stock market description

1. FOREIGN EXCHANGE
MARKET
The foreign exchange
market is the place where
one currency is bought or
sold for another currency
12/15/12 lecture - 1, IFM III unit 1

2. BASIC CONCEPTS/TERMINOLOGIES
Foreign Currency vs. Foreign Exchange
As per Foreign Exchange Act, (Section 2), 1947.
•(c) "Foreign Currency" means any currency other than
Indian currency;
•(d) "Foreign Exchange" means includes any instrument
drawn, accepted, made or issued under clause (8) of
section 17 of the Banking Regulation Act, 1956, all
deposits, credits and balance payable in any foreign
currency, and any drafts, traveler’s cheques, letters of
credit and bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency;
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3. FOREIGN EXCHANGE MARKET
TYPES & PLAYERS
WHOLESALE MARKET
RETAIL MARKET OR
INTERBANK MARKET
COMMERCIAL BANKS
FOREX BROKERS
TRAVELLERS CENTRAL BANKS
TOURISTS MNCs
INDIVIDUALS AND SMEs
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4. PLAYERS
RETAIL MARKET
• THE TRAVELLERS AND TOURISTS
EXCHANGE ONE CURRENCY FOR
ANOTHER IN THE FORM OF
CURRENCY NOTES OR TRAVELLERS
CHEQUES.
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5. PLAYERS
WHOLESALE MARKET
• COMMERCIAL BANKS
– participates in foreign exchange on behalf
of their clients
- At retail level enters through inter bank
market or through specialized brokers.
- At bulk level enters through inter-bank
wholesale market or international banks
and brokers
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6. PLAYERS
WHOLESALE MARKET
• FOREX BROKERS
– They act as agents who facilitate trading
between dealers.
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7. PLAYERS
WHOLESALE MARKET
• CENTRAL BANKS
– Central banks frequently intervene in the
foreign exchange market to maintain the
exchange rate at desired level
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8. PLAYERS
WHOLESALE MARKET
• MNCs
– MNCs are participating in forward
exchange market
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9. PLAYERS
WHOLESALE MARKET
• INDIVIDUAL
– They took part in foreign exchange market
for their investment and commercial
activities
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10. PLAYERS
WHOLESALE MARKET
• INDIVIDUAL
– They took part in foreign exchange market
for their investment and commercial
activities
12/15/12 lecture - 1, IFM III unit 10

11. What is an Exchange Rate ?
Exchange Rate is the price of one
country's currency expressed in another
country's currency. In other words, the rate
at which one currency can be exchanged
for another.
e.g. Rs. 48.50 per one USD
Major currencies of the World
USD
EURO
YEN
12/15/12 lecture - 1, IFM III unit 11

12. What is a Foreign Exchange
Transaction ?
– Any financial transaction that involves more
than one currency is a foreign exchange
transaction.
– Most important characteristic of a foreign
exchange transaction is that it involves
Foreign Exchange Risk
12/15/12 lecture - 1, IFM III unit 12

13. Value Date Conventions
Currencies are traded both in Ready and
forward value dates.
1) Ready: Settlement on the deal date. e.g. India
2) Value Tom : Settlement on next day. e.g.
Canada
3) Spot Transaction : Settlement usually in two
working days.
In International FX transactions, Spot is the
Standard value date.
Forward Transaction: Settlement at some future
date ahead of the spot1, IFM III unit
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14. Price maker Vs. Price Taker
The bank quoting the price is ‘price maker’
or ‘market maker’.
The bank asking for the price or ‘quote’ is
the ‘price taker’ or ‘user’.
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15. FORWARD TRANSACTIONS
1. Out right sale/purchase of a currency against the
other for settlement at a future date at the
predetermined exchange rate.
2. Forward rates are quoted as premium or discount
over spot rate.
3. Forward rates depend upon interest rate
differential between the two currencies.
4. Currency with higher interest rates is at discount
wrt currency having lower interest rate.
5. Currency with lower interest rates is at premium
wrt currency having higher interest rate.
12/15/12 lecture - 1, IFM III unit 15

16. FX SWAP Transaction
“An FX swap is a contract to buy an amount
of currency for one value date at an agreed
rate, and to simultaneously resell the same
amount of currency for a later value date,
also at an agreed rate, to the same counter
party”.
FX swap is essentially a ‘funding’ or ‘Money
Market’ transaction and does not involve
exchange risk.
12/15/12 lecture - 1, IFM III unit 16

17. – Foreign exchange transactions are settled
through Nostro and Vostro accounts.
• Nostro: our account with banks abroad.
Reserve Bank of India (RBI) maintains
various Nostro accounts in a number of
countries.
• Vostro: their account with us. Many
multilateral agencies (e.g. IMF, World
Bank) maintain their Nostro accounts at
Reserve Bank of India (RBI).
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18. RBI’s Role in the Forex Market
• To manage the exchange rate
mechanism.
• Regulate inter-bank forex transactions and
monitor the foreign exchange risk of the
banks.
• Keep the exchange rate stable.
• Manage and maintain country's foreign
exchange reserves.
12/15/12 lecture - 1, IFM III unit 18

19. INTERVENTION
To keep exchange rate in line with macro
objectives RBI has to intervene from time to
time
Intervention is a process where FX is sold or
purchased to keep the right amount of
liquidity available in the FX market so that
demand / supply equilibrium is maintained
Intervention can be in READY or
FORWARD
12/15/12 lecture - 1, IFM III unit 19