UNIVERSITY OF MUMBAI

“STUDY OF FOREX MARKET IN INDIA”

A Project Submitted to

University of Mumbai for partial completion of the degree of

Master’s in commerce

Under the Faculty of Commerce

BY

MR. PRATIK VIJAY KURKUTE

Under the Guidance of

PROF- Dr. SNEHA PATIL

SIES (NERUL) COLLEGE OF ARTS, SCIENCE AND COMMERCE PLOT1-C.

SECTOR-5, NERUL, NAVI MUMBAI.

APRIL-2023

1|Page
 UNIVERSITY OF MUMBAI

“STUDY OF FOREX MARKET IN INDIA”

A Project Submitted to

University of Mumbai for partial completion of the degree of

Master’s in commerce

Under the Faculty of Commerce

BY

MR. PRATIK VIJAY KURKUTE

Under the Guidance of

PROF- Dr. SNEHA PATIL

SIES (NERUL) COLLEGE OF ARTS, SCIENCE AND COMMERCE PLOT1-C.

SECTOR-5, NERUL, NAVI MUMBAI.

APRIL-2023

2|Page
 SIES (NERUL) COLLEGE OF ARTS, SCIENCE AND COMMERCE PLOT1-C.

SECTOR-5, NERUL, NAVI MUMBAI.

CERTIFICATE

This is to certify that MR. PRATIK VIJAY KURKUTE has worked and duly

completed his Project Work for the degree of master’s in commerce under the Faculty

of Commerce, his project is entitled,

“STUDY OF FOREX MARKET IN INDIA”

under my supervision. I further certify that the entire work has been done by the

learner under my guidance and that no part of it has been submitted previously for any

Degree or Diploma of any University. It is his own work and facts reported by his

personal findings and investigations.

PROF – Dr. SNEHAL

PATIL
SIGNAURE OF
SEAL OF COLLEGE GUIDING TEACHER

DATE OF SUBMISSION NAME AND SIGNATURE

OF SIGNATURE EXTERNAL
EXAMINER

3|Page
 DECLARATION

I the undersigned Mr. PRATIK VIJAY KURKUTE hereby, declare that

the work embodied in this project work titled,

“STUDY OF FOREX MARKET IN INDIA”

forms my own contribution to the research work carried out under the

guidance of PROF - Dr. SNEHAL PATIL is a result of my own research

work and has not been previously submitted to any other University for

any other Degree or Diploma to this or any other University. Wherever

reference has been made to previous works of others, it has been clearly

indicated as such and included in the bibliography. I hereby further

declare that all information in this document has been obtained and

presented in accordance with academic rules and ethical conduct.

Certified by-

PROF – Dr. SNEHAL PATIL Mr. PRATIK VIJAY

KURKUTE
SIGNATURE OF SIGNATURE OF
GUIDING TEACHER STUDENT

4|Page
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous,
and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me a

chance to do this project.

I would like to thank my Principal, Dr. KOEL ROYCHOUDHURY, for

providing the necessary facilities required for the completion of this
project.

I take this opportunity to thank our coordinator Ms. SUNGANDHA JHA,

for her moral support and guidance.

I would like to express my sincere gratitude to my project guide PROF -

Dr. SNEHAL PATIL whose guidance and care made the project
successful.

I would like to thank my college library for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each person who directly or indirectly helped
me in the completion of the project, especially my parents and peers who
supported me throughout my project.

5|Page
 INDEX

PATICULARS PAGE NO

CHAPTER 1 INTRODUCTION 8-36

1.1 FOREX MARKET IN INDIA

1.2 HISTORY

1.3 ABSTRACT,

1.4 INDIAN VIEW

1.5 GLOBAL VIEW

REGULATORY FRAMEWORK OF FOREX

1.6
MARKET IN INDIA

ADVANTAGES OF FOREIGN EXCHANGE

1.7
MARKET

1.7 LIMITATIONS OF FOREX MARKET INDIA

1.9 STRUCTURE OF FOREX MARKET

1.10 FEMA ACT,1999

1.11 FERA ACT,1973

1.12 FEDAI

1.13 ROLE OF RBI

1.14 DEALING ROOM

1.15 RETAIL AND WHOLESALE MARKET

1.16 FOREIGN EXCHANE MARKET

1.17 INSTITUTIONAL FRAMEWORK

6|Page
 CHAPTER.2 REVIEW OF LITERATURE 37-40

CHAPTER 3 RESEARCH METHODOLOGY 41-43

2.1 OBJECTIVE OF STUDY

2.2 SCOPE OF STUDY

2.3 LIMITATIONS OF STUDY

CHAPTER 4 DATA ANALYSIS, 44-57

INTERPERTATION AND
PRESENTATION

CHAPTER 5 FINDING AND CONCLUSION 58-68

5.1 FINDINGS

5.2 HYPOTHESIS

5.3 CONCLUSION

CHAPTER 6 REFERENCES & WEBLIOGRAPHY 69-71

7|Page
 CHAPTER – 1
INTRODUCTION

8|Page
1.1 FOREX MARKET IN INDIA
Traditionally Indian forex market has been a highly regulated one. Till about 1992-
93, the government exercised absolute control on the exchange rate, export-import
policy, FDI (Foreign Direct Investment) policy. The Foreign Exchange Regulation Act
(FERA), enacted in 1973, strictly controlled any activities in any remote way related
to foreign exchange. FERA was introduced during 1973, when foreign exchange was
a scarce commodity. Post-independence, union government’s socialistic way of
managing business and the license raj made the Indian companies noncompetitive in
the international market, leading to decline in export. Simultaneously India imports
bill because of capital goods, crude oil & petrol products increased the forex outgo
leading to sever scarcity of foreign exchange. FERA was enacted so that all forex
earnings by companies and residents have to reported and surrendered (immediately
after receiving) to RBI (Reserve Bank of India) at a rate which was mandated by RBI.
FERA was given the real power by making “any violation of FERA was a criminal
offense liable to imprisonment”. It a professed a policy of “a person is guilty of forex
violations unless he proves that he has not violated any norms of FERA”.

Foreign exchange market is described as an OTC (Over the counter) market as there is
no physical place where the participants meet to execute their deals. It is more an
informal arrangement among the banks and brokers operating in a financing centre
purchasing and selling currencies, connected to each other by tele communications
like telex, telephone and a satellite communication network, SWIFT. The term foreign
exchange market is used to refer to the wholesale a segment of the market, where the
dealings take place among the banks. The retail segment refers to the dealings take
place between banks and their customers. The retail segment refers to the dealings
take place between banks and their customers. The retail segment is situated at a large
number of places. They can be considered not as foreign exchange markets, but as the
counters of such markets. The leading foreign exchange market in India is Mumbai,
Calcutta, Chennai and Delhi is other centres accounting for bulk of the exchange
dealings in India.

9|Page
DEFINATION-
“The market in which international currency trade takes place i.e. where foreign
currencies are bought and sold simultaneously is called the Foreign Exchange (Forex)
Market. It is the organizational framework within which banks, merchants, firms,
investors, individuals and government exchange foreign currencies for one another.

MEANING

The foreign exchange market (Forex, FX, or currency market) is a global

decentralized or over the counter (OTC) market for the trading of currencies. This
market determines the foreign exchange rate. It includes all aspects of buying, selling
and exchanging currencies at current or determined prices. In terms of trading
volume, it is by far the largest market in the world, followed by the Credit market.

The main participants in this market are the larger international banks. Financial
centres around the world function as anchors of trading between a wide range of
multiple types of buyers and sellers around the clock, with the exception of weekends.
Since currencies are always traded in pairs, the foreign exchange market does not set
a currency's absolute value but rather determines its relative value by setting the
market price of one currency if paid for with another. Ex: US$1 is worth X CAD, or
CHF, or JPY, etc

The foreign exchange market works through financial institutions and operates on
several levels. Behind the scenes, banks turn to a smaller number of financial firms
known as "dealers", who are involved in large quantities of foreign exchange trading.
Most foreign exchange dealers are banks, so his behind-the-scenes market is
sometimes called the "interbank market" (although a few insurance companies and
other kinds of financial firms are involved). Trades between foreign exchange dealers
can be very large, involving hundreds of millions of dollars. Because of the
sovereignty issue involving two currencies, Forex has little (if any) supervisory entity
regulating its actions. The foreign exchange market assists international trade and
investments by enabling currency conversion.

