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Foreign Exchange Market
 

Foreign Exchange Market

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    Foreign Exchange Market Foreign Exchange Market Presentation Transcript

    • Welcome
    • FOREIGN EXCHANGE MARKETS
    • Foreign Exchange Market
      • The market where one currency is traded for another is called foreign exchange market
      • Every international sale or purchase of commodities, services or assets, there corresponds an international sale or purchase of currencies
    • Features of Foreign Exchange Market
      • Location: OTC Market – banks and brokers at a financial centre
      • Wholesale and Retail segments
      • Size : Daily turnover of over $3.98 trillion
      • 24 hours market
      • Efficiency
      • Currencies traded
    • Most traded currencies by value 200.0% Total 12.2% Other 0.9% INR ( ) Indian rupee 15 1.3% MXN ($) Mexican Peso 14 1.3% NOK (kr) Norwegian Krone 13 1.4% SGD ($) Singapore dollar 12 1.5% KRW (₩) South Korean Won 11 1.6% NZD ($) New Zealand dollar 10 2.2% SEK (kr) Swedish Krona 9 2.4% HKD ($) Hong Kong dollar 8 CAD ($) CHF (Fr) AUD ($) GBP (£) JPY (¥) EUR (€) USD ($) Symbol 5.3% Canadian dollar 7 6.4% Swiss franc 6 7.6% Australian dollar 5 12.9% Pound sterling 4 19.0% Japanese yen 3 39.1% Euro 2 84.9% United States dollar 1 % daily share( April 2010) Currency Rank
    • Top 10 currency traders % of overall volume, May 2011 3.64% Morgan Stanley 10 4.13% Goldman Sachs 9 4.80% Credit Suisse 8 6.20% Royal Bank of Scotland 7 6.26% HSBC 6 6.43% JP Morgan 5 8.88% Citi 4 10.59% UBS AG 3 10.75% Barclays Capital 2 15.64% Deutsche Bank 1 Market Share Name Rank
    • Foreign Exchange Market
      • Participants:
        • Corporates
        • Commercial banks
        • Exchange brokers
        • Central banks
    • SWIFT : Society for Worldwide Interbank Financial Telecommunications - a co-operative society owned by about 250 banks in Europe and North America - registered in Brussels, Belgium Settlement of Transactions
    • CHIPS : Clearing House Interbank Payment System- an electronic payment system owned by 12 private commercial banks constituting New York Clearing House Association CHAPS : Clearing House Automated Payment System - London Settlement of Transactions
      • The foreign exchange market has two segments
        • Spot Market
        • Forward Market
      • The rate at which one currency is traded for
      • another is called exchange rate
      Foreign Exchange Market
    • Spot Market
      • The exchange rate for immediate delivery is called Spot Exchange Rate and is denoted by S (.) e.g. S (Rs. /$) = Rs.46.85/$
      • Here immediate delivery means delivery after two business days
      • The market where the purchase and sale of currencies is contracted for spot delivery is called the Spot Market
    • Quotations at the FX Market
      • The quotes are usually made in the form of ‘buy’ and ‘sell’ or ‘bid’ and ‘ask’ rates
      • Sometimes ‘ask’ is also referred as ‘offer’ price
      Buy/ Bid Sell/ Ask Exchange dealer is ready to buy Exchange dealer is ready to sell
    • In case of ‘direct’ quotes, a unit of foreign currency is quoted in terms of domestic currency For example: At Mumbai foreign exchange market , the US dollar is quoted as: USD 1 = Rs. 45.1525/1650 Spot (bid) = Rs. 45.1525/$ Spot (ask) = Rs. 45.1650/$ Direct & Indirect Quotes Rule : “ Buy low: Sell high”
    • In case of ‘indirect’ quotes, a unit of domestic currency is quoted in terms of foreign currency For example: At Mumbai foreign exchange market , the quotation are made as: Rs. 100 = USD 2.0762/0767 Spot (bid) = $ 2.0767/Rs.100 Spot (ask) = $ 2.0762/ Rs.100 Direct & Indirect Quotes Rule : “ Buy high: Sell low”
      • Sometimes the quotes are made against 100
      • units of a currency instead of a unit of the
      • currency
      • European quotes are indirect quotes
      • Indian quotes are direct quotes
      Direct & Indirect Quotes
      • When a bank quotes for a currency, it simultaneously offers another currency in lieu i.e. if it buys dollars for rupees, it is simultaneously offering rupees for dollars
      • Thus, there are two sides of all quotes
        • S ( x /bid y ) = 1/ S ( y /ask x ) and S ( x /ask y ) = 1/ ( y /bid x )
        • Where:
        • x and y are currencies of two countries
      Relationship between Bid/ Ask prices
      • Ask and bid differential is called the spread
      • When quotes are direct :
      • Spread = Ask – Bid
      • When quotes are indirect :
      • Spread = Bid – Ask
      • Spread represents cost of transaction
      • It is represented by the percentage of spread and is
      • given by:
      • [( Ask- Bid)/ Ask] x 100 when quotes are direct
      • 2. [(Bid – Ask)/ Bid] x 100 when quotes are indirect
      Spread
    • Let ‘c’ be one side average cost of transaction and ‘ M’ be the mid rate, then the bid and ask rates are given as: S (bid) = M x ( 1-c) and S (ask) = M x (1+c) The mid rate is issued by the central banks of the countries if convertibility conditions exist Spread equals twice the one side average cost of transaction How ‘ BID’ and ‘ASK’ rates are formed
