Report on Foreign exchange market of hsbc bangladesh ltd

Internship report
On

Foreign Exchange Market of HSBC Bangladesh Ltd

An Internship Report Presented in Partial Fulfillment of the Requirements for
the Degree Bachelor of Business Administration

www.AssignmentPoint.com

Date..

Md. …………………
Lecturer, School of Business
……………………….

Sir:
It is a great pleasure for me to submit a. internship report on “Foreign Exchange Market of HSBC

Bangladesh Ltd”. I am submitting this report as the part of my internship (………….) on HSBC
Bangladesh. This report will help the organization to find out different forecasting techniques of
foreign exchange markets.

This is the first time I have done a descriptive study in a complete form and I have tried my best to
complete the study in proper way. It is true that it could have been done in a better way if there
would not be any limitations.
I hope you will asses my report considering the limitations of the study. Your kind advice will
encourage me to do further research in future.

Yours’ most faithfully,
………………………


ACKNOWLEDGEMENT

First of all I want to pay my gratitude to the Almighty Allah for helping me in preparing this
internship paper successfully. Secondly, I want to express my gratefulness to my internship
supervisor, Md. ……………, for providing me continuous support and guideline to prepare a
research paper. His contribution to me can only be acknowledged but never be compensated.

I would like to thank …………. and also a special thanks to ……………….., the colleagues of
HSBC global markets.

Furthermore, I want to convey my heartiest thanks to my friends and families. Without their help I
could not even think of preparing this report.


Table of Content
Page
Executive Summary

1

1.0 Introduction

2

2.0 Statement of the Problem

5

3.0 Purpose of the study

6

4.0 Research Time Line

6

5.0 Limitation of the Study

7

6.0 Literature Review

8

7.0 Forecasting techniques in the foreign exchange markets

10

7.1 Fundamental Analysis

10

7.1. a General Steps to Fundamental Evaluation

11

7.1. b Economic Forecast

12

7.2 Technical Analysis

13

7.2. a Underlying assumptions of technical analysis

13

7.2. b The main considerations in Technical Analysis

13

8.0 Research Methodology

14

8.1 Research Design

14

8.1. a Primary Sources

14

8.1. b Secondary Sources

15

8.2 Data Collection

15

8.3 Data Analysis

15

8.3.1 Technical Analysis Basics

15

Table of Content
Page
8.3.1. a Rationale

15

8.3.1. b Types of Charts

16

8.3.1. c Candle Chart

17

8.3.1. d Why Use Candle charts

17

8.3.2 Some other Forecasting Techniques

18

9.0 Discussion

21

9.1 Business utilization of technical analysis

21

9.1.1 Bangladesh inter-bank Foreign Exchange Market

21

9.1.1. a Inter-Bank Transaction in Foreign Exchange

21

9.1.1. b Quarterly transactions of USD/BDT and
Other FCY/BDT Transaction
9.2 The use of Technical analysis in Bangladesh

23
24

9.2.1 Importers point of views

25

9.2.2 Exporters point of views

25

10.0 Significance of the Study

25

11.0 Risks Involved in foreign exchange

26

11.1. Exchange Rate Risk

27

11.2. Interest Rate Risk

28

11.3. Credit Risk

28

11.4. Country Risk

29

12.0 Recommendation

30

13.0 Conclusion

31

Reference

33

Appendix 1

34

Appendix 2

34

Appendix 3

35

Appendix 4

35

Appendix 5

36

Appendix 6

37

Appendix 7

37

Appendix 8

38

List of Figures
Page
1. A chart of the S&P 500 and the yield on the 10-year note
over the last 30 years

13

2. Types of charts used in forecasting

16

3. A price chart that displays the high, low, open, and close for a security
each day over a specified period of time

17

4. Comparison of different forecasted rates with the actual market rate

20

5. Yearly transaction from the year 2002-2007

21

6. Month to Month Inter-Bank Transaction in Foreign Exchange

22

7. Quarterly transactions of USD/BDT and Other FCY/BDT Transaction
in the inter-bank markets

23

Executive Summary

Banks play a major role in maintaining confidence in the monetary system of a country.
This study investigates about different forecasting techniques of foreign exchange markets. This
includes different forecasting techniques which are followed by HSBC and also some other
forecasting methods which I have suggested to do in stead of the current techniques followed by
the bank.

The foreign exchange market has played a vital role in the last decade or so in guiding the
purchase and sale of goods, services and raw materials globally. The market directly affects
country’s bond, equities, private property, manufacturing and all assets that are available to
foreign investors. The market is a stabilizing factor in the world system of monetary exchange
and was created not by design but necessity.

Foreign exchange rates also play a major role in determining who finances government
deficits, which buys equities in companies and literally effects and influences the economic
scenario of every nation to cope with the foreign exchange risk in an open market economy. The
market has its own momentum and therefore it is crucial to follow a universal time tested policy
to tackle the forces behind the free market system with minimal risk involvement.

This study is based on both primary and secondary data, which are collected from many
sources.


1.0.

Introduction

Hong Kong Shanghai Banking Corporation (HSBC)
Headquartered in London, HSBC is one of the largest banking and financial services organizations
in the world. It began operations in Hong Kong more than 130 years ago. The HSBC Group's
international network comprises some 7,000 offices in 80 countries and territories in Europe, the
Asia-Pacific region, the Americas, the Middle East and Africa. With listings on the London, Hong
Kong, New York and Paris stock exchanges, around 190,000 shareholders in some 100 countries
and territories hold shares in HSBC. Through a global network linked by advanced technology,
including a rapidly growing e-commerce capability, HSBC provides a comprehensive range of
financial services: personal, commercial, corporate, investment and private banking; trade services;
cash management; treasury and capital markets services; insurance; consumer and business
finance;

HSBC group Vision & Values:
Become the world’s leading financial services company.
•

Long term, ethical client service.

•

High productivity through teamwork.

•

Confident and ambitious sense of excellence.

•

Capable of creativity and strong marketing.