10 | P a g e
For example, it permits a business in the United States to import goods from
European Union member states, especially Eurozone members, and pay Euros, even
though its income is in United States dollars.

For example, in India the currency in circulation is called the rupee INR and in the
United States, the currency in circulation is called the US Dollar (USD).

An example of a Forex trade is to sell the Indian rupee while simultaneously buying
the US Dollar. Forex market has no geographical location, it is electronically linked
network and is open 24 hours a day.

The value for which one currency is exchanged for another or the value of one
currency in terms of another currency is called exchange rate. For example, US dollar
can be bought for 63 INR rupees. This is the exchange rate for Indian rupees in US
dollars. The foreign exchange market in India started when in 1978 the government
allowed banks to trade foreign exchange with one another. Foreign Exchange Market
in India operates under the Central Government of India and executes wide powers to
control transactions in foreign exchange. The Foreign Exchange Management Act,
1999 or FEMA regulates the whole Foreign Exchange Market in India. Before the
introduction of this act, the foreign exchange market in India was regulated by the
Reserve Bank of India through the Exchange Control Department, by the Foreign
Exchange Regulation on Act or FERA, 1947. Interbank foreign exchange Trading is
regulated by the Foreign Exchange Dealers Association of India (FEDAI) created in
1958, a self-regulatory voluntary association of dealers or banks specializing in the
foreign exchange activities in India that regulates the governing rules and determines
the commissions and charges associated with the interbank foreign exchange business.
Since 2001, clearing and settlement functions in the foreign exchange market are
largely carried out by the Clearing Corporation of India Limited (CCIL) that handles
transactions of approximately 3.5 billion US dollars a day, about 80% of the total
transactions.

1.2 HISTORY:

The history of forex market in India owes its origin to an important decision taken by
the Reserve Bank of India (RBI) in the year 1978 which allows banks to undertake

11 | P a g e
intra-day trading in foreign currency exchange. As a result of this step, the agreement
of maintaining.
‘square’ or ‘near square’ position was to be complied with only at the close of
business every day. The history of currency trading in India also clearly shows that
during the initial period when these economic reforms started, the exchange rate of
national currency i.e. Indian rupee used to be determined by the RBI in terms of a
weighted basket of currencies of India’s major trading partners. Moreover, there were
some fairly significant restrictions on the current account transactions. Then again
during early nineties, more economic reforms were introduced which witnessed the
important two-step downward adjustment in the exchange rate of the Indian rupee in
order to place it at a suitable level in line with the inflation differential so that the
competitiveness in exports could be maintained. With these economic reforms which
resulted in the unification exchange rate of the rupee heralded the commencement of
the new era of market determined forex currency rate regime of rupee in the Indian
forex history which was based on the demand and supply principle in the forex
market.

Another landmark in Forex history of India came with the appointment of an Expert
Group committee on Forex currency in 1994. This committee was made to study the
forex market in detail so that step can be taken out to develop, deepen and widen the
forex market in India. The result of this exercise was that banks were significant
freedom in many of its market operations related to like forex market development
and liberalization. The freedom was granted to banks in term of fixing their trading
limits, allowed to borrow and invest funds in the overseas markets up to specified
limits, accorded freedom to make use of derivative products for asset-liability
management purposes.

The corporate was granted the flexibility to book forward cover based on previous
turnover and were given freedom to make use of financial instruments like interest
rates and currency swaps in the international currency exchange market. The other
feature of forex history in India is that a large sum of foreign exchange in India came
through the large Indian population working in foreign countries. However, the
common man was not much interested in forex trading. the things are changing now
and with the growing economy more and more people are showing interest in forex
trading and are looking out for hedging currency risks.

12 | P a g e
National Stock Exchange of India popularly known as NSE was the first recognized
exchange in Indian forex history to launch forex currency futures trading in India.
These currency futures are beneficial over overseas forex trading especially to
comparatively small traders and retail investors. Another important point to know is
that before discussing the history of forex market in India, it is important to know the
central government of India has the powers to control transactions in foreign
exchange and hence forex transactions in India are managed by the government
authorities.

1.3 ABSTRACT

The economic liberalization of early nineties in India facilitated the introduction of

derivatives based on interest rates and foreign exchange. Derivatives products provide
certain important economic benefits such as risk management and help in price
discovery. Market determined exchange rates were adopted by India in March 1993.
In August 1994, the rupee was made fully convertible on current account. These
reforms allowed increased integration between domestic and international markets
and created a need to manage currency risk. Rupee derivatives in India were
introduced in July 1999 when RBI permitted banks and Financial Institutions to
undertake interest rate swaps and forward rate agreements. These institutions were
allowed to offer these products to corporate for hedging interest rates as well as deal
in these instruments for hedging and trading purpose. The financial markets including
derivative markets, in India have been through a reform process over the last two
decades nearly, witnessed growth in terms of size, product profile and participant’s
base. Derivative markets worldwide have witnessed explosive growth in the recent
past. Indian forex and derivative markets have also developed significantly over the
years. This paper finds the possible factors and developments pushing the growth in
these financial segments. The foreign exchange market is the mechanism by which a
person of firm transfers purchasing.

power from one country to another, obtains or provides credit for international trade
transactions, and minimizes exposure to foreign exchange risk.

1.4 INDIAN VIEW

13 | P a g e
The changing contours were mirrored in rapid expansion of foreign exchange market
in terms of participants , transaction volumes , decline in transactions costs and more
efficient mechanisms of risk transfer .The origin of the foreign exchange market in
India could be traced to the year 1978 when Banks in India were permitted to
undertake intra-day trade in foreign exchange .However , it was in the 1990s that the
Indian Foreign exchange market witnessed far reaching changes along with the shifts
in the currency regime in India.

India has been seen a systematic transaction from being closed door economy to an
open economy since the beginning of the economic reforms in the country in 1991.
These reforms have had a far-reaching impact and have helped India unleash its
enormous growth potential. Today, the Indian economy as characterized by a
liberalized foreign investment and trade policy, a significant role being played by the
private sector and deregulation.

India has grown to become a trillion-dollar economy with a largely self-sufficient

agricultural sector, a diversified industrial base and a stable financial & service sector.
India economy has strong fundamentals and its host to several eminent global
corporate giants that are leaders in their perspective fields. according to the Global
competitiveness report 2011-12 India ranks 56 among 142 countries. The country
ranks higher than many countries in various key parameters such as market size 3 rd.
& innovation 38. It also has sound financial market, which ranks 21 set in the world.
Keywords: Foreign currency derivatives, Foreign Exchange Management Act
(FEMA), OTC derivatives, Foreign Exchange Markets, capital account convertibility.

1.5 GLOBAL VIEW

Globally operations in the Foreign Exchange Market started in a major way after the
break down of the Bretton Wood System in 1971 which also marked the beginning
of floating exchange rates regimes in several countries. Over the years, the foreign
exchange market has emerged as the largest market in the world. The decade of the
1990s witnessed a perceptible policy shift in many emerging markets towards
reorientation of their financial markets in the terms of the new products and
instruments, development of institutional and market infrastructure and realignment

14 | P a g e
 of regulatory structure consistent with the liberalized operational framework.
Foreign exchange market is described as an OTC (Over the counter) market as there
is no physical place where the participants meet to execute their deals. It is more an
informal arrangement among the banks and brokers operating in a financing Centre
purchasing and selling currencies, connected to each other by telecommunications
like telex, telephone and a satellite communication network, SWIFT.

The term foreign exchange market is used to refer to the wholesale a segment of the
market, where the dealings take place among the banks. The retail segment refers to
the dealings take place between banks and their customers. The retail segment refers
to the dealings take place between banks and their customers. The retail segment is
situated at many places. They can be considered not as foreign exchange markets,
but as the counters of such markets. The leading foreign exchange market in India is
Mumbai, Calcutta, Chennai, and Delhi is other centres accounting for bulk of the
exchange dealings in India. The policy of Reserve Bank has been to decentralize
exchanges operations and develop broader based exchange markets. As a result of
the efforts of Reserve Bank Cochin, Bangalore, Ahmadabad, and Goa have emerged
as new Centre of foreign exchange market.

1.6 REGULATORY FRAMEWORK OF FOREX MARKET IN INDIA

A major step in development of Indian forex market happened in 2008, when

currency futures (Indian Rupee and US Dollar) started trading at National Stock
Exchange (NSE). Since the introduction, the turnover in futures has increased leaps
and bound. Though banks and authorized dealers were undertaking forex derivatives
contracts, but the introduction of exchange traded currency futures marked a new
beginning as the retail investors were able to participate in forex derivatives trading.

