Foreign Exchange Market1111

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Foreign Exchange Market1111

  1. 1. Foreign exchange market Presented by: Ankit Gupta(64) Ashish Agrawal(67) Foreign exchange market
  2. 2. <ul><li>The foreign exchange market is that in which currencies are bought and sold against each other . </li></ul><ul><li>it is a largest market in the world </li></ul><ul><li>The daily turnover in the market was estimated to be USD1500 billion. </li></ul>
  3. 3. Features <ul><li>Over the counter market </li></ul><ul><li>Round the clock market </li></ul><ul><li>Large volume of transactions </li></ul>
  4. 4. Participants <ul><li>Individuals: tourists </li></ul><ul><li>Firms: importers and exporters </li></ul><ul><li>Banks </li></ul><ul><li>Governments/ monetary authorities: </li></ul>
  5. 5. Types of markets <ul><li>Spot market </li></ul><ul><li>Forward market </li></ul>
  6. 6. Spot market <ul><li>Currencies traded for immediate delivery at rates prevailing at the time of transaction </li></ul><ul><li>Actual delivery (electronic transfer) may take two working days </li></ul>
  7. 7. <ul><li>Currency arbitrage : buying a currency at cheaper rate in one market and selling at a higher rate in another market </li></ul><ul><ul><li>Two point arbitrage </li></ul></ul><ul><ul><li>Triangular (three point) arbitrage – three currencies </li></ul></ul><ul><ul><li>Currency speculation : buying and holding a currency for sale at a higher rate in the near future </li></ul></ul>
  8. 8. Forward market <ul><li>In the forward market, contracts are made to buy & </li></ul><ul><li>Sell currencies for future delivery, say one month </li></ul><ul><li>two month ,three month & so on. </li></ul><ul><li>The rate of exchange for the transition is agree is agreed upon the very date the deal is finalized. </li></ul><ul><li>Ex:- Suppose a currency is purchased on 1 Aug. If it is a spot transition , the currency will be delivered on 3 Aug. </li></ul><ul><li>but if it one month forward contract the value date will </li></ul><ul><li>fall on 3 Sep. </li></ul>Foreign exchange market
  9. 9. <ul><li>Speculation: </li></ul><ul><ul><li>Reap profit from changes in exchange rates in future . </li></ul></ul><ul><ul><li>(difference between forward rates and future spot rates) </li></ul></ul><ul><li>Arbitrage: </li></ul><ul><ul><li>Reaping profit from disparity between forward differential and interest rate differential. </li></ul></ul><ul><ul><li>Buy cheap in one market, sell at a higher price in another market. </li></ul></ul>Foreign exchange market
  10. 10. Hedging: Currencies are bought or sold for forward delivery. & Reduces foreign exchange risk. ex:- Suppose a investor sell the US $ 1,000 three month forward @ 40.50/US $ . If on maturity the US dollar depreciates to Rs.40, the investor will get Rs. 40500 under the forward contract . Foreign exchange market

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