HSBC’s Business Principal and value:
The HSBC Group is committed to five Business Principles:
•

Outstanding customer service;

•

Effective and efficient operations;

•

Strong capital liquidity;

•

Conservative lending policy;

•

Strict expense discipline;

HSBC in Bangladesh
The HSBC Asia Pacific group represents HSBC in Bangladesh. HSBC opened its first branch in
Dhaka in 17th December 1996 to provide personal banking services, trade and corporate services,
and custody services. The Bank was awarded ISO9002 accreditation for its personal and business
banking services, which cover trade services, securities and safe custody, corporate banking,
Hexagon and all personal banking. This ISO9002 designation is the first of its kind for a bank in
Bangladesh. The Hong Kong and Shanghai Banking Corporation Bangladesh Ltd. primarily
limited its operations to help garments industry and to commercial banking. Latter, it is extended to
pharmaceuticals, jute and consumer products. Other services include cash management, treasury,
securities, and custodial service.

HSBC in Bangladesh also specializes in self-service banking through providing 24-hour ATM
services. In total the branch currently has 9 ATM’s (5 on-site & 4 offsite) located at various
geographical areas of Dhaka & Chittagong.


Operations of Global Markets:

HSBC’s operations in Global Markets consist of treasury and capital markets services for
supranational, central banks, corporations, institutional and private investors, financial institutions
and other market participants. Products include:
• Foreign exchange;
• Currency, interest rate, bond, credit, equity and other specialized derivatives;
• Government and non-government fixed income and money market instruments;
• Precious metals and exchange traded futures;
• Equity services, including research, sales and trading for institutional, corporate and private
clients and asset management services, including global investment advisory and fund
management services; and
• Distribution of capital markets instruments, including debt, equity and structured products,
utilizing links with HSBC’s global networks. Corporate and Investment Banking

The main purpose of treasury is to:
•

Manage bank’s assets and liabilities.

•

Promote and sell bank’s product.

•

Manage the Bank’s excess/short foreign exchange products.

•

Manage the bank’s excess/short interest rate products.


Some Typical Treasury Products
•

Spot foreign exchange

•

Forward foreign exchange

•

Swaps : a) currency b) interest rate & c) structured

•

Options : a) plain vanilla & b) complex

•

Derivatives : a) plain vanilla & b) structured

•

Securities : a) T-Bills and T-Bonds b) FRNs

•

Repo & Reverse Repo : Repurchase / Sell-Buy transactions

•

Money market : overnight and term deposits

2.0 Statement of the Problem
Now a days, competition between banks has really increased in Bangladesh as there are quite a
large numbers of bank’s has established in past few years. So it has really important for HSBC to
hold up there current customers. So the management of HSBC is facing a lot of competition and
also thinking how they can attract new customers.

In this research I have tried to show different forecasting techniques of exchange rate, some
forecasting problems in the forex markets due to technical problem or wrong prediction and also
tried to recommend some solution to overcome these problems.


3.0 Purpose of the study
The purposes of this paper are to establish rational behind the activity and to enlighten a core
area of operation- to forecast the exchange rate. Within the two major forecasting techniques, more
emphasis is given on the technical forecasting techniques which is followed by HSBC and I have
also tried to shown some alternative forecasting techniques and also suggested the best one I found
based on my calculations. A detailed discussion of these is presented in this paper.

The purpose of the study is to explore different forecasting techniques of foreign exchange
markets, technical analysis basics of foreign exchange market, business utilization of technical
analysis, use of technical analysis in HSBC, some risks involved in foreign exchange market and
also the way to avoid mistakes in foreign exchange market

4.0 Research Time Line

2007-Sept

Writing Research Proposal

2007-Sept

Developing Literature Review

2007-Sept

Collecting Data

2007-Oct

Data Analysis and Interpretation of the Findings

2007-Nov

Preparing Draft and Finalizing the Research Paper

2007-Dec

Submission of the Research Paper


5.0 Limitation of the Study
•

The major limitations of the technical analysis is, it may or may not produces the accurate
projections of the foreign currency rates as a large amount of dependency on the dealers
perspective. Also experience is the countable variables here, which cannot be expressed, in any
mathematical models.

•

According to the technical forecasting techniques the market has it own destiny and the major
part of the analysis based on to determine the future. So major social or economical even
political events can change it a lot. So dealers must be reactive rather than proactive.

•

Time frame for the research was very limited.

•

Large-scale research was not possible due to constraints and restrictions posed by the
organization.

•

Getting relevant papers and documents were strictly prohibited.

•

The limitations that I already faced are to unable to collect local financial data, and also direct
interviewing to managers doesn’t reveal many aspects of HSBC which they deny to answer or
doesn’t want to answer due to their own personal career security at HSBC

•

One of the main barriers in writing this report was the confidentiality of data. Though I saw
their internal procedure that is being used in processing and evaluating any documentary credit,
but I was told strictly not to disclose that even in my internship report.


6.0 Literature Review
Financial markets could mean:
1. Organizations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the
trade in stocks, bonds and warrants.
2. The coming together of buyers and sellers to trade financial products. i.e. stocks and shares are
traded between buyers and sellers in a number of ways including: the use of stock exchanges;
directly between buyers and sellers etc.
In academia, students of finance will use both meanings but students of economics will only use
the second meaning.
Financial markets can be domestic or they can be international.
The foreign exchange (currency or forex or FX) market exists wherever one currency is
traded for another. It is by far the largest financial market in the world, and includes trading
between large banks, central banks, currency speculators, multinational corporations,
governments, and other financial markets and institutions. The average daily trade in the global
forex and related markets currently is over US$ 3 trillion. Retail traders (individuals) are a small
fraction of this market and may only participate indirectly through brokers or banks, and are
subject to forex scams.


The term FOREX is derived from the words Foreign exchange and is the largest financial
market in the world. Unlike many markets the FX market is open 24 hours per day and has an
estimated $1.2 Trillion in turnover every day. This tremendous turnover is more than the
combined turnover of the main worlds’ stock markets on any given day. This trends to lead to a
very liquid market and thus a desirable market to trade.

Unlike many other securities (any financial instrument that can be traded) the FX market does
not have a fixed exchange. It is primarily traded through banks, brokers, dealers, financial
institutions and private individuals.

