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Understanding Foreign Exchange Markets

This document provides an overview of foreign exchange and the global financial environment from an Indian perspective. It discusses the liberalization of India's economy in the 1990s, the global financial markets, the structure and uniqueness of the foreign exchange market, the functions and participants in the foreign exchange market, spot and forward exchange dealings, arbitrage and hedging, and the key determinants that influence exchange rates.

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16 views14 pages

Understanding Foreign Exchange Markets

This document provides an overview of foreign exchange and the global financial environment from an Indian perspective. It discusses the liberalization of India's economy in the 1990s, the global financial markets, the structure and uniqueness of the foreign exchange market, the functions and participants in the foreign exchange market, spot and forward exchange dealings, arbitrage and hedging, and the key determinants that influence exchange rates.

Uploaded by

lekshmi517
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© Attribution Non-Commercial (BY-NC)
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Download as PPTX, PDF, TXT or read online on Scribd

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

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