International Finance

Development of Foreign Exchange Market & Dynamics of

exchange rate
Volume of Market
transactions

• Market never sleeps

• Per day USD 5.0567 Trillion
• Every 4/5 seconds market moves
• Most dynamic market
Active markets…..
• London……
• New York
• Singapore
• Tokyo
• Hongkong
• Frankfurt
• Dubai
Developments in Indian Forex market
• Regulated – administrated exchange rates
• Sterling schedule
• USD as intervening currency
• LERMS
• Unified exchange rates- modified LERMS
• Indirect to direct method of quoting exchange rates
Market participants...
• Merchants…
• Domestic corporate / Multinational corporations
• Financial institutions
• Hedge funds –
• High risky investment vehicles that speculates in the currency
Market participants…
• Authorized Dealers ( Banks ) / market makers
• Cover transactions – for merchant transactions
• Proprietary transactions
• Brokers….
• Overseas Banks
• Central Monitory Authority (BOE / FEDRESERVE / Bundesbank)
Market participants.. merchants.
• Hedgers…. To meet their contractual obligations
• Arbitragers
• Speculators
Certain terminologies….
• Exchange rates
• Ratio used to convert from one currency into another currency
• GBP/USD ……1.3215/3220
• USD/INR 70.80/70.81 - 70.80/81 - 80/81
Pair of currencies quoted
• GBP/USD
• EUR/USD
• AUD/USD
• NZD/USD
• USD/JPY
• USD/CHF
• USD/INR
• USD/IDR
• USD/SGD
Who moves the exchange rates…
 Under Perfect market condition demand and supply moves the market
 Perfect market condition means
 Freedom of entry and exit from the market
 Homogeneous or identical –
 Must be able to earn a reasonable profit
 Freedom of information flows – efficient markets….
 Development of euro markets
 Trade related flows
 Current account surplus / deficit.
 Capital flows
 Economic news and statistics
 Political changes
 Intervention by the Central Banking authority
 Sentiments or rumours…?
Impact of Govt policy on
exchange rate movements..
• Fixed exchange regime…
• Floating exchange rates…free float..
• Managed float –
• Impact of revaluation in line with REER
• Impact of certain steps like
• Increasing Reserve Requirements – CRR
• Foreign investments flow..
Understanding market quotes
• If you want to buy silver you are enquiring with the Jeweler the
price:
• He quotes his selling price as 1gm Silver = Rs.40
• If you wish to sell your old silver to the Jeweler and request for a
price:
• He quotes his buying price as 1gm Silver = Rs.38.
• When you enquire about the difference in the rates trader/Jeweler
says very clearly that he is a trader in Silver and his price in Rupees
for buying and selling will be:
• 1 gm of Silver/INR = 38/40
• Commodity price is expressed in terms of INR
Exchange rate dynamics
 Unique method of ‘Two way quotation’
 GBP/USD - 1.2145/1.2150
 EUR/USD 1.1140/1.1145
 USD/INR 70.80/70.81
 USD/JPY 110.05/110.10
 USD/CHF 0.9970/0.9975
 Concept of base currency
 Methods of quoting exchange rates
 Direct quote: USD/INR 70.80/81
 Indirect quote: Rs.100 = 1.1465/70
 Different transactions and different rates of exchange
 Card rate / Market rate/ cover rate - base rate/ merchant
rate/cross rate/spot rate / forward rate
Cross rates…..
• Exposure in currencies other than USD
• how it settles
• one export / import transaction
• Export realization in EUR to be converted into INR
• Importer wants to retire import bill drawn in JPY from its INR
account
End of session