FOREIGN EXCHANGE

SAINTGITS INSTITUTE OF
MANAGEMENT, KOTTAYAM

Presented By
Group Four
 GLOBAL FINANCIAL ENVIRONMENT


Indian Perspective


• 1990s- Globalization Decade

– Dismantled barriers to international trade and
capital flows.
– Shift in policies towards more open economy.
– Quantitative restrictions on imports phased out.
– Foreign Direct & Portfolio Investments.
– Unified market determined exchange rate.
– Current account convertibility.

GLOBAL FINANCIAL MARKETS


• US Dollar Market

• Japanese Yen Market

• Australian Dollar Market

• Sterling Market
 FOREIGN EXCHANGE MARKET


• Foreign exchange market is a place where the

currencies of different countries are bought and
sold against each other.


• Foreign exchange means a process of converting

one currency into another or foreign currencies.
•
• It includes foreign currency, drafts, bills, letters of
credit and travellers cheque.
 Uniqueness of Forex
The Forex market is unique because of:


• High trading volume

• Extreme liquidity of market
• Geographical dispersion
• Long trading hours
• Variety of factors affecting exchange rate
• Use of leverage
• Low margin but huge profits
•
 FUNCTIONS OF FOREIGN EXCHANGE MARKET

qTransfer of purchasing power

qProvision of credit

qProvision for hedging facilities

 PARTICIPANTS

 The participants in the foreign exchange include

ü Central Bank

ü Commercial Banks

ü Brokers

ü Corporations

ü Individuals


 CODES FOR SELECTED CURRENCIES

o INR- Indian Rupee

o USD- US Dollar
o GBP- Great Britain Pound
o JPY- Japanese Yen
o CAD- Canadian Dollar
o EUR- Euro
o CHF- Swiss Franc
o AUD- Australian Dollar
o SAR- Saudi Riyal
 Mechanism

ASK
Dealer A Dealer B
BID

ASK PRICE (OFFER PRICE): The price at which A

sells the currency to B

BID PRICE: The price at which B buys the currency.

 DEALINGS ON FOREX
Spot Exchange


It includes:


§ Spot Rate- Rate of exchange for spot

transactions
§ Spot Market- Transactions are completed on the
spot.

 FORWARD EXCHANGE
 It includes:
§ Forward Exchange- An agreement between 2
parties whereby the transactions are carried out
in a future date at a predetermined amount.
§ Forward Exchange Rate- The predetermined rate.
§ Forward Market- Market for forward
transactions.
 ARBITRAGE & HEDGING

o The simultaneous buying o To cover export risk.

and selling currencies o
in different markets.


oA forward contract
o It tends to equalize the
between exporters and
exchange rates importers against
between foreign losses arising from
exchange market. fluctuations in
• exchange rate.
•
 DETERMINANTS
Ø Demand & Supply
Ø Interest Rate Differentials
Ø Inflation rate Differentials
Ø Balance of Payment Position
Ø Government Intervention
Ø Market Expectations
Ø Overseas Investment
Ø Speculation
Ø Productivity of Economy
Ø


 THANK YOU