The Foreign Exchange market is a worldwide network which connects the various national
exchange markets by telephone and telex etc, either directly or via brokers, to transact foreign
exchange business.

The Foreign Exchange, also referred to as the "Forex" or "Spot FX" market, is the largest
financial market in the world. Money is traded in the FX market. Forex trading is where the
currency of one nation is traded for that of another. Therefore, Forex trading is always traded in
pairs. The most commonly traded currency pairs are traded against the US Dollar (USD). They
are called ‘the Majors'. The major currency pairs are the Euro Dollar (EUR/USD); the British
Pound (GBP/USD); the Japanese Yen (USD/JPY); and the Swiss Franc (USD/CHF).
The notable ‘commodity’ currency pairs that trade are the Canadian Dollar (USD/CAD) and the
Australian Dollar AUD/USD. Because there is not a central exchange for the Forex market, these


pairs and their crosses are traded over the telephone and online through a global network of
banks, multinational corporations, importers and exporters, brokers and currency traders.
"Technical analysis is the study of market action, primarily through the use of charts, for the
purpose of forecasting future price trends." In its purest form, technical analysis considers only
the actual price behavior of the market or instrument, based on the premise that price reflects all
relevant factors before an investor becomes aware of them through other channels.
Technical analysis is widely used among traders and financial professionals, and some studies
say its use is more widespread than is "fundamental" analysis in the foreign exchange market.
Academics such as Eugene Fama say the evidence for technical analysis is sparse and is refuted
by the efficient market hypothesis, yet some Federal Reserve and academic studies include
evidence that supports technical analysis. MIT finance professor Andrew Lo argues that "several
academic studies suggest that…technical analysis may well be an effective means for extracting
useful information from market prices." Burton Malkiel argues, "Technical analysis is anathema
to the academic world." He further argues that under the weak form of the efficient market
hypothesis, "...you cannot predict future stock prices from past stock prices.

7.0 Forecasting techniques in the foreign exchange markets:
Currently there are widely accepted two alternative techniques for forecasting, namely
1. Fundamental Analysis
2. Technical Analysis

7.1 Fundamental Analysis

A method of currency valuation which involves examining the countries financial figures like
import/exports, balance of trade, reserve on currency, political and economical news etc.
Fundamental analysis takes into consideration only those variables that are directly related to the
country itself, rather than the overall state of the market or technical analysis data.
Fundamental analysis is the examination of the underlying forces that affect the well being of the
economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast
and profit from future price movements. At the company level, fundamental analysis may involve
examination of financial data, management, business concept and competition. At the industry
level, there might be an examination of supply and demand forces for the products offered. For the
national economy, fundamental analysis might focus on economic data to assess the present and
future growth of the economy. To forecast future stock prices, fundamental analysis combines
economic, industry, and company analysis to derive a stock's current fair value and forecast future
value. If fair value is not equal to the current stock price, fundamental analysts believe that the
stock is either over or under valued and the market price will ultimately gravitate towards fair
value. Fundamentalists do not heed the advice of the random walkers and believe that markets are
weak-form efficient. By believing that prices do not accurately reflect all available information,
fundamental analysts look to capitalize on perceived price discrepancies.

7.1. a General Steps to Fundamental Evaluation
Even though there is no one clear-cut method, a breakdown is presented below in the order an
investor might proceed. This method employs a top-down approach that starts with the overall
economy and then works down from industry groups to specific companies. As part of the analysis
process, it is important to remember that all information is relative. Industry groups are compared


against other industry groups and companies against other companies. Usually, companies are
compared with others in the same group. For example, a telecom operator (City cell) would be
compared to another telecom operator (Gremeen Phone), not to an Electronics company (Philips).

7.1. b Economic Forecast
First and foremost in a top-down approach would be an overall evaluation of the general
economy. The economy is like the tide and the various industry groups and individual companies
are like boats. When the economy expands, most industry groups and companies benefit and grow.
When the economy declines, most sectors and companies usually suffer. Many economists link
economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading
indicator for the stock market as well.

Below is a chart of the S&P 500 and the yield on the 10-year note over the last 30 years.
Although not exact, a correlation between stock prices and interest rates can be seen. Once a
scenario for the overall economy has been developed, an investor can break down the economy
into its various industry groups.


(Figure: 1- A chart of the S&P 500 and the yield on the 10-year note over the last 30 years)

7.2 Technical Analysis
In contrast to the efficient market hypothesis or fundamental analysis, technical analysis
involves the examination of past data like prices and volume of trading, which leads to an
estimation of future price trends and there of an investment decision. Technical analysis don’t
require any analysis of the multitude of economic, industry and company variables to arrive at an
estimate of future value because they believe that past price movements will signal future price
movements.

7.2. a Underlying assumptions of technical analysis
1. The market value of any goods and service is determined solely by the interaction of supply and
demand
2. Supply and demand is governed by numerous factors, both rational and irrational.


3. Disregarding minor fluctuations, the prices for individual securities and the overall value of the
market tend to move in trends, which persists for appreciable length of time
4. Prevailing trends change in reaction to shifts in supply and demand relationships. These shifts,
no matter why they occur can be detected sooner or later in the action of the market itself.

7.2.

b

The

main

considerations

in

Technical

Analysis

Price: Changes in price reflect in investor attitudes and demand and supply of
securities.
Time: The degree of movements in price is a function of time. The longer it takes for a reversal
in trend for instance, the greater the price changes that would follow.
Volume: The intensity of price changes is reflected in the volume transactions that accompany
the changes. An increase is not strong enough.
Breadth: Study of Breadth of market indicators, the extent to which the price changes have
taken place in the market in accordance with a certain overall limit.

8.0 Research Methodology:

8.1 Research Design:
Source of Data
Both the primary as well as the secondary form of data was used to prepare the report. The details
of these sources are highlighted below:
8.1. a Primary Sources


Major sources of primary information were discussions with Mr. Wahiduzzaman and Md.
Bahaudding Saad, Dealers of global markets.
8.1.b Secondary Sources
Secondary information was collected from relevant documents and literature, HSBC Internet
web sites, ABC guide to foreign exchange, treasury.
Other secondary sources were books on foreign exchange and treasury back office stuffs.

