Foreign Exchange Market

KARISHMA SHARMA (2K12A27)

ANUJ GARG (2K12A13)
ANKIT SAPRA (2K12A55)
GUNJA KUMARI (2K12A22)
J PRATEEK KUNDU (2K12A26)
SHRUTIKA DHAWAN (2K12A53)

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

Cntd .
It also refers to the stock of foreign currencies
and other foreign assets. The foreign exchange
management ACT 1999 defines Foreign
exchange means foreign currency and includes
(a) Deposits credits and balances payable in any
foreign currency.
(b) Draft travelers cheques, letter or credit or
bills of exchange expressed or drawn in Indian
currency but payable in any foreign currency.
(c) Drafts travelers cheques, letter of credit or
bills of exchange drawn by banks, institution or
persons outside India, but payable in Indian
currency

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

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.

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.

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.

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.

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.

The Foreign Exchange Market for

Beginners
The

foreign exchange market or forex market as it is

often called is the market in which currencies are traded.
Currency Trading is the worlds largest market consisting
of almost trillion in daily volumes and as investors learn
more and become more interested, market continues to
rapidly grow.
All trades that take place in the foreign exchange
market involve the buying of one currency and the
selling of another currency simultaneously. This is
because the value of one currency is determined by its
comparison to another currency.
The first currency of a currency pair is called the base
currency, while the second currency is called the
counter currency.

Contd.
Foreign

exchange Capital Markets (FXCM)

is an online currency trading firm that offers
a free demo account to traders who are new
and interested in the foreign exchange
market.
Registering for a demo account allows a
new trader to download the
online trading platform that is used by the
companys clients trading live accounts and
make trades as if they were doing it with
real money.

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.

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.

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.

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

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.

Top 10 Currency Traders as on May

2012 are

CURRENCY TRADING RULES

PLAN YOUR TRADE AND TRADE YOUR
PLAN.
THE TREND IS YOUR FRIEND.
FOCUS ON CAPITAL PRESERVATION.
KNOW WHEN TO CUT LOSS.
TAKE PROFIT WHEN THE TRADE IS
GOOD
BE EMOTIONLESS.
NOT TRADE BASED ON A TIP FROM A
FRIEND OR BROKER.

Mistakes of Foreign exchange

Traders
Trading

Out of Boredom or Anger

Having Unrealistic Expectations.
Taking Highly Correlated Trades.
Failing to Use a Stop.
Taking Unnecessary Risks.
Being Too Patient With Losers and Not
Patient Enough With Winners.
Being a Possum Trader.