Foreign Exchange

(FOREX)
market
 FOREX Market
•Worldwide decentralized OTC financial market for trading of
currencies; determines relative values of different currencies
•Began during ‘70s when countries switched to
floating exchange rates from the previous fixed
exchange rate system.
•Closest to the ideal of perfect competition unique because of
–its huge trading volume [av turnover >$4 trillion/d] so, high liquidity;
–its geographical dispersion- around the earth ;
–its operation 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 margins with respect to account
size.
FOREX Market Turnover 1988-2007
Top 10 Currency Traders
 FX Rates vary due to
• Economic factors
– economic policy, including budget / spending practices
– economic conditions
– other economic indicators
• Political Conditions
• Market psychology
– moving to ‘safe’ regions
– Long-term trends
– "Buy the rumor, sell the fact“ – over-bought/ -sold state
– Technical considerations, economic numbers.
 Financial instruments
•Spot
–two-day delivery transaction (except a few – 1 day)
–represents a “direct exchange” between two currencies
–has the shortest time frame
–involves cash rather than a contract
–interest is not included in the agreed-upon transaction
•Forward
–money does not actually change hands until some agreed
upon future date, at the market rates then
–The duration can be 1day, a few days, months or years.
Usually the date is decided by both parties. Then the forward
contract is negotiated and agreed upon by both parties
• Swap -- FX swap is the most common. two parties
exchange currencies for a certain length of time and
agree to reverse the transaction at a later date.
• Future - Standardized and usually traded on an
exchange created for this purpose. The average
contract length is roughly 3 months. Futures
contracts usually include any interest amounts
• Option - derivative where the owner has the right
but not the obligation to exchange money
denominated in one currency into another currency
at a pre-agreed exchange rate on a specified date.
Largest and most liquid market in the world.
 Terms
• Direct: $1 = Rs. 42.5; Indirect Rs. 100 = $2.3529
• 2-Way:
– Direct: USD 1 = Rs. 42.5 – Rs. 43.2
– Indirect: Rs. 100 = $2.35 - $ 2.31
• Value Date: Same day – ‘Cash’ or ‘ready’;
– Next working day: ‘Tom’ or ‘spot’ transaction
– Later date: ‘forward’ transaction (usually 1-3 months)
 PARTCIPANTS
• Commercial Banks
• Central Banks
• Brokers
• Exporters, Importers
• Authorized dealers
NOTE:- There is no specific location for the FOREX
market. Traders do the transactions over telephone
or computers from their rooms