8.2 Data Collection
For data collection I have interviewed dealers of global markets and also the treasurer of global
market. I have asked them many questions about my related topics. Some questions are:
•

What are the operations of Global Markets?

•

What are the main purposes of Treasury?

•

What are the Treasury products HSBC is using right now?

•

What are the forecasting techniques of foreign exchange market?

•

What are the Basic for technical analysis?

8.3 Data Analysis
Here are some Forecasting Techniques followed by HSBC in their Foreign Exchange Markets:
8.3.1 Technical Analysis Basics

8.3.1. a Rationale
–Examination of the past price movements to forecast future movements
–Price Discounts Everything

–Price Movements are not Totally Random
–What is More Important than Why
–Discipline – divorce yourself from emotions
– Volume for Stock, Open Interest & volume for Futures

8.3.1. b Types of Charts
•

Line,

•

Bar,

•

Candle,

•

Points & Figure Etc

(Figure: 2- Types of charts used in forecasting)

8.3.1. c Candle Chart

HIGH

Close

Open

Upper Shadow
Real
Body
Lower Shadow

Close

Open
Bull
Candle

LOW

Bear
Candle

Candle Chart – High visual impact
•
Mostly used for identifying short term trend reversals
•
Must be used in conjunction with other indicators


(Figure: 3- A price chart that displays the high, low, open, and close for a security each day over a
specified period of time)

8.3.1. d Why Use Candle charts
“Make use of your opportunities.” (Japanese proverb)
The candlestick techniques we use today originated in the style of technical charting used by the
Japanese for over 100 years before the West developed the bar and point-and-figure analysis
systems. In the 1700s a Japanese man named Homma, a trader in the futures market, discovered
that, although there was a link between price and the supply and demand of rice, the markets were
strongly influenced by the emotions of the traders. He understood that when emotions played into
the equation a vast difference between the value and the price of rice occurred. This difference
between the value and the price is as applicable to stocks today as it was to rice in Japan centuries
ago. The principles established by Homma are the basis for the candlestick chart analysis, which is
used to measure market emotions towards a stock.
This charting technique has become very popular among traders. One reason is that the charts
reflect only short-term outlooks--sometimes lasting less than eight to 10 trading sessions.
A big difference between the bar charts common in North America and the Japanese candlestick
line is the relationship between opening and closing prices. We place more emphasis on the
progression of today's closing price from yesterday's close. In Japan, chartists are more interested
in the relationship between the closing price and the opening price of the same trading day.


8.3.2 Followings are some other Forecasting Techniques in which I have shown the calculations
of forecasting foreign exchange rates and also based on the result I made recommendation for
HSBC which they can be used instead of their current method:

Moving Average:
In the moving average method, we use the most recent n data values in the time series as the
forecast for the next period. Mathematically, the moving average calculation is made as follows:
Moving Average=∑ (most recent n data values)/n
The term “moving” is used because every time a new observation becomes available for the time
series, it replaces the oldest observations, and a new average is computed. The average changes, or
moves, as new observations become available.
(See Appendix: 4- Calculation of moving average)

Exponential Smoothing Average:
Exponential smoothing uses a weighted average of past time values as the forecast, it is special
case of the weighted moving averages method in which we select only one weight-the weight for
the most recent observation. The weights for the other data values are computed automatically and
become smaller as the observations move farther into the past. The basic exponential smoothing
model follows:
Exponential Smoothing Average, F (t+1)=∞Yt+(1-∞)Ft
Where,
F (t+1) =forecast of the time series for period t+1
Yt =actual value of the time series in period t


Ft=forecast of the time series for period t
∞=smoothing constant (0≤∞≤1)
Or we can use the simplified form,
F(t+1)=0.2Yt+0.8Ft
(See Appendix: 5- Calculation of exponential smoothing average)

Seasonal Variation:
Seasonal variation is the patterns of change in a time series within a year. These patterns tend to
repeat themselves each year.
The third component of a time series is the seasonal component. Many sales, production, and
other series fluctuate with the seasons. The unit of time reported is either quarterly or monthly.

Almost all businesses tend to have recurring seasonal patterns. Men’s and boys’ clothing, for
example, have extremely high sales just prior to Christmas and relatively low sales just after
Christmas and during summer.

In the following Graph I will show you the comparison between different forecasting rate with
the actual market rate (See appendix: 7):


Comparison Of different Forecasted rate with the Actual Market rate
73
72
71
Rate

70
69
68
67
66
65
1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19

Moving
average
forecast
Centered
moving
average
Exponential
Smothing
Forcast (Ft)
Actual
Market Rate

Month

(Figure: 4-Comparison of different forecasted rates with the actual market rate)

Among the three forecasting techniques, I think the moving average technique is the most
appropriate, because from the graph you can see that among the three techniques the moving
average techniques has the least spread than the other techniques compared to the actual
forecasting techniques.
And also from the mean calculation(See-Appendix: 7),we can see that the spread between
Moving Average method and the Actual Market rate is the least, which is 0.116172778,and it is
the closest amongst the other methods. So, I can suggest HSBC to use the moving average
method if they wants to change their current Forecasting Method.

9.0 Discussion
9
.1 Business utilization of technical analysis
9.1.1 Bangladesh inter-bank Foreign Exchange Market

9.1.1. a Inter-Bank Transaction in Foreign Exchange
The volume of inter-bank foreign exchange transaction maintained a downward trend till year
2006 but started to move upward from the year 2006. In year 2006-2007, the inter-bank
transactions in foreign exchange were totaled US$13,705,791.14, which has increased by
6,709,141.064 compared with the preceding year total US$ 6,996,650.076 (See appendix 1).
Total transactions in the inter-bank foreign exchange market from the year 2002-2007 were given
into a graph as under:

Figure in US Dollar

Total Transaction from year 2002-2007
16000000
14000000
12000000
10000000
8000000
6000000
4000000
2000000
0

Volume in
USD/ BDT

02-03

03-04

04-05

05-06

06-07

Year

(Figure: 5- Yearly transaction from the year 2002-2007)

Monthly position of inter-bank transactions was uneven over the period due to unpredictable
demand and supply position in the inter-bank market.

