PROJECT REPORT ON

EURO MARKET
IN PARTIAL TO FULFILLMENT OF
THE DEGREE AWARDED AT

M.COM PART II BANKING AND FINANCE

SEMESTER III
FINANCIAL MARKETS IN INDIA

SUBMITTED TO

UNIVERSITY OF MUMBAI
FOR ACADEMIC YEAR 2016-2017
SUBMITTED BY
NAME: SIDDHI PATIL
ROLL NO.: 16

VIVA COLLEGE OF ARTS COMMERCE AND SCIENCE

VIRAR (WEST)
401303

DECLARATION
I hereby declare that the project titled EURO MARKET is an original work
prepared by me and is being submitted to University of Mumbai in partial
fulfillment of M.COM- PART-II SEM III (BANKING & FINANCE) degree for
the academic year 2016-2017. To the best of my knowledge this report has not
been submitted earlier to the University of Mumbai or any other affiliated college
for the fulfillment of M.COM degree.

Date

Name

: Siddhi Patil

Place

Roll No.: 16

Signature:

ACKNOWLEGEMENT
I Siddhi Prakash Patil the student of VIVA college pursuing my M.COMBANKING AND FINANCE , would like to pay credits, for all those who helped
me making this project
The first in accomplishment of this project is our Principal DR.R.D.
Bhagat, Vice Principal Prof.Prajakata Paranjpe, Course Co-ordinator Prof.
Prajakata Parajpe & Guide Prof. Neeta Rath & teaching and non-teaching staff of
VIVA college.
I would also like to thanks all my college friends those who influenced my
project in order to achieve the desired result correctly.

INDEX
SR.NO

CONTENTS

PAGE
NO

1
2
3
4
5
6
7

Introduction
History
Definition
Euro currency Market
Euro Bonds Market
Benefits of Euro Market
Factors Contributing to the Growth of Euro

7
8
12
13
15
17
18

8
9
10

Market
Advantages of Euro Market
Disadvantages of Euro Market
Borrowing Instruments in the Euro Markets

20
21
22

11
12
13
14
15
16

Bank Claims
Characteristics of Euro Market
Factors Affecting Eurocurrency Market
Market Participants in Eurocurrency Market
Comparing Eurocurrency Market to Futures
Conclusion
Bibliography

23
25
27
30
32
33

INTRODUCTION
7

The euro (sign: ; code: EUR) is the official currency of the euro zone, which
consists

of

19

of

the

28 member

states

of

the

European

Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland,
Italy, Latvia,Lithuania, Luxembourg, Malta,the Netherlands, Portugal, Slovakia, Slove
nia, and Spain. The currency is also officially used by the institutions of the European
Union and four other European countries, as well as unilaterally by two others, and is
consequently used daily by some 337 million Europeans as of 2015. Outside of
Europe, a number of overseas territories of EU members also use the euro as their
currency.
Additionally,

210 million

people

worldwide

as

of

2013 use

currencies pegged to the euro. The euro is the second largest reserve currency as well
as the second most traded currency in the world after the United States dollar. As of
August 2014, with more than 995,000,000,000 in circulation, the euro has the highest
combined value of banknotes and coins in circulation in the world, having surpassed
the U.S. dollar Based on International estimates of 2008 GDP and purchasing power
parity among the various currencies, the euro zone is the second largest economy in
the world.
The name euro was officially adopted on 16 December 1995. The euro was
introduced to world financial markets as an accounting currency on 1 January 1999,
replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US$1.1743).
Physical euro coins and banknotes entered into circulation on 1 January 2002, making
it the day-to-day operating currency of its original members, and by May 2002 had
completely replaced the former currencies. While the euro dropped subsequently to
US$0.8252 within two years (26 October 2000), it has traded above the U.S. dollar
since the end of 2002, peaking at US$1.6038 on 18 July 2008. Since late 2009, the
euro has been immersed in the European which has led to the creation of the European
Financial Stability Facility as well as other reforms aimed at stabilizing the currency.
In July 2012, the euro fell below US$1.21 for the first time in two years, following
concerns raised over Greek debt and Spain's troubled banking sector. As of 21
September 2016, the eurodollar exchange rate stands at ~ US$1.1150.
HISTORY
8

