Impact of capItal marketKallol Kumar SarkarB.Com(3rd year)6th SemRoll-432Room-31Financial Market Operation & Financial Statement analysis
Contents discussedIntroduction - Capital market - Foreign currencyObjective of this studyAnalysis - Factors affecting exchange rates - Exchange rate of some well known currencies - Determination of value of domestic currency - Concept of Quotes - Currency derivatives - Currency FuturesConclusion
IntroductionA capital market is a market for securities (debt or equity), where business enterprises (companies) andgovernments can raise long-term funds. It is defined as a market in which money is provided for periodslonger than a year, as the raising of short-term funds takes place on other markets (e.g., the moneymarket). The capital market includes the stock market (equity securities) and the bond market (debt).Financial regulators, such as the UKs Financial Services Authority (FSA) or the U.S. Securities andExchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure thatinvestors are protected against fraud, among other duties.Capital markets may be classified as primary markets and secondary markets. In primary markets, newstock or bond issues are sold to investors via a mechanism known as underwriting. In the secondarymarkets, existing securities are sold and bought among investors or traders, usually on a securitiesexchange, over-the-counter, or elsewhere.FOREIGN CURRENCYThe foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Financial centers around the world function asanchors of trading between a wide range of different types of buyers and sellers around the clock, with theexception of weekends. The foreign exchange market determines the relative values of different currencies.The primary purpose of the foreign exchange is to assist international trade and investment, by allowingbusinesses to convert one currency to another currency. For example, it permits a US business to importBritish goods and pay Pound Sterling, even though the businesss income is in US dollars. It also supportsspeculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend(invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness insome countries.In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying aquantity of another currency. The modern foreign exchange market began forming during the 1970s whencountries gradually switched to floating exchange rates from the previous exchange rate regime, whichremained fixed as per the Bretton Woods system.A foreign exchange deal is done in currency pairs. For example (USD-INR),(JPY-USD) etc…The formalcurrency is called base currency and the latter is called terms/counter/quote currency. USD-INR rate of Rs48.053 implies that Rs. 48.053 needs to be paid to get 1US dollar.
OBJECTIVE OF THIS STUDY This forex market is studied for the purpose of knowing the impact of the currency market in the Indian Economy. Today’s financial environment has more risk than before. Businesses that manage their risk carefully are the ones which succeed. Firms that monitor their risks carefully and manage their risks with judicious policies enjoy a more stable business than those who are unable to identify and manage their risks. ANALYSISFactors affecting exchange rates:-Fundamental factor : The fundamental factors are basic economic policies followed by the government inrelation to inflation, balance of payment position, unemployment, capacity utilization, trends in import andexport, etc…Technical factor: Interest rates, Inflation rates, Exchange rate policies.Political factorsSpeculationExchange rate of some well known currencies.Date: 28 June 2009 USD JPY EUR INRUSD 1.00 95.380 0.711 48.053JPY 0.010 1.000 0.007 0.504EUR 1.406 134.033 1.000 67.719INR 0.021 1.984 0.015 1.000Source :www.economictimes.com
Determination of value of domestic currencyFixed exchange rate or pegged exchange rate • Currency’s value is maintained at fixed ratio to the value of other currency or gold. • Participation of govt. in open currency market. • Value of currency raises beyond a permissible limit, govt. sells thereby increasing the supply and the value decreases and vice-versa.Floating exchange rate or managed float. • Value is determined by the market mechanism through demand and supply of the currency. • No govt. intervention is there. If the demand for currency is low its value decrease and thus making imports dearer and exports cheaper. • However at extreme case of appreciation or depreciation of currency , the central bank can interfere to stabilize.Concept of QUOTESIn currency market the rates are generally quoted in terms of USD. The price of a currency in terms ofanother currency is called quotes. For example we can refer to the chart on the previous page, wherein itis depicted that Rs.48.083 is equal to 1USD. Other combinations can also be made by us using the suitabledata as provided in the chart above.Direct Quote- A quote where USD is the base currency is called a direct quoteIndirect Quote- A quote where USD is used as a terms currency is called a indirect quote.There is however another kind of quote referred to as ‘cross quote’ where the quote is not against USD. Itis calculated via USD.Currency derivatives can be described as contracts between the sellers and buyers whose values arederived from the underlying which in this case is the Exchange Rate. Currency derivatives are mostlydesigned for hedging purposes, although they are also used as instruments for speculation.Currency FuturesFutures contracts act as hedging tools and help in protecting the risks associated with uncertainties inexchange rates. Anyone who is anticipating a future cash outflow (payment of money) in a foreign currencycan lock-in the exchange rate for the future date by entering into a futures contract. It is actually a tool bymeans of which we can regulate the trade of future, so the name ‘Futures’.
CONCLUSION The forex market is one of the most important parts of trading these days. The forex marketdetermines the nature of growth and development in an economy. Even the forex market is responsible forthe networked growth and development. We can refer to the position last year during recession. Greece, a European country went on with aloss and that affected the whole world. Now if we try to go deep we will find out that the open economieshad the most bitter taste of this recession, while partially open economies like Brazil, India etc… didn’ttake long to tackle the mass growing problem. But if an economy is not open at all then it will not beaffected by the recession but in the long-run it can’t gain momentum to compete with the rest of the world. By just referring to one example I wanted to communicate the tremendous impact this forex market hason our day-to-day life. We are all part of this, ‘we can play safe for sometime but can’t ignore it for ever’ ,for we say Time is Money.