Month-wise position of inter-bank transaction in foreign exchange for last twelve months is
given below in a graphical form. It appears from the graph that the highest transaction took place in
June-July 2007, over the last 12 months period (see appendix 2).

Amount (equivalent in
US Dollar)

Monthly Position of Inter-Bank Transactions
20000000
1
8000000
1
6000000
1
4000000
1
2000000
1
0000000
8000000
6000000
4000000
2000000
0
Sep06

Oct 06

Nov06

Dec06

Jan-07

Feb07

M ar07

Apr07

M ay- Jun-07 Jul-07
07

Aug07

Sep07

M onth

(Figure: 6- Month to Month Inter-Bank Transaction in Foreign Exchange)

Inter-bank foreign exchange transactions have been going on smoothly despite declining the
trend of transaction volume from July 2007. The transactions equivalent in million U.S.
Dollar in the inter-bank foreign exchange market during July-Sept, 2007 were the followings17914318.18, 16027368.42, and
10396500(equivalent in US Dollar), from which we can see very easily that the transaction
volume is declining month by month.

9.1.1. b Quarterly transactions of USD/BDT and Other FCY/BDT Transaction
FCY/BDT Market has experienced much unsteady condition over the period in current year.
The volume of other FCY/BDT transactions incredibly increased during second quarter, the
amount equal to 1478914.474, and after that during third and forth quarter it again declined and
reach almost to its earlier position.


On the other hand, USD/BDT transactions decreased from 13738515.63 to 10706875 during
the second quarter, but after that it again started moving upward and reached to15385873.02
during the fourth quarter (see appendix 4).
This is happened mainly due to supply of U.S. Dollar in the inter-bank forex market and price
hike of importable products like petroleum & petroleum products and other essential commodities
in the international market. A comparative position showing quarterly movement of USD/BDT and
other FCY/BDT transactions for the current year is given in graph:

Q uarte rly mo v e me nt o f uS D/
BDT a nd o the r FC Y/
BDT
Tra ns a c tio ns ( Vo lume )
1
8000000
1
6000000
1
4000000
1
2000000
1
0000000

USD/ BDT Tr ansact ion

8000000

FCY/ BDT Tr ansact ion

6000000
4000000
2000000
0

1 Quarter
st

2nd Quarter

3rd Quarter

4th Quarter

Quart e rs o f y ear 2 0 0 6- 2 0 0 7

(Figure: 7- Quarterly transactions of USD/BDT and Other FCY/BDT Transaction in the interbank markets)
The volume of BDT trades against USD decline during the second quarter due to the higher
demand of import payments as well as the official rate declared against the USD/BDT by the
central bank. According to the official sources from Central Bank USD/BDT rates are 68.61 taka
(as of Nov 07) whereas the underlying rates of BDT against FCY reaches Tk69.50. Comparing
average TT clean buying rates of the commercial banks operated into this market stands at 68.80
on 15Nov06 and selling rates at 69.80 (refers appendix 6). The difference between these 1..00 taka

between the official and actual markets rates insist the volume of FCY deals against BDT thus
originating more cross currency trading.

9.2 The use of Technical analysis in Bangladesh
The use of forecasting techniques can play major role in the increasing amount of transactions
into the inter-bank foreign exchange markets in the third currency. The reasons underlying these
transactions are mainly the Spot currency speculations as well as the obligations arise from the
imports and governments payments.
In order to

minimize the risk and to gain the opportunity over the global currency markets the

introduction of the technical analysis help the speculators and give the importer or exporter the
opportunity to hedge their currency positions.

9.2.1 Importers point of views
If major trends can be identified in advance the dealers can advise the importer in advance to
cover the risk through forwards or even within the day transactions.
Suppose an importer opens a L/C of GBP1.00 million and the current market rate against GBP=
USD 2.0655 and USD= TK 68.6050. if the documents have to retire today the importer have to
pay Tk141.7036 million today.
But utilizing the technical analysis, if the major trends can be identified, the importer can hedge
their obligations as per the trend, i.e. if the trend is upward in both GBP/USD and USD/BDT,
hedge it today through spot of forward or if the trend in downward use the maximum period before
the payments due date.


9.2.2 Exporters point of views
Similar to an importer, if an exporter due to receive currency like GBP or USD against the
export documents, can position accordingly to the major outlooks of the underlying currency
he/she will receive.
In the current scenario in USD/BDT as the market is in favor of USD, the exporter should try to
lag his/her export proceeds in order to get deprecated rates over Taka.

10.0 Significance of the Study
The foreign exchange market has played a vital role in the last decade or so in guiding the
purchase and sale of goods, services and raw materials globally. The market directly affects
country’s bond, equities, private property, manufacturing and all assets that are available to foreign
investors. The market is a stabilizing factor in the world system of monetary exchange and was
created not by design but by necessity.
Foreign exchange rates also play a major role in determining who finances government deficits,
which buys equities in companies and literally effects and influences the economic scenario of
every nation to cope with the foreign exchange risk in an open market economy. The market has its
own momentum and therefore it is crucial to follow a universal time tested policy to tackle the
forces behind the free market system with minimal risk involvement.
The research will draw various forecasting techniques in the foreign exchange market, basics of the
technical analysis, business utilization of the technical analysis and also the utilization of the
technical analysis in Bangladesh.


And finally the research has also described about some of the mistakes made in the forex markets
and also some techniques to avoid the mistakes in the forex markets which the dealers apply while
doing their works.

11.0 Risks Involved in foreign exchange
On the foreign exchange market one discerns the following kinds of the risks:
•

Exchange rate risk;

•

Interest rate risk;

•

Credit risk;

•

Country risk.