The euro has been part of the financial landscape since 1 January 1999; it has been in
our pockets since 1 January 2002. The creation of the single European currency took
decades of preparation.
1957
Everything began with the Treaty of Rome, signed in 1957, which set the objective for
Europe of creating a "common market" to increase economic prosperity and contribute
towards "an ever closer union among the peoples of Europe". However, the treaty
makes no mention of economic and monetary union and the single currency.
1970
It is not until the Werner Report (end of 1970), that the European Community
considers a monetary union. The monetary turbulence of those days and the end of the
Bretton Woods agreements prevent the project from being carried out.
1985
The European Community adopts the project of a single European market.
It soon becomes apparent that this will be supplemented by a single currency.
1989
The Delors Report on Economic and Monetary Union proposes a three-stage plan
culminating in the creation of a single currency and a European central bank. It
triggers renewed discussion on the Treaty of Rome.

1992
9

The Maastricht Treaty transforms the European Community into a full Economic and
Monetary Union. The participants adopt a range of macroeconomic criteria which
must be respected in order to qualify for membership of the Monetary Union.
1995
The formal undertakings given by the 15 Member States in favour of a single
currency, accompanied by a timetable, are adopted at the Madrid European Summit
on the basis of the Green Paper drawn up by the European Commission on the
practical arrangements for the transition.
1997
The Stability and Growth Pact is adopted by all the member countries at
the Amsterdam European Council. For the countries joining the euro, it lays down
certain common constraints relating to public finance, mainly a 3% ceiling on the
budget deficit, and provides for financial sanctions. These constraints are necessary in
an asymmetrical system in which the countries of the euro area have a single monetary
policy while retaining their national fiscal policy. The Stability and Growth Pact (site
European Commission).
1999
Stage 3 of Economic and Monetary Union begins on 1 January. The exchange rates of
the participating currencies are irrevocably fixed. The countries of the euro area
implement a single monetary policy. The euro is introduced as legal tender.
Until 2001 the euro exists only in the form of cashless payments (cheques, transfers,
bank cards). Payments to tax and social security authorities can be made in francs or
in euros: there is no prohibition and no compulsion regarding the use of the single
currency.
Greece adopts the euro in January 2001.
2002
10

On 1 January the euro notes and coins are introduced and withdrawal of the Belgian
franc begins. In Belgium, the period of dual circulation of the euro and the national
currency ends on 28 February 2002.
2004
In May ten new countries join the European Union, thus committing them to adopt the
euro in due course as currency.
2007
On 1 January, Bulgaria and Romania join the European Union, thus committing them
to adopt the euro in due course as currency. Slovenia joins the euro area.
2008
Following the entry of Cyprus and Malta into the euro area on 1 January, 2008, the
euro area consists of fifteen Member States having adopted the single currency.
2009
On 1 January 2009, Slovakia joins the euro area.
2011
Estonia becomes the 17th Member State to join the euro area on 1 January 2011.

2014
11

On 1 January 2014, Latvia becomes the 18th Member State to adopt the euro.
2015
The last country to adopt the euro is Lithuania, on 1 January 2015.

DEFINITION OF EURO

12

The single European currency, which replaced the national currencies of France,
Germany, Spain, Italy, Greece, Portugal, Luxembourg, Austria, Finland, the Republic
of Ireland, Belgium, and the Netherlands in 2002. Seventeen member states of the
European Union now use the euro.
DEFINITION OF MARKET
A regular gathering of people for the purchase and sale of provisions, livestock, and
other commodities.
DEFINITION OF 'EURO MARKET'
The market comprised of the member countries of the European Union (EU). The
Euro market includes countries that have fixed external tariffs and no internal tariffs,
and follow the policy set by the European Central Bank. While many member
states do use the Euro as their common currency, the Euro market applies to all states
in the EU.
The euro market is the market that includes all of the European Union member
countries - many of which use the same currency, the euro. All tariffs between Euro
market member countries have been abolished, and import duties from all nonmember countries have been fixed for all of the member countries. The Euro market
also has one central bank for all of the member countries, the European Central Bank
(ECB).
These can broadly be classified as Eurocurrency and Eurobond markets. We
want to focus on how MNCs can use these international markets to meet their
financing requirements.

