Foreign Exchange Market SHRUTIKA DHAW.ri eee WHAT IS FOREIGN EXCHANGE Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country. The conversion of currency is done by the banks who deal in foreign exchange. These banks maintain stocks of one currencies in the form of balances with banksCnid .... It also refers to the stock of foreign currencies and other foreign assets. The foreign exchange management ACT 1999 defines " ech exchange means foreign currency an includes... (a) Deposits credits and balances payable in any foreign currency. (b) Draft traveler's cheques, letter or credit or bills of exchange expressed or drawn in Indian currency but payable in any foreign currency. (¢) Drafts travelers cheques, letter of credit or bills drawn by banks, institution or e India, but payable in Indianee Ce Riefura of foreign exchange #Volatile, affected by hedger, arbitrager, speculator. ® Affected by demand and supply. « Affected by rate of interest. « Affected by balance of payment surplus and deficit. » Affected inflation rate. ® Spot and forward rates are different. « Affected by the economic stability of the country. » Affected by the fiscal policy of the government. » Affe the political condition of the country. fed directly or indirectlyeee NN ee Operation of foreign exchange market: Foreign exchange market operates either as:- Spot Market: (Current Market) Spot market for foreign exchange is that market which handles only spot transaction or current transactions. Principle characteristics: + Spot Market is of daily nature. [t does not trade in future deliveries. + Spot rate of exchange is that rate which happens to prevail at the tions are incurred.Forward Market: Forward Market for foreign exchange is that market which handles such transaction of foreign exchange as are meant for future delivery. Principles Characteristics:- « It only caters to forward transaction. + It determines forward exchange rate at which forward transaction are to be honored.Exchange Rate > Fixed Exchange Rate System Fixed rates provide greater certainty for exporters and importers. » Flexible Exchange Rate System Flexible exchange rate or floating exchange rates change freely and are determined by trading in fhe forex market.History of Foreign exchange Foreign exchange history can be viewed as a series of solutions that allowed countries to issue their own currency and to conduct their own monetary policy while also allowing international trade to be conducted by providing a means of exchanging one currency for another according to the exchange rate between them, which was eith d-upon or set by the market.ae rate maeraeiene A reliable forecast or future spot rate is called study of empirical patterns of exchange rate fluctuation. It provides essential information for an exchange rate exposure. Market Information Forecasting = Weak * No information "Required * Semistrong * Published *Not required 2 information * Strong * Published plus private information *Not requiredeee The Foreign Exchange Market for Beginners »The foreign exchange market or forex market as it is often called is the market in which currencies are traded. >» Currency Trading is the world’s largest market consisting of almost trillion in daily volumes and as investors learn more and become.more interested, market continues to rapidly grow, >All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its another currency. cy of a currency pair is called the ," while the second currency is called ency. See eeeConde » Foreign exchange Capital Markets (FXCM) is an online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market. »Registering for a demo account allows a new trader to download the online trading platform that is used by the company's clients tre i counts and make trades as if ing it with real money.“Characteristics 5 of foreign exchange e Its huge trading volume representing the largest asset class in the world leading to high liquidity. e Its geographical dispersion; e Its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday. eThe use of leverage to enhance profit and eS with respect fo account size.Retail Exchange Market il People may need to exchange currencies in a number of situations.for Eg... Fluctuations in exchange rates A market based exchange rate will change whenever the values of either of the two component currencies change. The higher a country’s interest rates, the il| be the demand for that currency.ime Market BancIUnts Central banks participate in the foreign exchange market to align currencies to their economic needs, Commercial companies . Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades offen have little short term impact on market rate. Central bank National central banks play an important role in the foreign exchange markets. They try to control ly, inflation, and/or interest rates € Official or Unofficial target rates ncies.~ Measures Initiated to Develop the Foreign Exchange Market in India Institutional Framework « Foreign Exchange Regulation Act (FERA), 1973 was replaced by the market friendly Foreign Exchange Management Act (FEMA), 1999. » Money and Securities Markets set up by the Reserve Bank in 1999 was expanded in 2004 to include foreign exchange marketsFOREIGN EXCHANGE MARKET STRUCTURE Market Segments Foreign exchange market activity takes place onshore with Many countries prohibiting onshore entities from undertaking the operations in offshore markets for their currencies, It is the central bank, or professional dealers association, which normally issues the code of conduct (Canales-krillenko, 2004).In auction markets, an. er or auction mechanism : eign exchange by matching emand orders.op p10 Curency 1 meets as on May 2 2012 are Top 10 currency traders [Rank| Name fmm Deutsche Bank = Citi Ed credit Suisse = Morgan. Stantey i 10 |—EEE Goldman Sachs = Royal Bank of Scotland [Market share | al Barclays Investment Bank | I i | | | | 14.57% 12. 26% 10.95% 10.48% 6 72% 6.6% 5 86% | 4.68% 3.52% 3.12%CURRENCY TRADING RULES > PLAN YOUR TRADE AND TRADE YOUR PLAN. » THE TREND IS YOUR FRIEND. » FOCUS ON CAPITAL PRESERVATION. » KNOW WHEN TO CUT LOSS. »>TAKE PROFIT WHEN THE TRADE IS GOOD > BE EMOTIONLESS. » NOT TRADE BASED ON A TIP FROM A FRIENDMistakes of Foreign exchange Traders > Trading Out of Boredom or Anger »Having Unrealistic Expectations. »Taking Highly Correlated Trades. »Failing to Use a Stop. »Taking Unnecessary Risks. » Being Too Patient With Losers and Not Patient Enough With Winners. > Bei “Possum Trader”.