1. Securities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority
established under the SEBI Act 1992 and is the principal regulator for Stock
Exchanges in India. SEBI’s primary functions include protecting investor interests,
promoting and regulating the Indian securities markets. All financial intermediaries
permitted by their respective regulators to participate in the Indian securities markets
are governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio

15 | P a g e
Investors are required to register with DDPs in order to participate in the Indian
securities markets.

2. Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934.
The RBI is responsible for implementing monetary and credit policies, issuing
currency notes, being banker to the government, regulator of the banking system,
manager of foreign exchange, and regulator of payment & settlement systems while
continuously working towards the development of

Indian financial markets. The RBI regulates financial markets and systems through
different legislations. It regulates the foreign exchange markets through the Foreign
Exchange Management Act, 1999.

3. National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and implement
rules and regulations to govern the securities market. These rules and regulations
extend to member registration, securities listing, transaction monitoring, compliance
by members to SEBI / RBI regulations, investor protection etc. NSE has a set of Rules
and Regulations specifically applicable to each of its trading segments. NSE as an
entity regulated by SEBI undergoes regular inspections by them to ensure compliance.

PLAYERS IN FOREX MARKET INDIA

The main participants in the foreign exchange market are commercial banks. Indeed,
one say that it is the commercial banks that “make a market” in foreign exchange.
Next in importance are the large corporations with foreign trade activities. Finally,
central banks are present in the foreign exchange market.

1.COMMERCIAL BANKS:

Commercial banks are normally known as the lending players in the foreign exchange
scene, we are speaking of large commercial banks with many clients engaging in

16 | P a g e
exports and imports which must be paid in foreign currencies or of banks which
specialize in the financing of trade. Commercial banks participate in the foreign
exchange market as an

intermediary for their corporate customers who wish to operate in the market and also
on their own account. Banks maintain certain inventories of foreign exchange to best
services its customers.

2. CENTRAL BANK

Central Banks are not only responsible for the printing of domestic currency and the
management of the money supply, but, in addition, they are often responsible for
maintaining the value of the domestic currency vis-a-vis the foreign currencies. This
is certainly true in the case of fixed exchange rates. However, even in systems of
floating exchange rates, the central banks have usually felt compelled to intervene in
the foreign exchange market at least to maintain orderly markets. Under the system
of freely floating exchange rates, the external value of the currency is determined like
the price of any other good in a free market, by the forces of supply and demand. If,
as a result of international transactions between the residents and the rest of the world,
more domestic currency is offered than is demand, that is, if more foreign currency is
demanded than is offered, then the value of the domestic currency in terms of the
foreign currencies will tend to decrease. In this model, the role of the central bank
should be minimal, unless it has certain preferences, i.e., it wishes to protect the local
export industry.

3.FOREIGN EXCHANGE BROKERS:

Foreign exchange brokers also operate in the international currency market. They act
as agents who facilitate trading between dealers. Unlike the banks, brokers serve
merely as matchmakers and do not put their own money at risk.

They actively and constantly monitor exchange rates offered by the major
international banks through computerized systems such as Reuters and are able to find
quickly an opposite party for a client without revealing the identity of either party
until a transaction has been agreed upon. This is why inter-bank traders use a broker
primarily to disseminate as quickly as possible a currency quote to many other
dealers.

17 | P a g e
4.MNCS:

MNCs are the major non-bank participants in the forward market as they exchange
cash flows associated with their multinational operations. MNCs often contract to
either pay or receive fixed amounts in foreign currencies at future dates, so they are
exposed to foreign currency risk. This is why they often hedge these future cash flows
through the inter-bank forward exchange market.

5. INDIVIDUAL AND SMALL BUSINESS:

Individuals and small businesses also use foreign exchange market to facilitate
execution of commercial or investment transactions. The foreign needs of these
players are usually small and account for only a fraction of all foreign exchange
transactions. Even then they are very important participants in the market. Some of
these participants use the market to hedge foreign exchange risk.

6.SPECULATORS AND ARBITRAGERS:

Speculators and arbitragers seek to profit from trading in the market. They operate in
their own interest, without a need for obligation to serve clients or to ensure a
continuous market. Speculators seek all of all their profit from exchange rates
charges. Arbitragers try to profit from simultaneously exchange rate differences in
different markets.

HOW IS THE FOREX MARKET DIFFERENT FROM OTHER MARKETS?

FEWER RULES:

Unlike the trading of stocks, futures or options, currency trading does not take place
on an exchange. As a result, investors are not held to the same type of rules and
regulations. It is not controlled by any central governing body, and there are no
clearing houses to make sure the party you are buying the currency from actually pays

18 | P a g e
up. In some countries, there are regulatory bodies that grant licenses to compliant
organizations to function as brokers or set levels of acceptable margin.

LOW COMMISSIONS

Since currencies do not trade on a traditional exchange, fees and commissions differ
widely from the commission structures found in other markets. Instead, many forex
brokers make money on the difference between price you pay to buy, and the amount
you receive when you sell, known as the spread. Since the dealer is retrieving
payment through the spread between buying and selling, it can appear as though there
are no fees for entering a trade. It is wise to not assume that there is no cost to you
when a dealer offers.

“Commission-free” trades. In many cases, the dealer may build in a relatively wide
bid-ask spread and it is often impossible to determine how much of the spread is
going to the broker. Regardless, given factors such as liquidity, deregulation and
electronic delivery, cost-savings are passed along to investors via low commissions or
fees.

TRADE WHENEVER YOU WANT:

Forex markets are open 24 hours a day, so if you are a night owl or early riser you can
set your own trading schedule.

EASY TO GET IN AND OUT

You can buy and sell currencies with the click of a button, instantaneously. The
market is so liquid that you will never be stuck holding onto a position that you want
to get out. On the other hand, you will never be limited by supply and can easily buy
as much of a currency as you can afford.

1.7 ADVANTAGES OF FOREX MARKET

FLEXIBILITY

Forex exchange markets provide traders with a lot of flexibility. This is because there
is no restriction on the amount of money that can be used for trading. Also, there is
almost no regulation of the markets. This combined with the fact that the market

19 | P a g e
operates on a 24 by 7 basis creates a very flexible scenario for traders. People with
regular jobs can also indulge in Forex trading on the weekends or in the nights.
However, they cannot do the same if they are trading in the stock or bond markets or
their own countries! It is for this reason that Forex trading is the trading of choice for
part time traders since it provides a flexible schedule with least interference in their
full time jobs.

20 | P a g e
TRANSPARENCY:

The Forex market is huge in size and operates across several time zones! Despite this,
information regarding Forex markets is easily available. Also, no country or Central
Bank can single handedly corner the market or rig prices for an extended period of
time. Short term advantages may occur to some entities because of the time lag in
passing information. However, this advantage cannot be sustained over time. The size
of the Forex market also makes it fair and efficient.

TRADING OPTIONS

Forex markets provide traders with a wide variety of trading options. Traders can
trade in hundreds of currency pairs. They also have the choice of entering into spot
trade or they could enter into a future agreement. Futures agreements are also
available in different sizes and with different maturities to meet the needs of the Forex
traders. Therefore, Forex market provides an option for every budget and every
investor with a different appetite for risk taking.

Also, one needs to consider the fact that Forex markets have a massive trading
volume. More trading occurs in the Forex market than anywhere else in the world. It
is for this reason that Forex provides unmatched liquidity to its traders who can enter
and exit the market in a matter of seconds any time they feel like.

TRANSACTION COSTS

Forex market provides an environment with low transaction costs as compared to

other markets. When compared on a percentage point basis, the transaction costs of
trading in Forex are extremely low as compared to trading in other markets. This is
primarily because Forex market is largely operated by dealers who provide a two way
quote after reserving a spread for themselves to cover the risks. Pure play brokerage is
very low in Forex markets.

LEVERAGE

Forex markets provide the most leverage amongst all financial asset markets. The
arrangements in the Forex markets provide investors to lever their original investment

21 | P a g e
by as many as 20 to 30 times and trade in the market! This magnifies both profits and
gains. Therefore, even though the movements in the Forex market are usually small,
traders end up gaining or losing a significant amount of money thanks to leverage.

