Foreign exchange market

 Shamail Raza(MAFM-F19-015)
What is FOREX?
Forex is a combination of two words.

FOR EX FOREX

Foreign
+ Exchange = Foreign Exchange

“ The money of another country is foreign currency. An

agreement between two parties for the exchange of one country
currency at a specific rate for other currency is a foreign exchange

transaction.”
For example
Suppose, Exchange rate for one US dollar in Pakistani rupee: (1 US Dollars = 160.28 PKR)
and after a day while reselling it the exchange rate changes from above mentioned to (1 US
Dollars = 170.28 PKR)

Buyer Pakistan 160.28 x 30= RS. 4808.4 Seller America

170.28 x 30= RS. 5108.4

 Definition
“ The foreign exchange market is a global decentralized or
over-the-counter market for the trading of currencies. This market
determines foreign exchange rates for every currency. It includes all
aspects of buying, selling and exchanging currencies at current or

determined prices. ”
 Market Transparency

Dollar Is The Most Traded Currency

Most Dynamic Market

Characteristics
International Network Of Dealers
of forex market
Over The Counter Market

High Liquidity

Twenty Four Hour Market

 Large and Global Market

Good for Beginners

Benefits of 24 hours Trade

forex market
There Are Low Transaction Costs

You Can Benefit from Leverage

It's a Market with High Liquidity

 Transfer
Functions of
forex market Hedging

Credit
Market structure
Bank 1 Bank 2 EBS

Reuters
Bank 3 Bank 2 ECN broker
Machine

ECN broker Bank 1 Bank 2 Bank 2

Buyer 1 Market Market Buyer 5

Maker Maker

Buyer 2 Buyer 3 Buyer 4

 Central banks

Commercial banks
Participants of
forex market Traditional users

Traders and Speculators

Brokers
 Major
banks

Electronic brokering service (EBS) /

Reuters dealing 3000 spot machine

Hierarchy of
Medium sized and small banks
forex market
Retail market makers/ retail ECNs/ Hedge
funds and commercial companies

Retail traders
 Types of FOREX
market
Types of forex
market

Spot Market Forward market

Types of FOREX market
1) Spot Market

These are the fastest transactions connecting currency in the foreign exchange market. This
market provides instant payment to the current exchange rate as buyers and sellers. The spot
market account for exactly one-third of all currency exchanges, and trades that usually take one or
two days to settle transactions. This allows the traders to open up the currency market, which can
raise or lower the price, between the agreement and the trade.

There is an increase in volume of spot transactions in the foreign exchange market. These
transactions are mostly forms of buying and selling of currency notes, cash-in-traveler's checks
and transfers through banking systems. There are two major participants of the spot market:

 Commercial Bank
 Central Bank
Types of FOREX market
2) Forward Market

In forward market there are two parties (two companies, individual or government agencies)
agreeing to do a trade at some future date, at an acknowledged price and quantity. No security
deposit is necessary as no money changes hands when the contract is signed. Forward contracting
is very priceless in hedging and speculation. The classic scenario of a hedging application is the
forward contract through a wheat farmer; Selling his harvest at a known fixed price in order to
eliminate price risk. Similarly, the price fluctuations of risk without the need for a bread factory to
assist in the production of a bread factory.
 Future transaction Forward transaction

Kinds of
transaction
Transactions
Option transaction Spot transaction

Swap transaction
 Types of FOREX transactions
 Spot Transaction

Where prospects contracts typically utilize a 3-month time span, spot exchanges include a 48-hour conveyance exchange
period. There are four attributes that all spot exchanges share practically speaking, specifically.

 A direct exchange between two currencies.

 Involves only cash, never contracts.

 No interest is included in the agreed upon transaction.

 Shortest of all transaction timeframes.

 Types of FOREX transactions
 Future Transaction

A forward exchange that contains standard agreement sizes and development dates are viewed as fates. Fates are
exchanged on trades that have been made for that reason solely. Much the same as with product advertises, a future in the
forex market ordinarily assigns an agreement length of 3 months in term. Interest sums are additionally remembered for a
prospects contract.

 Forward Transaction

A forward exchange that contains standard agreement sizes and development dates are viewed as fates. Fates are
exchanged on trades that have been made for that reason solely. Much the same as with item advertises, a future in the forex
market regularly assigns an agreement length of 3 months in term. Interest sums are additionally remembered for a
prospects contract.
 Types of FOREX transactions
 Swap Transaction

Cash trades are the most well-known sort of forward exchanges. A trade is an exchange between two gatherings wherein
they trade monetary standards for a pre-decided time allotment. The exchange at that point is turned around at a pre-settled
upon future date. Money trades can be haggled to develop as long as 30 years later, and include the trading of the guideline
sum. Loan fees are not "gotten" since they are named in various monetary standards.

 Option Transaction

Normally abbreviated to FX alternative from unfamiliar trade choice. Choices are subordinates (monetary instruments
whose qualities vary dependent on hidden factors) wherein the proprietor has the privilege to, yet isn't really committed to,
trade one money for another at a pre-settled upon rate and a predetermined date. At the point when you talk about choices in
any structure (financial exchange, forex, or some other market), the forex market is the most profound and biggest, just as
the most fluid market of any alternatives on the planet.
 Hedging
Nature of forex
market Speculator

Arbitrager
 Interest rates

Economic stability

Trade-Weighted Index

Factors
World events

influencing Government debt

foreign exchange Inflation Rates

market Country’s Current Account / Balance of Payments

Political Stability

Recession

Speculation