A. EUROCURRENCY MARKET:

Definition and background

13

The Eurocurrency market consists of banks (called Eurobanks) that accept

deposits and make loans in foreign currencies. A Eurocurrency is a freely
convertible currency deposited in a bank located in a country which is not the
native country of the currency. The deposit can be placed in a foreign bank or
in the foreign branch of a domestic US bank.
In the Eurocurrency market, investors hold short-term claims on commercial
banks which intermediate to transform these deposits into long-term claims on
final borrowers.
The Eurocurrency market is dominated by US $ or the Eurodollar.
Occasionally, during weak dollar periods (latter part of 1970s and 1980s), the
EuroSwiss franc and the EuroDM markets increased in importance.

The

Eurodollar market originated post WWII in France and England thanks to the
fear of Soviet Bloc countries that dollar deposits held in the US may be
attached by US citizens with claims against communist governments!

Thriving on government regulation

By using Euromarkets, banks and financiers are able to circumvent / avoid certain
regulatory costs and restrictions. Some examples are:
a) Reserve requirements
14

b) Requirement to pay FDIC fees

c) Rules or regulations that restrict competition among banks
Continuing government regulations and taxes provide opportunities to engage in
Eurocurrency transactions. However, ongoing erosion of domestic regulations
have rendered the cost and return differentials much less significant than before.
As a result, the domestic money market and Eurocurrency markets are closely
integrated for most major currencies, effectively creating a single worldwide
money market for each participating currency.

B. EUROBONDS MARKET
Eurobonds are bonds sold outside the country whose currency they are dominated in.
They are similar in many ways to public debt sold in domestic capital markets.
15

However, the Eurobond market is entirely free of official regulation and is selfregulated by the Association of International Bond Dealers.
Borrowers in the Eurobond market are typically well known and have impeccable
credit ratings (for example, developed countries, international institutions, and large
MNCs). The Eurobond market has grown rapidly in the last two decades, and it
exceeds the Eurocurrency market in size.
i) Currency denomination
About 75 % of Eurobonds are dollar denominated. The most important nondollar
currencies for Eurobond issues are DM and FF (now rapidly replaced by the euro), the
JY and the BP [The Swiss central bank ban has led to the absence of SF Eurobonds].
ii) Fixed rate Eurobonds
Fixed-rate Eurobonds pay coupons once a year, unlike the semiannual coupon,
domestic bonds in the US market. Borrowers compare the all-in cost, that is, the
effective interest rate, on Eurobonds and domestic bonds.
This interest rate is calculated as the discount rate that equates the present value of the
future interest and principal payments to the net proceeds received by the issuer, or as
the IRR of the bond.

iii) Comparing Eurobond issue with a US domestic issue:

To compare a Eurobond issue with a US domestic issue, therefore, the all-in cost of
funds on an annual basis must be converted to a semiannual basis or vice versa. Thus,
Semiannual yield = [1 + Annual yield]^0.5 1, and

(1)
16

Annual yield = [1 + Semiannual yield]^2 1.

(2)

BENEFITS OF THE EURO MARKET

Following benefits seem to have accrued to the countries involved in the Euro-market:

17

1. It has provided a truly international short-term capital market, owing to a high

degree of mobility of the Euro-dollars.
2. Euro market is useful for the financing of foreign trade.
3. It has enabled the financial institutions to have greater flexibility in adjusting their
cash and liquidity positions.
4. It has enabled importers and exporters to borrow dollars for financing trade, at
cheaper rates than otherwise obtainable.
5. It has helped in reducing the profit margins between deposit rates and lending rates.
6. It has enhanced the quantum of funds available for arbitrage.
7. It has enabled monetary authorities with inadequate reserves to increase their
reserves by borrowing Euro-market deposits.
8. It has enlarged the facilities available for short-term investment.
9. It has caused the levels of national interest rates more akin to international
influences.

FACTORS CONTRIBUTING TO THE GROWTH OF EURO

MARKET

I.

Relaxation of exchange control and resumption of currency convertibility:

18

The general relaxation of exchange control , the stability of the exchange market and
the redemption of the currency convertibility in western Europe in 1958 provided an
added impetus to the growth of the euro market .
II.

The political factors:

The cold war between the United States and the communist countries also contributed
to the euro currency market.
III.

Balance of payment deficit of the US:

Deficit in the balance of payment in US meant an increasing flow of US dollar to

those countries which had a surplus with the US.
IV.

The regulation of Q:

Regulation of Q which fixed the maximum rate of interest payable to the banks in US
and the prohibition of payment of interest on deposit for less than 30 days very
significantly contributed to the fast growth of the euro market.
V.