1.8 LIMITATION OF FOREX MARKET IN INDIA

It would be a biased evaluation of the Forex markets if attention was paid only to the
advantages while ignoring the disadvantages. Therefore, in the interest of full
disclosure, some of the disadvantages have been listed below:

COUNTERPARTY RISKS

Forex market is an international market. Therefore, regulation of the Forex market is a

difficult issue because it pertains to the sovereignty of the currencies of many
countries. This creates a scenario wherein the Forex market is largely unregulated.
Therefore, there is no centralized exchange which guarantees the risk-free execution
of trades. Therefore, when investors or traders enter trades, they also have to be
cognizant of the default risk that they are facing i.e. the risk that the counterparty may
not have the intention or the ability to honor the contracts. Forex trading therefore
involves careful assessment of counterparty risks as well as creation of plans to
mitigate them.

LEVERAGE RISKS

Forex markets provide the maximum leverage. The word leverage automatically
implies risk and a gearing ratio of 20 to 30 times implies a lot of risk! Given the fact
that there are no limits to the amount of movement that could happen in the Forex
market in a given day, it is possible that a person may lose all of their investment in a
matter of minutes if they placed highly leveraged bets. Novice investors are more
prone to making such mistakes because they do not understand the amount of risk that
leverage brings along.

OPERATIONAL RISKS

Forex trading operations are difficult to manage operationally. This is because the
Forex market works all the time whereas humans do not! Therefore, traders have to
resort to algorithms to protect the value of their investments when they are away.

22 | P a g e
Alternatively, multinational firms have trading desks spread all across the world.
However, that can only be done if trading is conducted on a very large scale.
Therefore, if a person does not have the capital or the know how to manage their
positions when they are away, Forex markets could cause a significant loss of value in
the nights or on vacancies

1.9 STRUCTURE OF FOREX MARKET IN INDIA

Central government and RBI regulates the Indian forex market. RBI provides
license to three categories of persons:

AUTHORIZED DEALERS IN FOREIGN EXCHANGE:

A major portion of actual dealing in foreign exchange from the customs (importers,
exporters, and other receiving or making personal remittances) is dealt with by such
23 | P a g e
 of the banks in India which have been authorized by the Reserve Bank of India to deal
in foreign exchange. Such of the banks and select financial institutions who have been
authorized to deal in foreign exchange by the Reserve Bank are known as Authorized
Dealers. An authorized dealer should comply with the directions and institutions of
the Reserve Bank given from time to time. With the coming into effect of the FEMA
the Reserve Bank has issued a series of regulations under the act.

AUTHORIZED MONEY CHANGERS

To provide facilities for encashment of foreign currency to visitors from abroad

especially foreign tourist, Reserve Bank has granted license to certain establish firms,
hotel and other organization permitting them to deal in foreign currency notes, coins
and travelers cheques subject to direction issued to when from time to time. These
firms in an organizations who are generally known as authorized money changers fall
into 2 categories ,viz . , full-fledged money changers , (FFMCs) who are authorized to
undertake both purchase and sale transactions with the public and Restricted money
changers (RMCs ) who are authorized only to purchase foreign currency notes, coins
and travelers cheque , subject to the conditions are surrendered by them in turn to an
authorized dealers in foreign exchange / full – fledged money changers .

OFFSHORE BANKING UNITS: -

The distinctive characteristics of the offshore centers is that the service provided is
one of the external financial intermediations i.e. it its provided to a foreign entity. The
bank branches operating at such financial centers are called as (OBUs). Offshore
banks are intended to serve and undertake voluminous transactions. They carry on
wholesale banking functions such as providing syndicated loans financing big
projects. They also issue instruments such as negotiable Certificate of deposits, order
to mobilize the funds.

Like other forex markets in the world, the forex in India consists of several
stakeholders.

The main stakeholders in this market are:

• TRADERS

24 | P a g e
• BANKS /AUTHORIZED DEALERS

• THE RESERVE BANK OF INDIA.

The three actors mentioned above play different roles in the trade. Traders are
generally all individuals in the public who are also corporate customers of the banks.
These customers use the banks as authorized dealers to access the forex market. There
are traders of different kinds but all of them are able to access the market only through
dealers. This is much like elsewhere in the world where brokers are the intermediaries
between the forex and ordinary traders.

The banks, on the other hand, are the legally authorized institutions to handle
currency. In India, banks exist in different tiers and there are clear laws that determine
which institution is categorized as a financial institution. From these legal institutions,
all those who want to trade can create accounts, access the market and choose
products that they would like to trade in. The trading landscape has changed a lot over
the years especially since the 1990's when the Indian regulatory authorities liberalized
this market.

1.10 FOREIGN EXCHANGE MANAGEMENT ACT

The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament
of India "to consolidate and change the law relating to foreign exchange with the
objective of facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India". It was passed in
the winter session of Parliament in 1999, replacing the Foreign Exchange
Regulation Act (FERA).
 This act makes offences related to foreign exchange civil offenses. It extends to the
whole of India, replacing FERA, which had become incompatible with the PR
liberalization policies of the Government of India. It enabled a new foreign exchange
management regime consistent with the emerging frame work of the World Trade
effect from 1 July 2005.

25 | P a g e
 The act applies to the whole country and to all the branches and agencies of the body
corporate operating outside India, whose owner or controller is an Indian resident and
also any violation committed by the person covered under the Act, outside India. The
main objective of the act is to facilitate foreign trade and to encourage systematic
development and maintenance of forex market in the country. There are total 7
chapters contained in the act which are divided into 49 sections, out of which 12
sections deal with the operational part.

FEATURES OF FOREIGN EXCHANGE MANAGEMENT ACT

Some of the important features of FEMA are as follows.

• Activities such as payments made to any person outside India or receipts from them,
along with the deals in foreign exchange and foreign security is restricted.
• It is FEMA that gives the central government the power to impose the restrictions
Activities. Without general or specific permission of the MA restricts the transactions
involving foreign exchange or foreign security and payments from outside the country
to India the transactions should be made only through an authorized person.
• Deals in foreign exchange under the current account by an authorized person can be
restricted by the central Government, based on public interest generally.
• Although selling or drawing of foreign exchange is done through an authorized
person, the RBI is empowered by this Act to subject the capital account transactions
to a number of restrictions.
• Resident of India will be permitted to carry out transactions in foreign exchange,
foreign security or to own hold immovable property abroad if the currency, security or
property was owned or acquired when he/she was living outside India, or when it was
inherited by him / her from someone living outside India.
• FEMA recognized capital account convertibility. The violation of FEMA is a civil
offence.
• FEMA is more concerned with management rather than regulations or control. FEMA
is a regulatory mechanism that enables RBI and central government to pass
regulations and rules relating to foreign exchange in tune with foreign trade policy of
India

26 | P a g e
 1.11 FOREIGN EXCHANGRE REGULATION ACT ,1973

• Foreign Exchange Regulation Act, shortly known as FERA, was introduced in the
year, 1973. It was passed by the Indian Parliament (under government of Indira
Gandhi) and came into force effect from January 1,1974. FERA was introduced at a
time when foreign exchange (Forex) reserve of a country was low, Forex being a
scares commodity. FERA therefore proceeded on the presumption that all foreign
exchange earned by Indian residents rightfully belonged to the Government of India
and had to be collected and surrendered to the RBI. The objectivity of FERA was to
regulate certain payments, dealings in foreign exchange and securities, transactions
indirectly affecting foreign exchange and to optimize the proper utilization of foreign
exchange so as to promote the economic development of the country. It aimed at
conserving foreign exchange and its optimum utilization in the development of the
economy.
• This act directly referred to the functions of multinational corporations working in
India. The main purpose FERA was to safeguard and discourage mishandling of
foreign exchange. According to FERA, the entire non-banking foreign subdivisions
and subordinates having foreign equity over and above 40% must carry out for
authorization to set up new accomplishments to acquire shares in present
corporations. It was a requirement in FERA to obtain authorization of RBI about the
transfer of funds relating external operational can be possible.
• The act was for the whole country, Therefore, all citizens of the country, inside or
outside India are covered under this act. The act extends to branches and agencies of
the Indian multinationals operating outside the country, which is owned or controlled
by the persons who is the resident of India. Coca- Cola was India leading soft drink
until 1977 when it is left India after a new government ordered the company to turn
over its secret formula for Coca-Cola and dilute its stake in its Indian unit as required
by the Foreign Exchange Regulation Act (FERA). In 1993, the company (along with
PepsiCo) returned after the introduction of India Liberalization policy. It was
amended by the Foreign Exchange Regulation (Amended) Act 1993. FEMA was
passed in1999 which was replaced in June 2000 with FERA.

