Q no :1 Introduce foreign exchange market ?

The foreign exchange market (forex, FX, or currency market) is a global, worldwide-decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of [1] weekends. The foreign exchange market determines the relative values of different currencies. The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in theUnited States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is inUnited States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change [2] in interest rates in two currencies. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of       its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

Foreign Exchange is an international financial market place where money is sold and bought freely. It is a non-stop cash market where you speculate on changes in exchange rates of foreign currencies. Forex operates through a global network of banks, corporations and individuals trading one currency for another but has no physical location and no central exchange not just like other financial markets. The Forex market spans from one zone to another in all major financial centers on a 24- hour basis since it has no physical exchange. Since there is no centralized exchange for currencies to be sold or bought, forex is considered to be an over- the counter market or what is called OTC. Banks and forex dealers are connected around the world via internet, fax and telephone to form the Forex market. Read through this article, introduction to forex, in order to know more about forex trading as well as its purpose and many more. Learning forex enables us to know some forex terms, codes, numbers and definitions. Forex trading 101 or the introduction to forex trading will enable us to know how forex works and how to make money with currency trading on forex.

Q no :2 Determine and select thories of exchange rate?

We have seen that existing studies have produced a number of different estimates of the exchange rate of the renminbi. The reason behind the difference is that different theories, data and econometric methods are used. It is clear that not all the theories that are actually used are suitable for forecasting the movement of exchange rate. Some may be better than others. Thus, it is very important for researchers who study exchange rates to choose or create a better model with micro foundations for an empirical study. In this Chapter, we investigate existing theories, their preconditions, implications and advantages and disadvantages, which will be helpful to the modeling efforts to be made in the next part. The exchange rate theories investigated in this part can be classified into three kinds: partial equilibrium models, general equilibrium models and disequilibrium or hybrid models. Partial equilibrium models include relative PPP and absolute PPP, which only consider the goods market; and covered interest rate parity (CIRP) and uncovered interest rate parity (UCIRP), which only consider the assets market, and the external equilibrium model, which states that the exchange rate is determined by the balance of payments. General exchange rate equilibrium models include the Mundell- Fleming model, which deals with the equilibrium of the goods market, money market and balance of payments, but lacks micro-foundations to some extent; the Balassa-Samuelson model, which is built on the maximization of firms profit; the Redux model, which was developed by Obestfeld and Rogoff, and the PTM (Pricing to Market) model, created on the maximization of consumers utility; A simple monetary model with price flexibility and the Dornbusch model (or Mundell-Fleming-Dornbusch model), are actually obtained by combining the monetary equilibrium with the adjustment of price and the adjustment of output toward their long run equilibrium, and can be called hybrids of monetary equilibrium with PPP or UCIRP. The balance of payments is covered in this investigation since many studies regards it as a foundation of equilibrium exchange rate determination

Q NO 3 CONCEPT AND TYPES OF OPTION ?

An option is a contract between two parties giving the taker (or buyer) the right, but not the obligation, to buy or sell a parcel of stocks (or shares) at a predetermined price; possibly on or before a predetermined date. To acquire this right the buyer pays a premium to the writer (or seller) of the contract.or

Definition of 'Option'
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

There are two types of options; namely:

There are two types of option contracts: Call Options and Put Options. Call Options give the option buyer the right to buy the underlying asset. Put Options give the option buyer the right the sell the underlying asset.
Call opion A Call is an options contract that gives the buyer the right to exercise the option and buy the underlying commodity at the strike price on (European style options) or at any time up to (US style options) the expiration date.

Put option
A Put is an options contract that gives the buyer the right to sell the underlying commodity at the strike price on (European style options) or at any time up to (US style options) the expiration date.

Q no :4 define forward contracts ?

Investopedia explains 'Forward Contract'

Most forward contracts don't have standards and aren't traded on exchanges. A farmer would use a forward contract to "lock-in" a price for his grain for the upcoming fall harvest. or

Definition of 'Forward Contract'

A cash market transaction in which delivery of the commodity is deferred until after the contract has been made. Although the delivery is made in the future, the price is determined on the initial trade date.

What are the uses of forward contracts?