Innovative banking:

The advent of the Innovative banking ,spearheaded by the US banks in Europe and
the willingness of the banks in the market to operate on a narrow basis also
encouraged the growth of euro market.

VI.

Supply of petrodollars:

The flow of petro dollar facilitated by the increase in the OPECS oil revenue
following by the oil price hike since 1973 has been a significant source of growth of
Euro currency.
19

ADVANTAGES OF EURO MARKET

As a member of the EU, you will be able to enjoy the following advantages:
1. Low prices of goods:
20

There exists a Single Market for all member countries wherein products are
low-priced and there are no charges when it comes to custom tax; custom tax
is usually charged when goods are transported or sold between states/countries
but this is not applied among member countries.
2. Citizens are free to move from one member country to another:
Citizens can freely travel, study, work, or live in any European country of their
choice.
3. More jobs are generated:
More or less than 3.5 million jobs have been generated over the years.
4. Development of deprived regions:
Some member countries of the EU are economically deprived and through the
European Structural Funds, deprived regions are developed.
5. Louder voice:
The EU is able to ensure that all their concerns are taken seriously and heard
internationally since it speaks in behalf of millions of people.
6. Workers are protected:
This is made possible through the European Working Time Directive; the
directive includes regulations regarding holidays, working hours, breaks, etc.

DISADVANTAGES OF EURO MARKET

If there are benefits to being a member of the EU, there are also disadvantages, and it
includes the following:

21

1) It is costly to be a member of the EU:

Different sources claim that the cost per head ranges from 300 to 873.
2) Not all policies are efficient:
A good example is that of the Common Agricultural Policy which resulted to
oversupply and higher prices of goods.
3) The single currency poses a great problem:
Not all member countries are using the Euro though the EU emphasized its
use; still, many problems have risen over the years.
4) Overcrowding:
It was mentioned earlier that the citizens of member countries are free to move
from one place to another; this has led to overcrowding in the major cities of
UK and it has increased prices of houses, as well as congestion on the roads

BORROWING INSTRUMENTS IN THE EUROMARKETS BANKS CLAIMS:

1. Euro credits: medium to long-term loans denominated in euro-currencies (> 1
year).

22

2. Stand-by Credit: A commitment to lend up to a specified amount for a specific

period, to be used only in a certain contingency. (Commitment fee paid on the
unused portion of a facility)
3. Euro-commercial paper: short-term euro notes issued by companies < 365
days. Nominal value of notes > $500,000, with corporate and sovereign
issuers. Investment grade rating not required. Euro notes are unsecured debt
securities <1 year

CHARACTERISTICS OF EURO MARKET

Being the world's largest financial market, the foreign exchange (or forex)
market offers unmatched benefits and advantages to the prospective investor. With

23

superior liquidity and leverage compared to stocks and futures markets, the forex
market is arguably the best financial investment you can find.
What makes the forex market an excellent financial market? The characteristics that
make the forex market a good one are lower trading costs, excellent transparency,
superior liquidity and very strong market trends.
LOWER TRADING COSTS:
Ask anyone dealing in stocks and they will tell you that they have to shell thousands
of dollars to get started. Not so with the forex market. With just a few hundred dollars
(often $250 or less), you can open a mini forex account and start trading!
The lower trading costs in the forex market have made it possible for even small,
individual investors to make decent profits from forex trading. With lower costs, the
possible losses are also much lower. You will discover that forex trading usually has
no commission fees unlike in other investments. The costs of forex trading are limited
to the spread or the difference between the selling and buying prices for a particular
currency pair.
EXCELLENT TRANSPARENCY:
Transparency means the free access to trading information. Forex trading is a
transparent process because the trader has full access to market data and information
that are necessary to perform successful transactions. The excellent transparency of
the forex market means that forex traders have more control over their investments
and can decide what to do base on the information available.