27 | P a g e
28 | P a g e
 FEATURES OF FOREIGN EXCHANGE REGULATION ACT
Some of the important features of FERA are as follows:

• RBI can authorize a person / company to deal in foreign exchange.

• RBI can authorize dealers to do transact the Foreign Currencies, subject to review and
RBI was to given power to revoke the authorization in case of non - compliancy.
• RBI would authorize the persons as Money Changers who will convert the currency
of one nation to currency of their nation at rates “Determined by RBI’’.
• No person, other than “Authorized Dealer’ ’would enter in any transaction of the
foreign currency.
• For whatever purpose Foreign exchange was required, it was to be used only for that
purpose. If he feels that he cannot used the currency of that particular purpose, he
would sell it to an authorized dealer within 30days.
• No person in India, without “permission from RBI” shall make payments to a person
resident outside India and receive and payment from a person from outside India.
• No person shall draw issue or negotiate any bill of exchange in which a right to
receive payment outside India is created.
• No person shall make any credit in an account of a person resident out of India.
• No person except authorized by RBI shall send foreign currency out of India.
• A person who has right to receive the foreign exchange would have not to delay the
receipt of the foreign exchange.
In FERA “anything and everything’ ’that has to do something with Foreign Exchange
was regulated. The Experts called it a “Draconian Act’’ which inherited the growth
and modernization of Indian Industries. The important aspect of FEMA, in contrast
with FERA is that facilitates Trade, while that of FERA was that it ‘prevented’
misuse. The focus was shifted from control to Management.

29 | P a g e
 1.12 ROLE OF FEDAI IN FOREIGN EXCHANGE MARKET

• The Foreign Exchange Dealers Association of India (FEDAI) is an association of

banks that specializes in the foreign exchange markets in India. (These institutions are
also called Authorized Dealers or ADs.) Created in 1958, the body regulates the rules
that determine commissions and charges that are attached to the interbank foreign
exchange business.
• Authorized Dealers in Foreign Exchange Business. Ad has to give an undertaking to
Reserve Bank of India to abide by the exchange control and other terms and
conditions introduced by the association for transactions in foreign exchange
business. Accordingly, FEDAI has evolved various rules and regulations for various
transactions in order to protect interest of the exporters, importers general public and
also the authorized in dealers.
• Its major activities include framing rules governing the conduct of interbank foreign
exchange business among banks vis -a -vis public and liaison with RBI for reforms
and development of forex market.
• All public sector banks, foreign banks, private sector and co-operative banks and
certain financial institutions are the members of FEDAI. FEDAI is a non-profit
making an Association and relative expenses are shared by all its member banks.
FEDAI Acts as a facilitating body and in consultation with Reserve Bank of India,
frames rules / regulations for AD s in India for conduct of the foreign exchange
business related transactions. Due to continuing integration of the global financial
markets and increased pace of de-regulation the role of self - regulatory organizations
like FEDAI has also transformed. In such an environment, FEDAI plays a catalytic
role for smooth functioning of the markets through closer coordination with the RBI
and various market participants.
• It also maximizes the benefits derived from synergies of member banks through
innovation in areas like new customized products, bench marking against
international standards on accounting, market practices, risk management systems
etc.

30 | P a g e
 FUNCTIONS OF FEDAI

Main function of FEDAI is to frame rules governing the conduct of foreign exchange
business between banks and the public and liaison with RBI for reforms and
development of foreign exchange market. Role of FEDAI in foreign exchange market
can be explained with the help of following points: -

• Frames guidelines and rules for Forex Market Business.

• Lays down the terms and conditions that survey the daily Forex transactions in India.
• Acts as a catalyst and ensures smooth functioning of the markets while closely
coordinating with the Reserve Bank of India and other group organizations.
• Maximizes the benefits derived from synergies of member banks through innovation
in areas like new customized products, benchmarking against international standards
on accounting, market practices, risk management systems, etc.  Training of Bank
personnel in the areas of Foreign Exchange Business.  Supports its associate banks
with regard to the advising and assisting in the training of its personnel.
• Certifies the foreign exchange brokers of India and announces the exchange rates to
its associate banks.
• Advising / Assisting member banks in setting issues / matters in their dealings. 
Represent member of the banks on Government / Reserve Bank of India /
other bodies.
• Announcement of daily and periodic rates to member banks.

31 | P a g e
 1.13 ROLE OF RESERVE BANK OF INDIA

RESERVE BANK OF INDIA is a central bank for India. All commercials and
cooperative bank come under the RBI. Therefore, it is known as Apex bank.

Authorized person shall comply with general are specific directions or orders of RBI
while dealing in foreign exchange. Failure to do so will attract revocation of such
authorization.

• RBI plays a vital role in the control and the management of forex market in India.
• RBI is entrusted with the task of regulating and managing foreign exchange.
• Exchange control department of RBI is the sanctioning and administrative authority
under FEMA 1999. Now this department is known as Foreign exchange department
by RBI.
• The instructions / guidelines of RBI operative through the authorized person in
foreign exchange.
• RBI has been vested with the powers to regulate investments, trading and commercial
activities in India of foreign companies and individuals.
• Holding of immovable property abroad and the trading. Commercial and the industrial
activities abroad by residents of India have been brought under the FEMA 1999 and
hence under the preview of RBI.
• The Directorate of enforcement is the investigating and authority under the FEMA
1999.
• FEMA 1999 act passed by government of India.
• Foreign exchange and management rules 2000 – notifications by government of
India.
• Foreign exchange management regulations 2000 – notifications by RBI.

32 | P a g e
 1.14 DEALING ROOM OPERATIONS

• The foreign exchange market is very different from other financial markets, such as
the bond or equity markets. Trading takes place on one floor, and for the most part
over the telephone, or on electronic screens. A dealing room is a centralized
establishment, usually of a commercial bank, which is willing to offer a two-way
dealing price for different currencies, (and asset classes instruments) at all times even
when they may not wish to deal all but during the prescribed business hours.

• Typically, a dealing room may consist of dealers and middle and back office staff who
are responsible for the follow up of deals made by the dealers. In a foreign – exchange
dealing room there are a large number of traders, each of them sitting at a desk. On
these desks there are a number of computers with electronic screens. Each of the
traders is trading, that is a buying or selling, usually one foreign – exchange bilateral
pair.

FUNCTIONS OF DEALING ROOM OPERATIONS: -

• POSITIONING OF DEALERS: - A dealer has to maintain two positions-

funds position and currency position.

• PROVIDING RATE: - The primary function of the Dealing Room is to provide

rates for various transactions being put through at branch level with customers.
Therefore, every foreign exchange currency related transaction gets reported to the
Dealing Room. Rates provided by a bank to its customers are called.
‘Merchant rates. These rates can be sub divided as :(1) Card Rates (2) Ready Rates

• PROFIT CENTER: - It acts as a profit center for the bank / financial institution.

• PROVIDING RATES FOR DERIVATIVE CONTRACTS: -

Customers of the bank require derivatives for hedging their currency risks. Forward
Contracts and Swaps being OTC derivatives, they are provided by banks. Providing
rates for such transactions and covering the same is also the function of the dealers.

33 | P a g e
• SERVICE FUNCTION: - Foreign exchange dealing room operations comprise
functions of the service branch to meet the needs of other branches / divisions to buy /
sell foreign currency. update with international market developments.

• Dealers in foreign exchange markets not only provide intraday liquidity, but they are
also key participants in the provision of overnight liquidity.

1.15 RETAIL & WHOLESALE COMPONENT OF INDIAN FOREX

MARKET:

The Indian Foreign Exchange Market can be broadly classified as wholesale Market
and

Retail Market are as follows as under the following.

1.WHOLESALE SEGMENT: - The foreign exchange market in India consists of 3

segments:
• The first segment consists of transactions between RBI and the Authorized dealers.
(Mostly commercial banks)
• The second segment is the interbank market in which the Ads deal with each other.
• The third segment consists of transactions between ADs and their corporate
customers.

The characteristics of this section of market are:

(1) All characteristics between ADs and their customers are consolidated at their
respective dealer’s rooms. The total exposure of the bank is segregated currency-wise
and maturity wise by foreign exchange dealers/ traders who work in the dealing
rooms.