11.1. Exchange Rate Risk
Exchange rate risk is a consequence of the continuous shift in the worldwide market supply and
demand balance on an outstanding foreign exchange position. A position will be a subject to all the
price changes as long as it is outstanding. In order to cut losses short and ride profitable positions
that losses should be kept within manageable limits. The most popular steps are the position limit
and the loss limit. The limits are a function of the policy of the banks along with the skills of the
traders and their specific areas of expertise. There are two types of position limits: daylight and
overnight.
1. The daylight position limit establishes the maximum amount of a certain currency which a trader
is allowed to carry at any single time during.
The limit should reflect both the trader's level of trading skills and the amount at which a trader
peaks.

2. The overnight position limit which should be smaller than daylight limits refers to any
outstanding position kept overnight by traders. Really, the majority of foreign exchange traders do
not hold overnight positions.
The loss limit is a measure to avoid unsustainable losses made by traders; which is enforced by
the senior officers in the dealing center. The loss limits are selected on a daily and monthly basis
by top management.
The position and loss limits can now be implemented more conveniently with the help of
computerized systems which enable the treasurer and the chief trader to have continuous,
instantaneous, and comprehensive access to accurate figures for all the positions and the profit and
loss. This information may also be delivered from all the branches abroad into the headquarters
terminals.
Trading 106
11.2. Interest Rate Risk
Interest rate risk is pertinent to currency swaps, forward out rights, futures, and options. It refers
to the profit and loss generated by both the fluctuations in the forward spreads and by forward
amount mismatches and maturity gaps among transactions in the foreign exchange book. An
amount mismatch is the difference between the spot and the forward amounts. For an active
forward desk the complete elimination of maturity gaps is virtually impossible. However, this may
not be a serious problem if the amounts involved in these mismatches are small. On a daily basis,
traders balance the net payments and receipts for each currency through a special type of swap,
called tomorrow/next or rollover.


To minimize interest rate risk, management sets limits on the total size of mismatches. The
policies differ among banks, but a common approach is to separate the mismatches, based on their
maturity dates, into up to six months and past six months. All the transactions are entered in
computerized systems in order to calculate the positions for all the delivery dates and the profit and
loss. Continuous analysis of the interest rate environment is necessary to forecast any changes that
may impact on the outstanding gaps.

11.3. Credit Risk
Credit risk is connected with the possibility that an outstanding currency position may not be
repaid as agreed, due to a voluntary or involuntary action by a counter party. In these cases, trading
occurs on regulated exchanges, where all trades are settled by the clearing house. On such
exchanges, traders of all sizes can deal without any credit concern.

The following forms of credit risk are known:
1. Replacement risk which occurs when counter parties of the failed bank find their books
unbalanced to the extent of their exposure to the insolvent party. To rebalance their books, these
banks enter new transactions.
2. Settlement risk which occurs because of different time zones on different continents. Such a
way, currencies may be credited at different times during the day. Australian and New Zealand
dollars are credited first, then Japanese yen, followed by the European currencies and ending with
the U.S. dollar. Therefore, payment may be made to a party that will declare insolvency (or be
declared insolvent) immediately after, but prior to executing its own payments.


The credit risk for instruments traded off regulated exchanges is to be minimized through the
customers' creditworthiness. Commercial and investment banks, trading companies, and banks'
customers must have credit lines with each other to be able to trade. Even after the credit lines are
extended, the counter parties’ financial soundness should be continuously monitored. Along with
the market value of their currency portfolios, end users, in assessing the credit risk, must consider
also the potential portfolios exposure. The latter may be determined through probability analysis
over the time to maturity of the outstanding position. For the same purposes netting is used.
Netting is a process that enables institutions to settle only their net positions with one another not
trade by trade but at the end of the day, in a single transaction. If signs of payment difficulty of a
bank are shown, a group of large banks may provide short-term backing from a common reserve
pool.
Successful Trading 108
11.4. Country Risk
The failure to receive an expected payment due to government interference amounts to the
insolvency of an individual bank or institution, a situation described under credit risk. Country risk
refers to the government's interference in the foreign exchange markets and falls under the joint
responsibility of the treasurer and the credit department. Outside the major economies, controls on
foreign exchange activities are still present and actively implemented.
For the traders it is important to know or be able to anticipate any restrictive changes concerning
the free flow of currencies. If this is possible, though trading in the affected currency will dry up
considerably, it is still a manageable situation


12.0 Recommendation
Followings are some methods of avoiding foreign exchange risks:
•Don’t read the news-analyze the news: Many times, seemingly straight forward news
releases from government agencies are really public relation vehicles to advance a
particular point of view or policy. Such “news,” in the forex markets more than any other,
is used as a tool to affect the investment psychology of the crowd. Such media
manipulation is not inherently a negative. Governments and traders try to do that all the
time. The new forex trader must realize that it is important to read the news to assess the
message behind the drums.

•Don’t trade surges: A price surge is a signature of panic or surprise. In Reproduction or use
of the text or pictorial content in any manner without written permission is prohibited.
Copyright 2002 by Futures Magazine Group, 250 S. Wacker Dr., Suite 1150, Chicago, IL
60606 these events, professional traders take cover and see what happens. The retail trader
also should let the market digest such shocks.

Trading during an announcement or right before, or amid some turmoil, minimizes the odds
of predicting the probable direction. Technical indicators during surge periods will be
distorted. You should wait for a confirmation of the new direction and remember that price
action will tend to revert to pre-surge ranges providing nothing fundamental has occurred.

• Simple is better: The desire to achieve great gains in forex trading can drive us to keep
adding indicators in a never-ending quest for the impossible dream.

Similarly, trading with a dozen indicators is not necessary. Many indicators just add redundant
information. Indicators should be used that give clues to:1) trend direction, 2) resistance, 3) support
and 4) buying and selling pres sure.

13.0 Conclusion
Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental
analysts consider the market to be 20% psychological and 80% logical. It may be open for debate,
but there is no questioning on the current price. After all, it is available for all to see and nobody
doubts its legitimacy. The price set by the market reflects the sum knowledge of all participants,
and we are not dealing with lightweights here. These participants have considered (discounted)
everything under the sun and settled on a price to buy or sell. These are the forces of supply and
demand at work. By examining price action to determine which force is prevailing, technical
analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it
going?