Forward contracts offer users the ability to lock in a purchase or sale price without incurring any direct cost. This feature makes it attractive to many corporate treasurers, who can use forward contracts to lock in a profit margin, lock in an interest rate, assist in cash planning, or ensure supply of a scarce resources. Speculators also use forward contracts to make bets on price movements of the underlying asset.

risk or forward contract

Because no money exchanges hands initially, there is counterparty credit risk involved with forward contracts. Since you depend on the counterparty to deliver the asset (or cash if it is a cash settled forward contract), if the counterparty defaultsbetween the initial agreement date and delivery date, you may have a loss. However, two conditions must apply before a party faces a loss: 1. The spot price moves in favor of the party, entitling it to compensation by the counterparty, and 2. the counterparty defaults and is unable to pay the cash difference or deliver the asset 3.

How do forward contracts work?

Forward contracts have a buyer and a seller, who agree upon a price, quantity, and date in the future in which to exchange an asset. On the delivery date, the buyer pays the seller the agreed upon price and receives the agreed upon quantity of the asset. If the contract is cash settled, the buyer would have a cash gain (and the seller a cash loss) if the spot price, or price of the asset at expiry, is higher than the agreed upon Forward price. If the spot price is lower than the Forward price at expiry, the seller has a cash gain and the buyer a cash loss. In cash settled forward contracts, both parties agree to simply pay the profit or loss of the contract, rather than physically exchanging the asset.

Q no :5 write a note on future and future contracts ?

Futures Contract - Looking Forward to the Future!

A Futures Contract is a universally regulated agreement to buy or sell a product at a particular date in the future, at a pre-determined price. The pre-fixed date is known as the final settlement date and the price is known as the futures price. Both parties - the buyer and the seller of the contract - must fulfill the contract on the final settlement date. Futures contracts include detailed information about the quality and quantity of the product. Some futures contracts require the physical delivery of the product, while others are settled through cash payments. Futures contracts are standardized to facilitate transactions. What are some Examples of Futures Contracts?

Risk involved: Regulations in the market:

High risk involved. They are not regulated.

Low risk involved. They are a government regulated market.

Some examples of Futures contract are:

y y y y y y

corn futures (CBOT) gold futures (COMEX) crude oil futures (NYMEX) stock index futures (CME) Eurodollar futures (IMM) bond futures (CBOT)

All these contracts are self explanatory as the transactions involve the physical assets named. However, the Stock Index Futures Contract needs an explanation. This is a Futures contract that has a number of stocks brought together to form an index. The advantage of this Futures Contract is investors have the option of a wide range of equities, reduced price risk, and a secure portfolio of investments. What are the Guidelines and Specifications of a Futures Contract? Since futures contract are flexible, and are privately negotiated, specifications and guidelines are necessary to detail the nature of these agreements. The first responsibility of the parties involved in this type of contract is to lay down the Futures Contract specifications and guidelines. The factors that need to be considered are:

y y y y y y

The asset - The quality of the product or the asset must be specified. Contract size - The amount of the asset delivered under one contract. Delivery arrangements - The seller will choose the exact date when the asset will be delivered. Price quotes - The way that the futures prices are quoted needs to be specified. Some futures are quoted as dollars and 32s of a dollar. This will also define the minimum price movements, the tick, in this case $1/32. Limit up/down -It has to be specified the limit of the price of the futures contract, when trading would stop. This is to prevent speculation. Position limits - The maximum number of contracts that the agent is allowed to hold has to be regulated. These include the total number of contracts that can be held and the maximum number of contracts expiring in any particular month. This also prevents speculation in the market.

What is a Future Contract? Another type of contract that can be signed between a seller and a buyer is the future contract. The concept behind future and forward contracts are the same. Like a forward contract, it is also a contract or an agreement for the sale or purchase of a good or loan, or currency at some time in the future. However, when it comes to forward contract vs future contract, the latter is a publicly traded contract, while the former is privately traded contract which takes place between people who know each other. Future contracts trade on the floor of future exchange, as thus their transactions are managed by a broker, who is a members of that exchange. The party who has made the future contract remains anonymous. Categories Structure: Method of pretermination: Size of the contract: Risk involved: Future Contract Initial margin payment is needed. This contract is standardized to the needs of the customers. There is opposite contract on the exchange. The size is standardized. Low risk involved.