(2) Theoretically every transaction with a customer needs to be covered to lock

the anticipated profit. These cover transactions are conducted in the interbank market.
This market therefore represents a network of all dealing rooms and authorized

34 | P a g e
 brokers who assist the ADs in purchases and selling their foreign currency
requirements.
(3) Unlike the retail Rates used between authorized dealers are called interbank
rates. Segment where transaction amount is customized, in interbank market rates.

(4) All operational aspects of the interbank market are governed by guidelines and
code of conduct of RBI and FEDAI.

2) Retail segment: - The characteristics of this section of market are: -

(1) End – users of foreign exchange approach ADs for rates for different categorized of
transactions. The rates quoted by ADs to their customers are called Merchant rates.
(2) Merchant rates can be sub-classified as: -

(a) Card Rates – these are standardized rates prepared and circulated by Dealing
Room to all authorized branches the standardized rates are applied by to all small
transactions of less than USD 5000. These rates are applicable throughout the trading
day.
(b) Ready rates- for transactions exceeding USD 500, customized rates are
provided by the dealing room for individual transactions. These rates are prepared on
the on-market rates provided at the time of reporting.
(3) No brokers or intermediaries are followed in this segment of the market.
(4) All transactions between ADs and their customers are governed by the exchange-
controlled regulations of RBI.
(5) In addition to ADs, RBI also provides licenses to money changers who are allowed to
transact only in tourism related instruments like Travelers Cheques and foreign
currency noted. Money changers can be classified as follows: -

(a) Restricted money changers – who are permitted only to purchase foreign
currency instruments. Example: - 5-star hotels and

(b) Full -fledged money changers – who are allowed to both buy and sell foreign
currency instruments. Example: - Travel agencies.

35 | P a g e
 CHAPTER – 2
REVIEW OF LITERATURE

36 | P a g e
INTRODUCTION:

Currency exposure management being important in the context of global trade

and investments, voluminous literature on the subject is available worldwide.
Developed economies account for a big chunk of empirical literature on
currency exposure management for obvious reasons. Some literature is
available relating to emerging and developing economies also, which may be of
greater help to the present research. To facilitate a better review of literature,
studies conducted abroad are presented first followed by studies conducted in
India. The following is an exhaustive list of investigations conducted in foreign
countries.
EMPIRICAL STUDIES CONDUCTED IN INDIA: -

As stated earlier, concept of currency exposure itself is new to Indian business

enterprises. Consequently, empirical literature on the same is also limited. Most of the
empirical investigations in India are carried out to know the impact of appreciation of
Indian rupee against other major currencies, especially USD. The following is the list
of such investigations.

Yadav and Jain (2004) studied the risk management practices relating to

international operations of public sector companies in India. The study included

political risk, interest rate risk and exchange risk. With reference to exchange risk,
study found that significant transaction that causes exchange risk is import activity.
Majority of public sector companies were not found to use forward to cover foreign
exchange risk.

ASSOCHAM (2007) conducted a survey of 400 large, medium and small exporters
on the adequacy of the Rs.1400 crore export package announced by government to the
rupee appreciation-hit exporters. An overwhelming majority of 80 percent complained
that a 10 percent rise in rupee has rendered the exports proceeds uncompetitive. About
68 percent expressed anguish citing that delay in implementing service tax
exemption

37 | P a g e
as declared by government was adding to their woes while about 90 percent
unanimously held that government response in identifying and promoting potential
export markets for them was almost `negligible’. 80 percent of the exporters surveyed
felt that the margins of SMEs had been wiped out on account of appreciation;
government should facilitate invoicing in rupees rather than US dollars and other
currencies, the relief package will not give much benefit to sustain export growth.
Respondents took part in the survey felt that the countries like Thailand, Indonesia,
Malaysia, Pakistan and Bangladesh will give stiff competition to Indian exporters in
lieu of Rupee appreciation. The Indian rupee has appreciated a lot as compared to
currencies of these countries against USD, making the Indian exports uncompetitive
in the international market.

A Mecklai and Business Standard (2007) survey says most Indian companies are
still quite far from having good risk management processes. Some of this may have to
do with the fact that it is only recently -- say, the last four or five years -- that the
forex market has started throwing up surprises in terms of two way movements.
Again, it is only recently that many companies have come to realize that they are,
indeed, on their own in the global market and need to create systems that will protect
them when things get rough. Only 17 companies out of 45 taken part in the survey
identify exposures for risk management on the date of the contract; in all other cases,
it is later

- either on the date of invoice or on the date the exposure is reported to the treasury.
This suggests that in most companies, risk is identified very late in the game. Twenty-
seven companies used only forwards as hedging instruments and nine used the entire
gamut of instruments, including structured products. The responses showed, however,
that only four of these nine companies have documented risk management policies.

Dash and Madhava (2008) analyses the impact of INR/USD exchange rate
fluctuation on the Indian IT sector The analysis is performed on a random sample of
fifty major IT companies. This survey was conducted in the light of drastic
appreciation of INR against USD during last part of 2007. The results of the
study showed that foreign exchange exposure was especially alarming for a

38 | P a g e
small fraction of small-cap IT companies. The mid-cap and large-cap IT
companies had relatively low/moderate
exposure levels. The majority of large-cap companies had already hedged their
foreign exchange risk, and were not significantly affected by their respective foreign
exchange exposures.

Siva Kumar and Sarkar (2008) attempt to evaluate the various alternatives
available to the Indian corporates for hedging currency exposure. The study was based
on 2006- 07 annual report of 8 listed companies. By studying the use of hedging
instruments by Indian firms from different sectors, the paper concludes that most
Indian firms use forwards and options to hedge their foreign currency exposure. This
implies that these firms chose shortterm measures to hedge as opposed to foreign
debt. This preference is possibly a consequence of their costs being in rupees, the
absence of a Rupee futures exchange in India and curbs on foreign debt. It also
follows that most of these firms behave like net exporters and are adversely affected
by appreciation of the local currency. There are a few firms which have import
liabilities which would be adversely affected by rupee depreciation.

Jain, Yadav, and Rastogi (2009) examines and compares the policies of foreign
exchange risk and interest rate risk management followed by public Sector, private
sector business houses and foreign controlled firms in India. The study reveals that
Indian firms are aware of their foreign exchange and Interest rate risk. However, all
the risks are not managed and the type of ownership control significantly influences
the usage of the techniques to manage exchange rate risk and interest rate risk.
'Exposures are not large enough' is the most widespread and prominent reason for not
managing risks. Ownership has been observed to be a significant determinant of firms'
strategy towards risk management.

39 | P a g e
 CHAPTER 3
RESEARCH METHODOLOGY

40 | P a g e
 1. OBJECTIVE OF THE STUDY.
2. SCOPE OF THE STUDY.
3. LIMITATIONS OF STUDY.

2.1 OBJECTIVE OF STUDY

• To study the various concepts and technicalities in foreign exchange.

• To get knowledge about various concepts and functions of foreign exchange market in
India.

• To get knowledge about role of RBI, FEDAI Foreign exchange market in India.

• To study about to estimate awareness of factors affecting movement of forex market

in India.

• To study the trend analysis exchange rate movement with respect to spot rate, forward
rate, foreign exchange reserve and trade balance.

• To get knowledge about hedging tools used in foreign exchange.

• To study Protect Domestic Industries.

2.2 SCOPE OF STUDY

• The project gives an introduction of forex market in India.

• It also highlights the Advantages & Disadvantages of forex market in India.

• The project also explains the structure of forex market in India.

• It also explains that factors affecting movement of forex market in India.

• It also explains the role of forex risk management, role of RBI, role of FEDAI, role of
FEMA.
• It also explains why forex market is unique.

41 | P a g e
 2.3LIMITATION OF THE STUDY
• Time consuming.
• Lack of secrecy.
• Resource constraint.
• Difficulties in collecting measuring data.
• The self-reported data was very limited to fit in the project topics.
• Administrative work.

42 | P a g e
 CHAPTER -4

DATA ANALYSIS AND INTERPRETATION

43 | P a g e
1. GENDER

Table 1
Male 60

Female 40
Total 100

Chart 1

Gender

40% Male
Female
60%

Source: Primary Data

INTERPRETATION

There are a total of 100 people in Table 1.

There are 40 females and 60 males among them.
The distribution of genders within the sample population is shown by these data. In
particular, it reveals that 40% of the sample is made up of females and 60% is made
up of men.
Gender representation in the given environment may be analyzed, comparisons can be
drawn, and gender demographics can be analyzed.