Even though there are some universal principles and rules that can be applied, it must be
remembered that technical analysis is more a practitioner’s things form than a science. As over
time form, it is subject to interpretation. However, it is also flexible in approach and each trader
should use only that which suits his/her style. Developing a style takes time, effort and dedication,
but the rewards can be significant.


Today's markets are incredibly volatile. Plus, thousands competing against HSBC who are
constantly looking for an "edge". The market risk is very real, and can be daunting if HSBC is not
prepared. That's why need a trading strategy that will help to reduce risk and ensure reward.


Reference
•

Bangladesh Bank, Foreign Exchange Guidelines, Bangladesh Bank, Dhaka

•

Bangladesh

Bank,

Circular

No.

17

,

http://www.bangladeshbank.org/pressrl/circulars/brpd/oct0703brpd17.html
•

Core Risk Management - http://www.bangladesh-bank.org/pressrl/corerisks/ferisks.pdf

•

Economic Development- Author Michael P Todaro and Stephen C Smith

•

Bangladesh Foreign Exchange Dealers Association (Bafeda) , Quarterly and Daily Forex
Market Reviews

•

Investment Analysis and Portfolio Management - Frank K Reilly and Keith C Brown

•

Technical Analysis in the Foreign Exchange Market: A Layman's Guide
Capital investment and financial decisions- Haim levy and Marshall Sarnat
http://www.technicalanalysis.org.uk/

•

www.wikipedia.com-definition-financial markets

•

www.wikipedia.com-foreignexchange market

•

www.google.com- definition of forex market-forex trading system, market, trade, foreign
currency and exchange trading

•

ABC guide to foreign exchange, HSBC, Global markets

•

www.google.com- introduction to forex

•

wikipedia-deinition-technical analysis

•

Statistics for Business and Economics- Anderson, Sweeney, Williams-Sixth Edition.

•

Statistical Techniques in Business & Economics- Lind, Marchel, Mason- Eleventh
Edition

Appendix
Appendix1: Inter-Bank Transaction in Foreign Exchange on Yearly Basis:
Calendar
Year
02-03
03-04
04-05
05-06
06-07

Total transactions
(Spot and Forward-equivalent in US Dollar)
11,574,579.44
10,754,685.92
8,590,738.175
6,996,650.076
13,705,791.14

Appendix 2: Month to Month Inter-Bank Transaction in Foreign Exchange:

Month
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07

Amount(Equivalent in US
Dollar)
13,673,250
9,867222.222
8,601,500
13,885,833.33
12,730,526.32
13,128,947.37
14,814,868.42
13,628,571.43
14,623,809.52
17,905,238.1
17,914,318.18
16,027,368.42
10,396,500


Appendix3: Quarterly transactions of USD/BDT and Other FCY/BDT Transaction in the interbank markets:
Quarters of year
July2006USD/BDT
Jun2007
Transaction
1st Quarter
13738515.63
2nd Quarter
10706875
3rd Quarter
13558114.04
4th Quarter
15385873.02

FCY/BDT Transaction
746,640.625
1,478,914.474
677,216.4388
675,238.0952

Appendix 4: Summary of 23 months Moving Average Calculations:
Summary of the 12 months moving average calculation
Month
January-06
February-06
March-06
April-06
May-06
June-06
July-06
August-06
September-06
October-06
November-06
December-06
January-07
February-07
March-07
April-07
May-07
June-07
July-07
August-07
September-07
October-07

Daily market
Rate
68.65492
70.23846
72.13497
70.63066
69.89733
70.2956
70.37398
70.18733
68.33639
67.58447
71.76473
70.11912
70.26637
69.4276
69.21849
69.28277
69.3557
69.24568
68.9061
69.00869
69.33975
69.423

Moving
forecast

70.34278333
71.00136333
70.88765333
70.27453
70.18897
70.28563667
69.63256667
68.70273
69.22853
69.82277333
70.71674
69.93769667
69.63748667
69.30962
69.28565333
69.29471667
69.16916
69.05349
69.08484667

average
Forecast error

Squared
error

0.287876667
-1.104033333
-0.592053333
0.09945
-0.00164
-1.949246667
-2.048096667
3.062
0.89059
0.443596667
-1.28914
-0.719206667
-0.354716667
0.04608
-0.039973333
-0.388616667
-0.16047
0.28626
0.338153333

0.082872975
1.218889601
0.35052715
0.009890303
2.6896E-06
3.799562568
4.194699956
9.375844
0.793150548
0.196778003
1.66188194
0.517258229
0.125823914
0.002123366
0.001597867
0.151022914
0.025750621
0.081944788
0.114347677


forecast

November-07

69.57957

69.25714667

0.322423333

0.103956806

5. Summary of the 15 months exponential smoothing average calculation:

Summary of the 15 months exponential smoothing average calculation
Forecast
Month
Rate (Yt) Exponential Smoothing Forecast (Ft)
Error
68.6549
Jan-06

2
70.2384

Feb-06

6
72.1349

68.65492

1.58354

Mar-06

7
70.6306

68.971628

3.163342

Apr-06

6
69.8973

69.6042964

1.0263636

May-06
Jun-06

3
70.2956
70.3739

69.8096
69.82718

0.08773
0.46842

Jul-06

8
70.1873

69.9209

0.45308

Aug-06

3
68.3363

70.0115

0.17583

Sep-06

9
67.5844

70.0467

-1.71031

Oct-06

7
71.7647

69.7047

-2.12023

Nov-06

3
70.1191

69.2807

2.48403

Dec-06
Jan-07

2
70.2663

69.7775
69.8458

0.34162
0.42057


Feb-07

7
69.4276
69.2184

69.92994

-0.50234

Mar-07

9
69.2827

69.8295

-0.61101

Apr-07
May-07

7
69.3557
69.2456

69.707298
69.6223924

-0.424528
-0.2666924

Jun-07

8

69.56905392

-0.32337392

6. Summary of the 12 months Seasonal irregular values:
Summary of the 12 months Seasonal irregular values
Four quarter Four
quarter
Year
Quarter
Rate
total
moving average
70.3427
2006
1
8
70.2745
2
3
69.6325 280.072653
3
7
3
70.01816333
69.8227 279.367356
4
7
7
69.84183917
69.6374 278.387543
2007
1
9
3
69.59688583
69.2947 277.839823
2
2
3
69.45995583
69.0848
3
5