Regulations in the market: Definition: Expiry date of the contract: Method of transaction: Institutional guarantee: Guarantees involved:

They are a government regulated market. Standardized contract, which is traded on a future exchange, in order to buy or sell a certain underlying instrument on a particular date in the future, at an agreed price. Expiry date is standardized. Transaction takes place on the Exchange. Clearing house. Both the buyer and the seller deposit a certain amount (deposit or margin), as an initial guarantee. Value of operations 'marked to market' rates, with the profit and losses being settled daily.

Q NO :6 FUNCTIONAL OF STOCK EXCHANGE ? Definition of stock exchange : A stock exchange is established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities " Functional of stock exchange : 1.Raising capital for businesses The Stock Exchange provides companies with the facility to raise capital for expansionthrough selling shares to the investing public. 2.Investment of savings, in purchase of securities Provides a market for the trading of securities to individuals and organizations seeking toinvest their saving or excess funds through the purchase of securities 3.Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increasedistribution channels,increase its market share, or acquire other necessary business assets.Business combinitation agreement through the stock market is one of the simplest andmost common ways for a company to grow by acquisition . 4.Redistribution of wealth Stocks exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may resultin capital gains, will share in the wealth of profitable businesses.

5.Management records of company By having a wide and varied scope of owners, companies generally tend to improve ontheir management standards and efficiency in order to satisfy the demands of theshareholders and the more tight rules for public corporations imposed by public stock exchanges and the government. Therefore, it is said that public companies tend to have better management records than privately-held companies. 6.Creating investment opportunity of small investor As opposed to other businesses that require huge capital expenditure, investing in sharesis open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for smallinvestors to own shares of the same companies as large investors. 7.Govt. capital- raising for development project Governments at various levels may decide to borrow money in order to finance base projects such as sewerage and water treatment works or housing estates by sellinganother category of securities known as bonds. These bonds can be raised through theStock Exchange whereby members of the public buy them, thus loaning money to thegovernment. The issuance of such bonds can avoid the need to directly tax the citizens inorder to finance development 8. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces.Share prices tend to rise or remain stable when companies and the economy in generalshow signs of stability and growth. An economic recession, depression, or financial crisiscould eventually lead to a stock market crash. Therefore the movement of share pricesand in general of the stock indexes can be an indicator of the general trend in theeconomy. 9-provide physical location for trade of securities Stock exchange provides a physical location for buying and selling securities to theinvesters that have been listed for trading on that exchange 10-Establish rules & regulations of trading of shares

Stock exchange establishes rules for fair trading practices and regulates the tradingactivities of its members according to those rules 11-Fair The exchange assures that no investor will have an excessive advantage over other market participants

12-Effective Market This means that orders are executed and transactions are settled in the fastest possibleway in stock exchange 13-Transparency Investor make informed and intelligent decision about the particular stock based oninformation.Listed companies must disclose information in timely, complete andaccurate manner to the Exchange and the public on a regular basis.Required informationinclude stock price, corporate conditions and developments dividend, mergers and jointventures, and management changes etc 14-Price At any point in time, the price of previously issued stock is determined by the ebb and flow of supply and demand.It fix the prices of the securities according to thefundamental law of the offer and the demand 15-Listing requirements There are specific requirements for allowing a public company to list its securities on theStock Exchange these are set out in the legislation 16-Get rid of Stock exchange can get rid of companies for a number of reasons including :-Merger with another companySolvency problems Name change company asked to be removedFailure to follow exchange rules 17-To provide liquidity to the investors. The investor can recover the money invested when needed. For it, he has to go to thestock exchange market to sell the securities previously acquired. This function of thestock market is done on the secondary market. It offers liquidity to the security investments, through a place in which to sell or buy securities 18-Gives the right to shareholders to vote in the general meetings. It permits for the investor to have a political power in the companies in which he investsits savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question. 19-Offer in company free publicity. It offers to the companys free publicity, which in other way would suppose considerableexpenses. The institution is objecting of attention of the media (television, radio, etc.) incase any important change in its owners (the share holders)