SUPERIOR LIQUIDITY:

24

In a forex market, traders are free to buy and sell currencies of their own choosing.
The superior liquidity of the forex market enables traders to easily exchange
currencies without affecting the prices of the currencies being traded.
So whether you trade a few thousand dollars or several millions, you can be assured of
the same currency prices during the time an order was placed and then executed. The
forex market's superior liquidity allows you to get the profits you expect at the time
you made the trade.
STRONG MARKET TRENDS:
Forex traders make money by getting accurate market data and then analyzing the
direction the market takes. To do this, forex traders rely heavily on trends and trending
in an attempt to predict the direction of the forex market. Most traders use technical
analysis to analyze past and present forex market data and then search for trends.
Other financial markets use trends and trending but this characteristic is much stronger
in the forex market. Due to strong trending, forex markets are much easier to analyze
and identify possible entry and exit positions during trading.
Now you already know the characteristics that make the forex market a sound,
financially-stable and profitable investment area, maybe it's time to put your money
into the forex market and earn handsome profits. You can just take advantage of the
forex market's positive assets and make your money work for you.

FACTORS AFFECTING EUROCURRENCY MARKET

25

 Interest Rates:
Typically, an increase in a countrys interest rate will increase the demand for the
currency, and value of its currency because ownership of this currency will provide
greater returns.
Government Budget Deficits:
A nations currency will usually weaken as a response to widening government budget
deficits, and vice versa on narrowing deficits.
Balance of Trade:
The trade flow between countries illustrates the demand for goods and services, which
in turn indicates demand for a countrys currency to conduct trade. So an increasing
balance of trade deficit will weaken the countrys currency.
Inflation:
Typically a currency will lose value if there is a high level of inflation in the country
or if inflation levels are perceived to be rising. This is because inflation makes things
more expensive and so demand for that particular currency drops. However, a
currency may sometimes strengthen when inflation rises because of expectations that
the central bank will raise interest rates to combat rising inflation.
Economic Growth:
Reports such as GDP, employment levels and retail sales detail the levels of a
countrys economic growth and health. Generally, the more healthy and robust a
countrys economy, the better its currency will perform, and the more demand for it
there will be.
Political Factors:

26

Internal, regional and international political conditions and events can have a profound
effect on currency markets. Situations such as Government upheaval, perceived fiscal
behavior of the next/current ruling party, increasing tensions and risk of confrontation,
either domestic or foreign, can greatly affect the strength of a nations currency.

MARKET PARTICIPANTS IN EUROCURRENCY MARKET

27

Central banks also participate in the foreign exchange market to align currencies to
their economic needs.
Commercial companies:
An important part of the foreign exchange market comes from the financial activities
of companies seeking foreign exchange to pay for goods or services. 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 rates. Nevertheless, trade
flows are an important factor in the long-term direction of a currency's exchange rate.
Some multinational corporations (MNCs) can have an unpredictable impact when
very large positions are covered due to exposures that are not widely known by other
market participants.
Central banks:
National central banks play an important role in the foreign exchange markets. They
try to control the supply, inflation, and/or interest rates and often have official or
unofficial target rates for their currencies. They can use their often substantial foreign
exchange reserves to stabilize the market. Nevertheless, the effectiveness of central
bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if
they make large losses, like other traders would, and there is no convincing evidence
that they do make a profit trading.
Foreign exchange fixing:
Foreign exchange fixing is the daily monetary exchange rate fixed by the national
bank of each country. The idea is that central banks use the fixing time and exchange
rate to evaluate behavior of their currency. Fixing exchange rates reflects the real
value of equilibrium in the market. Banks, dealers and traders use fixing rates as
a market trend indicator.

28

The mere expectation or rumor of a central bank foreign exchange intervention might
be enough to stabilize a currency, but aggressive intervention might be used several
times each year in countries with a dirty float currency regime. Central banks do not
always achieve their objectives. The combined resources of the market can easily
overwhelm any central bank. Several scenarios of this nature were seen in the 1992
93 European Exchange Rate Mechanism collapse, and in more recent times in Asia.
Hedge funds as speculators:
About 70% to 90% of the foreign exchange transactions conducted are speculative.
This means the person or institution that bought or sold the currency has no plan to
actually take delivery of the currency in the end; rather, they were solely speculating
on the movement of that particular currency. Since 1996, hedge funds have gained a
reputation for aggressive currency speculation. They control billions of dollars
of equity and may borrow billions more, and thus may overwhelm intervention by
central banks to support almost any currency, if the economic fundamentals are in the
hedge funds' favor.
Investment management firms:
Investment management firms (who typically manage large accounts on behalf of
customers such as pension funds and endowments) use the foreign exchange market to
facilitate transactions in foreign securities. For example, an investment manager
bearing an international equity portfolio needs to purchase and sell several pairs of
foreign currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of
generating profits as well as limiting risk. While the number of this type of specialist
firms is quite small, many have a large value of assets under management and, hence,
can generate large trades.