Centered
moving average

SeasonalIrregular Value

69.9300013

1.001260719

69.7193625

1.00175671

69.5284208

1.000984705

7. Comparison of Different forecasted rates with the Actual Market rate:

Month
Jan-06
Feb-06
Mar-06
Apr-06

Comparison of Different forecasted rates with the Actual Market rate
Moving average Centered moving Exponential Smoothing Actual Market
forecast
average
Forecast (Ft)
Rate
68.65492
68.65492
70.23846
68.971628
72.13497
70.34278333
69.6042964
70.63066

May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Mean-

71.00136333
70.88765333
70.27453
70.18897
70.28563667
69.63256667
68.70273
69.22853
69.82277333
70.71674
69.93769667
69.63748667
69.30962
69.28565333
69.95031556

69.93000125
69.93000125
69.93000125
69.7193625
69.7193625
69.7193625
69.52842083
69.52842083
69.52842083

69.72592819

69.8096
69.82718
69.9209
70.0115
70.0467
69.7047
69.2807
69.7775
69.8458
69.92994
69.8295
69.707298
69.6223924
69.56905392
69.65374169

69.89733
70.2956
70.37398
70.18733
68.33639
67.58447
71.76473
70.11912
70.26637
69.4276
69.21849
69.28277
69.3557
69.24568
69.83414278

8. Exchange rates of Commercial Banks to public for Us Dollar

SL.
No. Name of Bank

U. S. Dollar
Spot Buying
Spot Selling
O.D.Sight O.D.
T.T. & B.C.
Exp. Bills Transfer O.D.

1

68.0000 67.7500 68.9200 68.9700

2
3
4
5
6
7
8
9

T.T.
Clean
68.020
Agrani Bank
0
68.550
Al-Arafah Islami Bank Limited
0
69.050
Arab Bangladesh Bank Limited
0
68.070
Bangladesh Krishi Bank
0
68.020
Bangladesh Shilpa Bank
0
68.550
BASIC Bank Limited
0
68.950
Bank Asia Limited
0
68.750
BRAC Bank Limited
0
Citibank, N.A.
68.900

68.4705 68.3900 69.6300 69.6500
68.9500 68.5332 69.9400 69.9900
68.0500 67.8300 68.9500 69.0000
68.0000 67.7400 68.9200 68.9700
68.4000 68.3000 69.5700 69.6000
68.9069 68.4674 69.9000 69.9500
68.7264 68.7130 69.7000 69.7400
68.8700 68.6656 69.9200 69.9500


10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31

0
Commercial Bank of Ceylon 68.900
Ltd.
0
68.890
Dhaka Bank Limited
0
68.720
Dutch-Bangla Bank Limited
0
68.850
Eastern Bank Limited
0
68.550
EXIM Bank Limited
0
68.050
First Security Bank Limited
0
68.300
Habib Bank Limited
0
68.883
HSBC Limited
7
68.694
IFIC Bank Limited
5
Islami
Bank
Bangladesh 68.500
Limited
0
68.020
Janata Bank
0
68.600
Jamuna Bank Limited
0
68.700
Mercantile Bank Limited
0
68.700
Mutual Trust Bank Limited
0
68.500
National Bank Limited
0
68.900
NCC Bank Limited
0
68.634
ONE Bank Limited
0
68.900
Prime Bank Limited
0
68.450
Pubali Bank Limited
0
68.250
Rupali Bank Limited
0
68.850
Shahjalal Islami Bank Limited
0
Social
Investment
Bank 68.900

68.8732 68.7641 69.9150 69.9450
68.7369 68.4681 69.8200 69.8800
68.6265 68.0786 69.7000 69.7500
68.7429 68.3910 69.8700 69.9000
68.4500 68.3539 69.4700 69.5000
67.8650 67.5150 69.2000 69.2500
68.4600 68.6200 69.4700 69.5000
68.8795 68.6705 69.9206 69.9447
68.5075 68.1335 69.4775 69.5075
68.4500 68.2500 69.4500 69.5000
68.0000 67.7400 68.9200 68.9700
68.4105 68.1732 69.6750 69.7000
68.5000 68.2592 69.6500 69.7000
68.4023 68.1790 69.6700 69.7000
68.4100 68.1600 69.4500 69.5000
68.8000 68.7000 69.8500 69.9000
68.6022 68.2147 69.5500 69.6000
68.7124 68.4981 69.8500 69.9000
68.3500 68.3000 69.4500 69.5000
68.2000 68.0000 69.2300 69.2500
68.6626 68.2074 69.8600 69.9000
68.7401 68.1912 69.7500 69.8000


Limited
32
33
34
35
36
37
38
39
40
41
42

0
68.020
Sonali Bank
68.0000
0
68.750
Southeast Bank Limited
68.5500
0
68.900
Standard Bank Limited
68.8001
0
68.900
Standard Chartered Bank
68.8770
0
68.650
State Bank of India
68.6175
0
68.900
The City Bank Limited
68.8062
0
67.800
The Oriental Bank Limited
67.6995
0
68.050
The Premier Bank Limited
67.8912
0
68.950
The Trust Bank Limited
68.8500
0
United Commercial Bank 68.850
68.7500
Limited
0
68.440
Uttara Bank Limited
68.3403
0
Average
68.5908 68.4985

67.7400 68.9200 68.9700
68.1000 69.6500 69.7500
68.7003 69.8600 69.9000
68.8311 69.9200 69.9500
68.3700 69.6500 69.7000
68.4558 69.7800 69.8500
67.5682 68.8500 68.9000
67.7551 69.2000 69.2500
68.5500 69.8000 69.8500
68.5900 69.8200 69.8500
68.1350 69.4500 59.5000
68.2631 69.5607 69.3664


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