44 | P a g e
2. AGE
Table 2
21 – 30 years 45
31 – 40 years 35
41 – 50 years 20
Total 100

Chart 2

Age

20%
21-30
45% 31-40
41-50

35%

Source: Primary Data

INTERPRETATION

Table 2 shows the distribution of persons in a sample population of 100 according to

various age groups. Three age groups are identified in the data:
- 21–30 years old: 45 people
- 31–40 years old: 35 people
40–50 years old: 20 people

This data offers insights into the sample's age demographics. It demonstrates that the
bulk of people are in the age range of 21 to 30, next 31 to 40, and finally 41 to 50.
Understanding the age makeup of the group being studied and performing other
demographic and marketing analytics may both benefit from an analysis of age
distribution.

45 | P a g e
3. ANNUAL INCOME

Table 3
Up to Rs.1,00,000 15

Rs.1,01,000 – Rs.3,00,000 25
Rs.3,01,000 – Rs.5,00,000 40
Rs.5,01,000 & above 20
Total no of respondent 100


Chart 3

Income

20% 15%
0-100000
10100-300000
301000-500000
25%
50100 & above

40%

Source: Primary Data

INTERPRETATION

Table 3 shows the distribution of persons in a sample population of 100 across various
yearly income categories. Data are divided into four income groups:
Up to Rs. 1,000,000: 15 people
From Rs. 1,01,000 to Rs. 3,00,000: 25 people
Between Rs. 3,01,000 and Rs. 5,00,000: 40 people
Rs. 5,01,000 and up: 20 people
This data offers insights into the sample's income distribution. According to the data,
most people make between Rs. 3,01,000 and Rs. 5,00,000, then Rs. 1,01,000 and Rs.
3,00,000, and Rs. 5,01,000 and above, and finally Up to Rs. 1,00,000.

46 | P a g e
Q4) Do you know about foreign exchange market 

Table 4
knowledge about market people
yes 70
no 30
total 100

Chart 4

knowledge about market

30%
yes
no

70%

Source: Primary Data

INTERPRETATION
Table 4 presents data on the level of knowledge that members of a sample population
of 100 have on the foreign exchange market. Two categories are used to separate the
data:
Yes, seventy people.

No:thirtypeople
This information shows people's awareness of and familiarity with the foreign
exchange market. In particular, it demonstrates that whereas 30% of the sample
population lacks an understanding of the foreign currency market, 70% of them do.
Understanding the general public's awareness of foreign exchange trading is
important for financial literacy and investment decision-making, and it may be gained
by analyzing this data.

47 | P a g e
Q5) Do you invest in forex market 

Table 5
yes 60

no 40
Total 100

Chart 5

Investing in forex

40% Yes
No
60%

Source: Primary Data

INTERPRETATION

The data in Table 5 indicates that 60 out of 100 individuals invest in the forex market,
while the remaining 40 do not. This suggests that a significant proportion of the
population is engaged in forex trading, which is the practice of buying and selling
foreign currencies to profit from fluctuations in exchange rates.

48 | P a g e
Q6) What are the main reasons for not investing in foreign exchange market.

Table 6
Poor risk and money management 32
Failing to adapt the market 28
Having unrealistic expectation 23
Trading without plan 22
Total 100

Chart 6

Chart Title

22% Poor risk and money

27% management
Failing to adapt the market
Having unrealistic expecta-
tion
18% Trading without plan
33%

Source: Primary Data

INTERPRETATION

Table 6 offers an analysis of the primary reasons, among a sample of 100 people, why
people decide not to invest in the foreign currency market.

The data is segmented into four categories:

Poor risk and money management: 32 individuals
Failing to adapt to the market: 28 individuals
Having unrealistic expectations: 23 individuals
Trading without a plan: 22 individuals

49 | P a g e
Q7) How frequently do you invest in the market.

Table 7
Monthly 25
Half yearly 15
Quarterly 35
Yearly
25
Total 100

Chart 7

Frequency of investing

25% 25% Half yearly

Quartelry
Yearly
Monthly
15%
35%

Source Primary data

INTERPRETATION

The frequency with which people invest in the foreign currency market is displayed in
Table 7.
The distribution shown in the table is as follows:

Every month: 25 people

Half yearly: 15 individuals

Quarterly: 35 individuals

Annually: 25 people

50 | P a g e
Q8) Do you use hedging for currency risk.

Table 8
yes 60

no 40

Total 100

Chart 8

Use hedging

40% Yes
No
60%

Source Primary data

INTERPRETATION

Table 8's data indicates that 60 out of 100 people employ hedging to protect
themselves against currency risk, whereas 40 do not.

51 | P a g e
Q9) what all are the hedging tools which you use as hedging.

Table 9
derivatives 25
Speculation 15
Future contract 17
Arbitrage 21
options 22
Total 100

Chart 9

Hedging Tools used

22% 25% derivatives

Speculation
Future contract
Arbitrage
21% 15% options

17%

Source Primary data

INTERPRETATION

Table 9 lists the hedging instruments that are applied to hedging in a sample
population.
Five categories are used to separate the data:

Derivatives: 25 individuals

Speculation: 15 individuals

Future contract: 17 individuals

Arbitrage: 21 individuals

52 | P a g e
Options: 22 individuals

10) Which type of risk do you face in the foreign exchange market.

Table 10
Counterparty risk 28
Leverage risk 17
Operational risk 15
Transaction risk 16
Economies risk 24
Total 100

Chart10

Type of risk

24% Counterparty risk

28%
Leverage risk
Operational risk
Transaction risk
16% Economies risk
17%
15%

Source Primary data

INTERPRETATION

Table 10 gives an overview of the many kinds of hazards that a sample population in
the foreign exchange market faces.

Five categories are used to separate the data:

Counterparty risk: 28 individuals

Leverage risk: 17 individuals

Operational risk: 15 individuals

Transaction risk: 16 individuals

53 | P a g e
Economic risk: 24 individuals

Q11) what are the factors that affected foreign exchange market most.

Table 11

Inflation rate 28
Interest rate 24
Country current account of payment
11
Recession
19
Government debt
18
Total 100

Chart 11

Factors affecting forex matrket

18% Inflation rate

28% Interest rate
Country current account of
payment
19% Recession
Government debt
11% 24%

Source Primary data

INTERPRETATION
Table 11 sheds light on the main variables influencing the foreign currency market in
each sample.
Five categories are used to separate the data:

Inflation rate: 28 individuals

Interest rate: 24 individuals

Country current account of payment: 11 individuals

Recession: 19 individuals

54 | P a g e
Government debt: 18 individuals

Q12) what are the main drawbacks of foreign exchange market.

Table 12
Low transparency 50
Price determination process 30
High volatility 20
Total 100

Chart 12

Drawbacks

20%
Transparency
Price determination process
50%
High volatily

30%

Source Primary data

INTERPRETATION

The respondents selected inadequate transparency (50%) as the primary negative of

the foreign currency market, followed by the price decision method (30%) and
significant volatility (20%). Due to these variables, investors may face dangers and
find the market to be difficult to manage.

55 | P a g e
 CHAPTER-5

FINDING & CONCLUSION

56 | P a g e
 FINDINGS

Gender Representation:
One hundred people make up the sample population.
Males make up 60% of the sample, and females make up 40%.

Given that there were more male participants than female, this points to a gender
imbalance.

Age Distribution:
There are three age categories within the sample population:
21–30 years old, 31–40 years old, and 41–50 years old.
With 45% of the sample, the age group of 21 to 30 years old is the biggest.
With 35% of the sample, the second-largest age group is 31 to 40 years old.
Ages 41 to 50 make up the smallest age group in the sample (20%).

This suggests that the sample is biased toward younger people, as most of the
participants are between the ages of 21 and 30.

Annual Income:

The sample population's annual income is broken down into four groups: income up
to Rs. 1,00,000, income between Rs. 1,01,000 and Rs. 3,00,000, income between Rs.
3,01,000 and Rs. 5,00,000, and income over Rs. 5,01,000.
40% of the sample falls into the greatest income bracket, which is between Rs.
3,01,000 and Rs. 5,00,000.
25% of the sample falls into the second-largest income category, which is between
Rs. 1,01,000 and Rs. 3,00,000.
Twenty percent of the sample falls into the third-largest income bracket, which is Rs.
5,01,000 and above.
Up to Rs. 1,00,000 is the lowest income category, accounting for 15% of the sample.

