FOREIGN EXCHANGE MARKETS

SUB: LAWS GOVERNING BANKING AND INSURANCE

 INTRODUCTION
• The Foreign Exchange Market (currency, FOREX or FX) market
is where currency trading takes place. It is where banks and
other financial institutions facilitate the buying and selling of
foreign currencies.
• FX transactions typically involve one party purchasing a quantity
of one currency in exchange of paying a quantity for another.
• The foreign exchange market that we see today started evolving
during the 1970s when the worldwide countries gradually
switched to floating exchange from fixed as per the Bretton
Woods system till 1971.
• Today, the FX market is one of
the largest and most liquid financial
markets in the world,and includes
trading between large banks, central
banks, Currency speculators,
corporations, governments and other
institutions.

•The need for a foreign exchange

market arises because of the
presence of multifarious
international currencies such as US
Dollar, Pound, Sterling, etc.and the
need for trading currencies.
 MARKET SIZE & LIQUIDITY
The foreign exchange
market is unique
because of
• its trading volumes,

• the extreme liquidity of

the market,

• its geographical dispersion,

• the variety of factors that affect
exchange rate,

•the low margins of profits compared

with other markets of fixed income
(but profits can be high due to very
large trading volumes) and

•the use of leverage.

•its long trading hours: 24 hours a day

except on weekends,
 MARKET PARTICIPANTS
Unlike a stock market, the foreign exchange market is divided into
levels of access. At the top is the inter-bank market, which is made
up of the largest commercial banks and securities dealers.

Within the inter-bank market, spreads, which are the difference

between the bids and ask prices, are razor sharp and usually
unavailable, and not known to players outside the inner circle.
The major participants are:
• Banks
•Commercial companies
•Central banks
•Hedge funds as speculators
•Investment management firms
•Retail foreign exchange brokers
•No-bank foreign exchange companies
•Money transfer/remittance companies
TRADING CHARACTERISTICS
• There is no unified or centrally cleared

market for the majority of FX trades,

and there is very little cross-border

regulation

• There is not a single exchange rate but

rather a number of different rates

(prices), depending on what bank or

market maker is trading, and where it is.

• Currency trading happens continuously

throughout the day

• Due to London's dominance in the market, a particular currency's quoted
price is usually the London market price.

•The main trading center is London, but New York, Tokyo, Hong Kong and

Singapore are all important centers as well. Banks throughout the world
participate. Currency trading happens continuously throughout the day.

• On the spot market, according to the BIS

study, the most heavily traded products
were:
EURUSD: 27%
USDJPY: 13%
GBPUSD (also called cable): 12%
 DETERMINANTS OF ‘FX’ RATES

The following theories explain the fluctuations in FX

rates in a floating exchange rate regime (In a fixed
exchange rate regime, FX rates are decided by its
government):
• International parity conditions
• Balance of payments model

• Asset market model

None of the models developed so far succeed to explain FX
rates levels and volatility in the longer time frames. For
shorter time frames (less than a few days) algorithm can
be devised to predict prices. Large and small institutions
and professional individual traders have made consistent
profits from it.
 ECONOMIC FACTORS
• Economic policy
• Government budget
deficits or surpluses
• Balance of trade levels and
trends
• Inflation levels and trends
• Economic growth and
health
• Productivity of an economy
 POLITICAL CONDITIONS

• Internal, regional, and international political conditions

and events can have a profound effect on currency
markets.

• All exchange rates are susceptible to political

instability and anticipations about the new ruling party.

• Political upheaval and instability can have a negative

impact on a nation's economy.
 MARKET PSYCHOLOGY
• Flights to quality

• Long-term trends
• “Buy the rumor,

Sell the fact”

• Economic numbers

• Technical trading considerations

 FINANCIAL INSTRUMENTS

• Spot
• Forward
• Future
• Swap

• Option
• speculation
 CREDITS
• BANGERA KOMAL 03
• JAIN JITIKA 15
• SANGHVI PAYAL 39
• SHETTY RAKSHITA 46
• SINGH POOJA 51
• THAPE KAJAL 56
• SONI ARCHANA 58