exchange markets

1. Foreign Exchange Market
Presented by
Sai kiran B
(12NA1E0036)

2. WHAT IS FOREIGN EXCHANGE
Foreign exchange is the mechanism by which
the currency of one country gets converted
into the currency of another country.
The conversion of currency is done by the
banks who deal in foreign exchange. These
banks maintain stocks of one currencies in the
form of balances with banks

3. Nature of foreign exchange
Volatile, affected by hedger, arbitrager, speculator.
Affected by demand and supply.
Affected by rate of interest.
Affected by balance of payment surplus and deficit.
Affected inflation rate.
Spot and forward rates are different.
Affected by the economic stability of the country.
Affected by the fiscal policy of the government.
Affected by the political condition of the country.
It can be quoted directly or indirectly

4. Operation of foreign exchange market:
Foreign exchange market operates either as:-
Spot Market: (Current Market)
Spot market for foreign exchange is that market which handles
only spot transaction or current transactions.
Principle characteristics:-
 Spot Market is of daily nature. It does not trade in future
deliveries.
 Spot rate of exchange is that rate which happens to prevail at the
time when transactions are incurred.

5. Forward Market:
Forward Market for foreign exchange is that market which handles
such transaction of foreign exchange as are meant for future
delivery.
Principles Characteristics:-
 It only caters to forward transaction.
 It determines forward exchange rate at which forward transaction
are to be honored.

6. Exchange Rate
►Fixed Exchange Rate System
Fixed rates provide greater certainty for
exporters and importers.
►Flexible Exchange Rate System
Flexible exchange rate or floating exchange
rates change freely and are determined by
trading in the forex market.

7. History of Foreign exchange
Foreign exchange history can be viewed as a
series of solutions that allowed countries to
issue their own currency and to conduct their
own monetary policy while also allowing
international trade to be conducted by
providing a means of exchanging one
currency for another according to the
exchange rate between them, which was
either agreed-upon or set by the market.

8. Exchange rate fluctuations
A reliable forecast or future spot rate is called
study of empirical patterns of exchange rate
fluctuation. It provides essential information
for an exchange rate exposure.

9. Characteristics of foreign exchange
☻ Its huge trading volume representing the
largest asset class in the world leading to high
liquidity.
☻ Its geographical dispersion;
☻ Its continuous operation: 24 hours a day
except weekends, i.e., trading from 20:15
GMT on Sunday until 22:00 GMT Friday.
☻The use of leverage to enhance profit and
loss margins and with respect to account size.

10. Retail Exchange Market
People may need to exchange currencies in
a number of situations.for Eg…
Fluctuations in exchange rates
A market based exchange rate will change
whenever the values of either of the two
component currencies change.
 The higher a country's interest rates, the
greater will be the demand for that currency.

11. Market Participants
Central banks participate in the foreign exchange
market to align currencies to their economic
needs.
Commercial companies
. Commercial companies often trade fairly small
amounts compared to those of banks or
speculators, and their trades often have little short
term impact on market rate.
Central bank
National central banks play an important role in
the foreign exchange markets. They try to control
the money supply, inflation, and/or interest rates
and often have official or unofficial target rates
for their currencies.

12. Measures Initiated to Develop the Foreign
Exchange Market in India
Institutional Framework
 Foreign Exchange Regulation Act (FERA),
1973 was replaced by the market friendly
Foreign Exchange Management Act (FEMA),
1999.
 Money and Securities Markets set up by the
Reserve Bank in 1999 was expanded in 2004
to include foreign exchange markets

13. FOREIGN EXCHANGE MARKET STRUCTURE
Market Segments
Foreign exchange market activity takes place
onshore with
Many countries prohibiting onshore entities
from undertaking the operations in offshore
markets for their currencies. It is the central
bank, or professional dealers association,
which normally issues the code of conduct
(Canales-Kriljenko, 2004).In auction markets,
an auctioneer or auction mechanism
allocates foreign exchange by matching
supply and demand orders.

14. Top 10 Currency Traders as on May 2014 are