57 | P a g e
This implies that a considerable fraction of the sample population earns between Rs.
3,01,000 and Rs. 5,00,000 yearly, indicating that the bulk of the population has a
comparatively higher income.
Knowledge of the Foreign Exchange Market:
Seventy percent of the individuals in the sample has knowledge of the foreign
exchange market.

Thirty percent of the sample population lacks basic understanding of the foreign
exchange market.

This suggests that while a sizable minority of the sample is ignorant of the FX market,
the majority of them are acquainted with it.

Forex Investment:

60% of the sample population makes investments in the foreign exchange market.
Forty percent of the study group does not make FX market investments.

This indicates that while a sizable fraction of the sample is not actively trading forex,
the majority appears to be doing so.

Reasons Not to Invest in Foreign Exchange:

The following are the main excuses for not making FX market investments:
Bad financial and risk management (32%).
Not adjusting to the market (28%).
Having irrational assumptions (23%)
Trading with no strategy (22%).

These results suggest that excessive expectations, a lack of risk management, and an
inability to adjust to changing market circumstances are the primary obstacles to
foreign investment.

58 | P a g e
The frequency of forex trading:
Quarterly is the most typical frequency for FX investments (35%).
Monthly (25%) and annual (25%) frequencies are the second most popular.
The half-yearly (15%) frequency is the least frequent.

This indicates that a smaller percentage of the sample population invests annually, but
the bulk trades forex more frequently quarterly or monthly.

Hedging as a Tool for Currency Risk:

Hedging is used by 60% of the sample group to reduce currency risk.

Forty percent of the sample group does not hedge.

This suggests that in order to reduce the risks associated with currency fluctuations,
the majority of the sample population uses risk management techniques like hedging.

Tools Used for Hedging:

The hedging techniques that are most often utilized are derivatives (25%)
Choices (22%).
Arbitrage (21%).
Contracts for the future (17%)
15% are speculative.

This implies that the sample population employs a range of hedging tools, the most
common being derivatives and options.

Risk Types Experienced:

In the currency market, the primary risks are:

Risk posed by other parties (28%).
Risk to the economy (24%).
Risk leverage (17%)
Risk associated with transactions (16%)

59 | P a g e
15% is operational risk.

This suggests that counterparty risk, economic variables, and risks related to
leveraged trading and transaction execution are the sample population's main
concerns.

Factors Affecting the Forex Market:

The following variables have the most effects on the currency market:
Rate of inflation (28%).
Rate of interest (24%).
Downturn (19%)
Debt to the government (18%)
Current payment account for the nation (11%)

According to the sample population, these results imply that macroeconomic variables
like interest rates, inflation, and general economic circumstances are what most
influence movements in the currency market.

The drawbacks of the Foreign Exchange Market:

According to the sample population's perceptions, the main disadvantages of the FX

market are:

50% transparency is low.

Procedure for determining prices (30%)
elevated volatility (20%)

This suggests that the primary problems of the forex market, according to the sample
population, are its extreme volatility, lack of transparency, and difficulty in
determining prices.

60 | P a g e
61 | P a g e
 CONCLUSION

The derivatives market in India has been expanding rapidly and will continue to grow.
While much of the activity is concentrated in foreign and a few private sector banks,
increasingly public sector banks are also participating in this market as market makers
and not just users. Their participation is dependent on the development of skills
adapting technology and developing sound risk management practices. While
derivatives are very useful for hedging and risk transfer, and hence improve market
efficiency, it is necessary to keep in view the risks of excessive leverage, lack of
transparency particularly in complex products, difficulties in valuation, tail risk
exposures, counterparty exposure and hidden systemic risk. Clearly there is need for
greater transparency to capture the market, credit as well as liquidity risks in off-
balance sheet positions and providing capital there for. From the corporate point of
view, understanding the product and inherent risks over the life of the product is
extremely important. Further development of market also hinges on adoption of
international accounting standards and disclosure practices by all market participants,
including corporate. Increasing convertibility on the capital account would accelerate
the process of integration of Indian financial markets with international markets.
Some of the necessary preconditions to this as suggested by the Tara- pore committee
report is already being met.

Increasing convertibility does carry the risk of removing the insularity of the Indian
markets to external shocks like the Southeast Asian crisis, but a proper management
of the transition should speed up the growth of the financial markets and the economy.
of derivative products tailored to specific corporate requirements would enable
corporate to completely focus on its core businesses, de-risking the currency and
interest rate risks while allowing it to gain despite any upheavals in the financial
markets. Increasing convertibility on the rupee and regulatory impetus for new
products should see a host of innovative products and structures, tailored to business
needs. The possibilities are many and include INR options, currency futures, exotic
options, rupee forward rate agreements, both rupee and cross currency swaps, as well
as structures composed of the above to address business needs as well as create real
options.

62 | P a g e
HYPOTHESIS TESTING
HYPOTHESIS – 1
Null hypothesis: There is no significant association between the main reasons for not
investing in the foreign exchange market and the perception of the forex market in
India.

Alternative hypothesis: There is a significant association between the main reasons

for not investing in the foreign exchange market and the perception of the forex
market in India

Reason for not Investing 21-30 31-40 41-50 Total

Poor risk and money
management 10 15 7 32
Failing to adapt the market 15 5 5 25
Having unrealistic expectation 8 10 3 21
Trading without plan 12 5 5 22
Total 45 35 20 100

Anova: Single Factor

SUMMARY
Averag Varianc
Groups Count Sum e e
10 2 22 11 32
15 2 10 5 0
8 2 13 6.5 24.5
12 2 10 5 0

ANOVA
Source of P-
Variation SS df MS F valueF crit
1.1415
Between Groups 48.375 3 16.125 9 0.43357 6.59138
Within Groups 56.5 4 14.125

104.87
Total 5 7

63 | P a g e
64 | P a g e
INTERPRETATION:

The F-statistic's p-value is 0.43357, which is higher than the accepted significance
level of 0.05. This suggests that the null hypothesis cannot be successfully rejected.
Put differently, there isn't enough data to draw the conclusion that the primary
disincentives to participating in the foreign exchange market and the perception of the
Indian forex market are significantly correlated.

We are thus unable to draw the conclusion that these factors have a significant
association based on the ANOVA findings.

HYPOTHESIS – 2
Null hypothesis: There is no significant difference in the type of risk faced in the
foreign exchange market among counterparty risk, leverage risk, operational risk,
transaction risk, and economies risk.

Alternative hypothesis: There is a significant difference in the type of risk faced in

the foreign exchange market among counterparty risk, leverage risk, operational risk,
transaction risk, and economies risk.

Reason for not Investing 21-30 31-40 41-50 Total

Counterparty risk 12 8 8 28
Leverage risk 8 4 5 17
Operational risk 7 3 5 15
Transaction risk 7 5 4 16
Economies risk 12 8 4 24
Total 46 28 26 100

Anova: Single Factor

SUMMARY
Groups Count Sum Average Variance
12 2 16 8 0
8 2 9 4.5 0.5
7 2 8 4 2

65 | P a g e
 7 2 9 4.5 0.5
12 2 12 6 8

ANOVA
Source of P-
Variation SS df MS F value F crit
Between 0.1780
Groups 21.4 4 5.35 2.431818 6 5.192168
Within Groups 11 5 2.2

Total 32.4 9

INTERPRETATION:

The F-statistic's p-value is 0.17806, which is higher than the accepted significance
level of 0.05. We are unable to reject the null hypothesis as a result. This suggests that
there is not enough data to draw the conclusion that the kind of risks that each of the
groups faces in the foreign currency market varies significantly from one another.

Stated otherwise, the ANOVA results do not support the notion that counterparty risk,
leverage risk, operational risk, transaction risk, and economic risk are significantly
different from one another when it comes to the types of risks encountered in the
foreign exchange market.

66 | P a g e
 CHAPTER 6

REFERENCES AND WEBLIOGRAPHY

67 | P a g e
 BIBLIOGRAPHY

1. www. Fema.rbi.org.in
2. www.eximguru.com/exim/ / reserve bank / fema. apex www.
a. Fema online .com / fema -act- regulation .com www. Kesdee.com / pdf / foreign
exchange market http://en.wikipedia . org / wiki / foreign exchange risk. www.
b. Paper tayari .com www.rbi.org.in

68 | P a g e
 PLAGIARISM_TEST

69 | P a g e
70 | P a g e
71 | P a g e
72 | P a g e
73 | P a g e
74 | P a g e