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THE FOREIGN EXCHANGE MARKET

Presented By Sanjay Yadav SMS, BUEST 12PBA 046

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Definition and Organization of the Foreign Exchange Markets Foreign Exchange Market Participants Foreign Exchange Market Functions Types of Foreign Exchange Transactions Determinants of Foreign Exchange Market FEMA

Foreign Exchange
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The system of converting one national currency into another, and of transferring money from one country to another.

Definition and Organization of the Foreign Exchange Markets


Forex Market is a place in which foreign exchange transactions taken place.

A market in which National Currencies are bought and sell against one another.
The Forex market is one of the largest market in the world. By some estimates , about 3.8 Trillion USD worth of currency changes every day.

Features of Foreign Exchange Market


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The Foreign Exchange Market is unique because of Trading volume results in market liquidity Geographical dispersion Continuous operation : 24 hours a day except weekend The use of leverages to enhance profit margins with respect to account size.

3. Foreign Exchange Market Participants


Individuals: Tourists & Migrants Firms: Exporters & Importers

Banks: Commercial & Central Banks

Governments & Monetary Authorities

International Agencies

Types of Foreign Exchange Market Transactions


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Spot Forward Swap Future Option

Spot Transactions
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Spot Transactions: A spot transaction is a two-day delivery transaction. This trade represents a direct exchange between two currencies, has the shortest time frame
almost immediate delivery of foreign exchange Forward Transactions buyer and seller establish the exchange rate at the time of the agreement, payment and delivery are not required until maturity forward exchange rates:
1, 3, 6, 9 months, one year

Swap Transactions
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In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date.
spot against forward swaps:
a annual swap rate (%), b premium/discount during the time of the currency swap, c spot exchange rate, and d - 1/part of the year, for which the currency swap is agreed upon (if the contract is valid for a three-month period, then this is one quarter of a year)

b a *d c

Futures Transactions
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Futures are standardized forward contracts and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

Functions of Forex Market


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Transfer of purchasing power Provision of credit Provision of hedging facilities


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Determinants of Foreign Exchange Market


Long-Term Factors Short Term Factors
Central Bank Interventions Export receipts & Import payments Foreign Direct Investment Political factors Speculations

Balance of payment Strength of Economy Interest Rate Inflation Money Supply National Income

Long Term Factors


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1.) Balance of payments: Surplus lead to stronger currency. 2.) Strength of economy : The relative strength of an economy has effect on demand and supply of foreign currencies. If an economy is growing at higher rate , in the long run, it is generally expected to have a better performance on balance of trade. 3.) Interest Rate : The capital is attracted towards currencies yielding higher interest rates, provided there is full currency convertibility in capital account.

Long Term Factors


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4.) Inflation: A higher rate of inflation will make a countrys currency less attractive because of the loss of real value with inflation. Hence, that currency would depreciate against major currencies. 5.) Money Supply : An increase in money supply will affect the exchange rate through which causing inflation in the country. It also affect the exchange rate directly in the short run. 6.) National Income : An increase in national income will lead to increase in investment or in consumption and accordingly it effect on the exchange rate will change.

Short Term Factors


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1.) Central Bank Interventions: Buying and selling of foreign currencies in the market by the central bank with the view to increasing the supply or demand, by affecting the exchange rate is known as intervention. 2.) Export receipts and Import payments 3.) Foreign Direct Investment 4.)Political factors: Factors like war, announcement of election result, increase in petrol rates etc. will cause the exchange rate fluctuations. 5.) Speculations : If a few big speculators start buying a currency at high price, others may follow and the demand of the currency may increase.

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FOREIGN EXCHANGE REGULATION ACT (FERA)1973

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FOREIGN EXCHANGE MANAGEMENT ACT(FEMA) 1999

FOREIGN EXCHANGE REGULATION ACT (FERA) 1973


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The FERA was enacted in September, 1973 and it came into force from 1st January, 1974. It was amended by the Foreign Exchange Regulation Act, 1993. This Act extends to whole of India and applies to all citizens of India. FERA was enacted to regulate foreign payments, dealings in foreign exchange and securities, conservation of foreign exchange resources of the nation and proper utilization thereof in the interest of economic

Objectives of fera
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1)

To regulate foreign payments.

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To regulate dealings in foreign exchange & foreign securities.


To regulate import and export of currency. TO regulate foreign companies. To regulate employment of foreign citizens in India. To ensure proper utilization of foreign exchange resources to promote economic development of the nation To regulate purchase of immovable property in India by non-residents and outside India by Indian residents.

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Main provisions of FERA


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Authorized Dealers Foreign Exchange Money Changer Restriction on Dealing in Foreign Exchange Restriction on Import and Export of any currency Regulation of Export and Transfer f Securities Restriction on Establishment of place of business in India. Restrictions on holding of immovable property outside India.

Foreign exchange management act (FEMA)


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FEMA was passed in the year 199 and was forced from 1st January, 2000.This Act has replaced Foreign Exchange Regulation Act. FEMA is more liberal in nature and conveys liberal attitude of Government towards foreign exchange transactions. Applicability of FEMA 1. It is applicable to whole India. 2. It also applies to all branches, offices and agencies outside India, owned or controlled by a person resident India.

Objectives of FEMA
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To facilitate external trade To facilitate external payments/receipts To promote the orderly development of foreign exchange in India.

Features of FEMA
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3) 4) 5) 6) 7) 8) 9) 10)

Dealing in foreign Exchange Holding of Foreign Exchange Current Account transactions Export of Goods & Services Authorized person Penalties Enforcement of penalty orders Appeal to Special Director Directorate of Enforcement Power to make rules

Enforcement Directorate
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FEMA head office is also known as Enforcement Directorate situated at Delhi and is headed by a director. The director is further divided into 5 zonal offices at Delhi, Bombay, Kolkata, Madras and Jalandhar and each office is headed by Deputy Director.

Conclusion
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Liquid Investment : Foreign Exchange market has the advantages of being extremely liquid. This means investor would be able to withdraw from their investment at any point of time easily. Foreign exchange market has a global market, which means searching for a buyer to purchase a particular currency which you are interested to sell is usually not a big problem. Conveniences : Foreign exchange currency trading is extremely convenient.

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