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foreign exchange market, currency trading, exchange rates
foreign exchange market, currency trading, exchange rates
The Foreign Exchange Market shivusira.webs.com Students career guide, part time job opportunities, life time income earning opportunities, mast fun and entertainment. Visit once and stay connected Foreign Exchange Market • The Foreign Exchange market, also referred to as the "Forex" or "FX" market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion — 30 times larger than the combined volume of all U.S. equity markets. • "Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). • Foreign Exchange Market:The market where one country’s currency is traded for another’s. International Foreign Exchange Market It is the oldest and largest financial market in the world—more than $1 trillion. – Participants: importers, exporters, traders, foreign exchange brokers, speculators, portfolio managers. – FEM is essentially OTC market: No central location – FEM has no central trading floor where buyers and sellers meet. – FEM extends from Tokyo and Sydney in the East to New York and San Francisco in the West. – Is open twenty-four hours a day, except for short gaps on weekends. – Global banks account for about two-thirds of the market volume, while foreign exchange brokers and dealers account for approximately 20 percent. – Speculative transactions account for more than 95 per cent of the turnover of FEM. Foreign Exchange Market in India • Very small market • Key participants: RBI, authorized Banks, and Business undertakings. • FEM in India is a Controlled market by RBI • Business undertakings can participate in the FEM in India only to the extent that they need cover for exchange exposure arising from merchant transaction (can not involve in speculative transactions) • Banks are permitted to have net overbought or oversold subject limits notified by the RBI. How a Foreign Exchange Transaction is Conducted Location of the Foreign Exchange Market 1. OTC-type: no specific location 2. Most trades by phone, telex, or SWIFT SWIFT: Society for Worldwide Inter-bank Telecommunications Financial Participants in the Foreign Exchange Market 1. Wholesale Level (95%) - major banks 2. Retail Level - business customers. Participants in the Foreign Exchange Market • Commercial & Investment Banks (―Inter-bank‖ market) – – – – amounts > $1m, typically $10m liquid market (vis-à-vis loans) with limited credit exposure for clients and themselves allows ―bit‖ players to economize on transactions costs • Central Banks – non-commercial motives – relatively small portion of trading volume – may intervene to address perceived economic/financial imbalances • Hedge Funds – partnership of high net-worth individuals – highly leveraged global investing – add liquidity, flexibility, and sometimes instability to FX markets • Corporations – mostly act through intermediaries • Individuals – tourists ~ insignificant volume • Intermediaries – Brokers – mostly service commercial banks and trading houses – anonymous – connected to many banks ~ shop for best price (exchange rate) • Direct Dealing – through dealing system – quotes valid for 20 sec. Exchange Control Regimes • Fixed Exchange Rate vis-à-vis One Currency (Official parity) – This was adopted under Bretton-woods Agreement in 1945 – allows ―bit‖ players to economize on transactions costs • Fixed Exchange Rate vis-à-vis a Basket – This system adopted after 1972 – A target parity for a basket of currencies was adopted – European Currency Unit (ECU) – Basket is revised every five years • Flexible Exchange Rates – Form 1996 most of the countries adopted Exchange Rates • Exchange Rate = Relative Price of Currencies • Exchange Rate: The price of one currency expressed in terms of another. • Direct Quote (Natural or Right Quote/American Terms): The exchange rate for a foreign currency is quoted in terms of the number of units of local currency that are equal to a unit of the foreign currency. (Rs.45 for one dollar) • dollar price of 1 unit foreign currency; $/FX1 = dollars per unit foreign exchange • used in futures market • Indirect Quote (Reverse or Left Quote/European Terms): The exchange rate for a foreign currency is quoted in terms of the number of units of foreign currency that are equal to a unit of the local currency. ($2.25 for Rs. 100) • foreign currency price of $; FX/$1 • used in Cash market. Most currencies quoted this way, except £ • Spot Exchange Rate: The rate applicable to transactions in which settlement (delivery) is made in two business days after the date of transaction. • Forward Exchange Rate: The exchange rate fixed today but the settlement is at some specified date in the future. How to Read a Currency Quote • • • • • Currency Pair Base Currency Quote Currency Bid Price Ask Price SIMPLE !! Foreign Exchange Exposure (Risk) • Foreign Exchange Risk: The risk that the value of a future receipt or obligation will change due to variations in foreign exchange rates. • Types of Foreign Exchange (Risk) Exposure – Transaction exposure – Translation exposure – Economic exposure (Operating) Types of Foreign Exchange Risk Exposure • Transaction Exposure: The risk that the revenues or costs associated with a transaction expressed in terms of the domestic currency changes due to exchange rate variations. • Translation Exposure: Foreign exchange risk resulting from the conversion of a firm’s foreigncurrency-denominated assets and liabilities into the domestic currency value. • Economic Exposure: The risk that changes in exchange values might alter today’s value of a firm’s future income streams Hedging Foreign Exchange Risk • Hedging: The act of offsetting or eliminating risk exposure. • Covered Exposure: A foreign exchange risk that has been completely eliminated with a hedging instrument. • Forward contract for foreign exchange • Derivative instruments Foreign Currency Accounts • Nostro Account (our account with you): The foreign currency account maintained by banks in India with banks aboard. • The currency of the account depends on the currency of the country where the account is maintained • All foreign exchange transactions are routed through Nostro accounts. • Maintenance of minimum balance is necessary. • It is just like current account • Vostro Account (your account with us): Foreign banks may open rupee accounts with Indian banks. • The account is also known as non-resident account. • Vostro Account (your account with us): Foreign banks may open rupee accounts with Indian banks. • The account is also known as non-resident account.
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