, or €5,000 total, with payment due at the time of
delivery. The American company agrees to this
contract at a time when the Euro and the US Dollar are
Foreign of equal value, so €1 = $1.
• Thus, the American company expects that when they
Exchange accept delivery of the wine, they will be obligated to
pay the agreed upon amount of €5,000, which at the
Risk time of the sale was $5,000.
• However, it will take a few months for delivery of
Example the wine. In the meantime, due to unforeseen
circumstances, the value of the US Dollar depreciates
versus the Euro to where at the time of delivery €1 =
$1.10. The contracted price is still €5000 but now the
US Dollar amount is $5500, which is the amount that
the American liquor company will have to pay.
 RISK MANAGEMENT
Hedging tools and techniques
Internal Techniques
• Form a part of the firm’s regulatory financial management
• Do not involve contractual relationship with any party outside the firm
o Leads and lags
o Cross-hedging
o Currency diversification
o Risk sharing
o Pricing of transactions
o Parallel loans
o Currency swaps
o Matching of cash
External Techniques
• Involve contractual
relationships with external
parties
• Forward market hedge
• Hedging through currency
futures
• Hedging through currency
options
• Money market hedge
THANK YOU