    • Determinants of Spread
        • The currency being traded
        • The volume of currency being traded
        • The nature of organisation making quotes
        • Overall perception of the Dealer about the
        • conditions of the economy and forex market
      • Usually these spreads are regulated by foreign exchange dealers associations such as FEDAI
    • Factors Determining Spot Exchange Rates
        • Balance of Payments
        • Inflation
        • Interest Rates
        • Money Supply
        • National Income
        • Resource Discoveries
        • Capital Movements
        • Political Factors
        • Psychological Factors and Speculation
        • Technical and Market Factors
    • Forward Market
      • Forward contracts are bought and sold at forward exchange rates
      • Hedging and speculation are the main activities which pertain to forward markets
      • The exchange rates for delivery and payment
      • at specified future dates are called Forward
      • Exchange Rates and is denoted by F(.)
      • For example, 60 days F (Rs. /$) : forward rate
      • between rupees and dollar is the rate at which
      • the foreign exchange dealer can arrange a
      • transaction between rupees and dollar 60 days
      • hence
      Forward Exchange Rate
    • Forward Exchange Rate
      • Forward exchange rates are determined by
      • forward demand and forward supply of
      • various currencies
      • A foreign currency is said to be at a forward
      • premium if its future value exceeds its
      • present value in terms of domestic currency
      • and it is said to be at discount if the converse
      • is true
      • For example : S (Rs. /$) = Rs. 45.70
      • F 3 (Rs./$) = Rs. 46.60
      • These rates are also quoted in the form of
      • ‘ bid’ and ‘ask’ rates and the spread also
      • depend on approximately the same factors as
      • spot rates plus:
          • Rate of Interest
          • Demand and Supply
          • Speculation about Spot Rates and
          • Exchange Regulations
      Quotations of Forward Rates
    • Payoffs in the case of a forward contract Quotations of Forward Rates 20,000.00 0.200 46.3500 46.1500 10,000.00 0.100 46.3500 46.2500 0.00 0.000 46.3500 46.3500 - 10,000.00 -0.100 46.3500 46.4500 - 20,000.00 -0.200 46.3500 46.5500 Profit/Loss (Rs.) Unanticipated Change Contracted Rate (Rs.) Realised Rate (Rs.)
            • Traders
            • Arbitrageurs
            • Hedgers
            • Speculators
            • Banks
            • Governments
      Participants in the Forward Market
    • The exchange rate which is obtained by cross product of two exchange rates is called Cross Rate Spot rate at Mumbai :S(Rs./$) = 31.2022/$ Spot rate at Frankfurt : S(Rs./DM) = 15.87 / DM Then Cross Rate = S(DM/$) = DM 2.0983/$ This is the rate a Mumbai broker may expect the Frankfurt price of dollar in terms of DM Cross Rates
    •  
      • In Indian forex market, not all currencies are
      • bought or sold
      • For non-traded currencies, the banks use
      • London, New York or Singapore markets
      • Exchange Market Segments:
      • 1. RBI and ADs( Commercial Banks)
      • 2. Interbank market
      • 3. Retail segment – ADs with corporate clients and other retail customers
      Indian Forex Market
      • The rates quoted by authorised dealers (ADs) are merchant rates at which trading can take place in the Retail segment
      • Merchant rates are different than inter-bank rates and contain administrative cost, cover for exchange fluctuation and some profit on the transaction for the Bank
      Indian Forex Market
      • Four types of rates are quoted:
        • 1. TT( Telegraphic Transfer) rate
        • 2. Bill rate
        • 3. Currency notes
        • 4. Travellers cheque rate
      Types of Exchange Rates
      • Transactions where TT rate is applied:
        • Issue/ Payment of demand drafts, mail transfers, telegraphic transfers etc.
        • Foreign bill collected and amount received in nostro account
        • Cancellation of foreign exchange sold/ purchased earlier
      TT ( Telegraphic Transfer) rate
    • Rate applied for a foreign bill purchased or payment against import bill Bill Buying rate: Basic rate (+ or -) Forward Premium ( Discount) for transit period plus usance period – Exchange margin Bill selling rate = TT selling rate + service margin Bill Rate
    •  
      • In India, the official rate is determined by the
      • RBI on the basis of the multi-currency basket
      • The official buying and selling rates are
      • announced
      • FEDAI announces indicative free market rate on
      • every business day
      • The RBI has the discretion to enter the market
      • so as to stabilise the exchange rate
      Indian Forex Market
    • FEDAI Indicative Rates 11.30 am 22nd August 2011 65.9900/66.0225 59.8500/9025 EUR JPY 75.7150/7450 45.9350/9450 GBP USD
    •