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 Retail foreign exchange traders:

Individual retail speculative traders constitute a growing segment of this market with
the advent of retail foreign exchange trading, both in size and importance. Currently,
they participate indirectly through brokers or banks. Retail brokers, while largely
controlled and regulated in the USA by the Commodity Futures Trading
Commission and National Futures Association, have in the past been subjected to
periodic foreign exchange fraud. To deal with the issue, in 2010 the NFA required its
members that deal in the Forex markets to register as such (I.e., Forex CTA instead of
a CTA). Those NFA members that would traditionally be subject to minimum net
capital requirements, FCMs and IBs, are subject to greater minimum net capital
requirements if they deal in Forex. A number of the foreign exchange brokers operate
from the UK under Financial Services Authority regulations where foreign exchange
trading using margin is part of the wider over-the-counter derivatives trading industry
that includes Contract for differences and financial spread betting.

30

COMPARING EUROCURRENCY MARKET TO FUTURES

The Forex market also has of a bunch of advantages over the futures market,
similar to its advantages over stocks. Here are just few of the examples:
Liquidity:
In the Forex market, $4 trillion is traded daily, making it the largest and most liquid
market in the world, whereas the futures market trades only 30 billion USD per day.
The futures markets can't compete with its relatively limited liquidity. The Forex
market is always liquid, meaning positions can be liquidated and stop orders executed
with little or no slippage except in extremely volatile market conditions.
24-Hour Market:
At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST
the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York
opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes,
the Sydney market is back open - it's a 24-hour seamless market!
As a trader, this allows you to react to favorable or unfavorable news by trading
immediately. If important data comes in from the United Kingdom or Japan while the
U.S. futures market is closed, the next day's opening could be a wild ride. (Overnight
markets in futures currency contracts exist, but they are thinly traded, not very liquid,
and are difficult for the average investor to access.)
Minimal or no commissions:
With Electronic Communications Brokers becoming more popular and prevalent over
the past couple of years, there is the chance that a broker may require you to pay
commissions. But really, the commission fees are peanuts compared to what you pay
in the futures market.
31

 Price Certainty:
When trading Forex, you get rapid execution and price certainty under normal market
conditions. In contrast, the futures and equities markets do not offer price certainty or
instant trade execution. Even with the advent of electronic trading and limited
guarantees of execution speed, the prices for fills for futures and equities on market
orders are far from certain. The prices quoted by brokers often represent the LAST
trade, not necessarily the price for which the contract will be filled.
Guaranteed Limited Risk:
Traders must have position limits for the purpose of risk management. This number is
set relative to the money in a trader's account. Risk is minimized in the spot Forex
market because the online capabilities of the trading platform will automatically
generate a margin call if the required margin amount exceeds the available trading
capital in your account.
Your account is protected by automatic Stop Out which closes the most negative trade
when your margin level drops below 100%. This makes it very difficult for the
account balance to go to negative. The risk grows slightly when keeping positions
open over weekend when your margin level is already very low. After the weekend the
markets may open on a different level and if this direction is even more on the
negative for you, it is possible that the account balance goes to negative.

32

CONCLUSION
The Euro markets are the largest and most traded financial markets in the world with
daily trading volume of the world more than $3trillion (Triennial Central Bank Survey
2007). Each transaction in the currency market involves two different trades: the sale
of one currency and the purchase of another. As the worlds reserve currency, the U.S.
dollar is the most actively traded currency; pairs involving the dollar make up the
majority of transactions.
Emerging markets often have political systems that are less stable than those of
developed nations, resulting in a greater possibility of governmental actions that
adversely affect investors. Many emerging market countries do not allow their
currencies to float freely. Emerging markets often suffer from illiquidity and large bidask spreads-conditions that are exacerbated during times of market volatility.
Individual investors who are unable or unwilling to trade emerging market
currencies directly can still be exposed to the risk. International investors with no
intension of directly trading foreign currencies should understand the influence
currency movements can have on f foreign stock and bond holdings.

33

BIBLIOGRAPHY
BOOKS:
Trading the Markets for a Living: How to Become a Professional Trader and
Grow Rich-Ashu Dutt

WEBSITE:
https://en.m.wikipedia.org
www.investopedia.com

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