Terms used n forex
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Terms used n forex

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terms used in forex

terms used in forex

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Terms used n forex Terms used n forex Presentation Transcript

  • Terms used in Foreign Exchange
  • Repo/ready forward: [opp – reverse repo]
    Means of funding by selling a security sold on SPOT basis and repurchasing on forward basis.
    Currency risk:
    Risk of value of an investment in some other country’s currency coming down in terms of domestic currency
  • Country risk: Risk of not being able to invest at will due to countries changing attitudes on foreign investment/ war revolution,…
    Tariff: Tax levied on goods traded internationally
    ->Import duty -on import (to support domestic production)
    -> Export duty – to discourage exports. (less frequently imposed)
    -> Transit duty – on goods passing through the country
  • Ad valorem duty: % of value of goods
    Specific valorem duty: flat duty based on number of units, not value of goods.
    BOP: “ A systematic record of all economic transactions between residents of a given country and the rest of the world, carried out over a particular period.(usually a year) ->eco, transactions include ‘invisible transactions’ like- banking, insurance, transport services
  • BOT: Merchandise imports and exports (visible trade - follows Double entry system)
    Transaction↑ purchasing power – exports – credit
    (capital inflow)
    Transaction↓ purchasing power – imports - debit
    (capital outflow/lending)
  • Exchange rate: rate at which conversion takes place. Value of one currency in terms of another.
    International monetary system: movement in which each exchange rate over a period of time involves,
    1. conversion of currencies to one another
    2. transfer of funds across nations
    for - i. International trade in goods and services.
    ii. Liquidation/ acquiring of financial assets.
    iii. Creation and repayment of individual credit.
    • Spot rate :rate at which one currency is converted into another on a particular day
    • Forwards : a contract (obligation) between two parties, to exchange currency or goods,at some specific date in the future
    • Options : contracts that give option to buy or sell underlying asset at a particular price on or before a specified period
    • The holder has a right and not obligation
    • Both pay a “premium”, which they loose if they fail
    • Call option : right to buy an underlying asset at a specified price, on or before a particular time by paying a premium
    • Put option : Right to sell an underlying asset at a specified price, on or before a particular time by paying a premium
    Option writer
    Bearish : seller (usually writes)
    Bullish : buyer
  • Types of option
    European style option :exercised only on expiry date/ maturity date
    American style option :at any time before or on due date
  • Swaps :simultaneous purchase and sale of foreign exchange for two different value dates. Happens between banks, govts, and business
    Arbitrate : buying currency low and selling high at the same time
    LIBOR : London Interbank Operating Rate of Interest
    • Integration effect :
    Freedom and opportunity to raise funds from and to invest anywhere in the world, through any type of investment
    • Transmission effect :
    As a result of freedom anything affecting financial markets in one part of the world, quickly and automatically affect the rest of the world
    Integration increases the transmission effect
  • Reason for integration?
    Technology :speed, reduced cost, co- production of activities
    Inflation & interest rates : changes in different instruments
    Development of new financial instruments like euro dollar market, interest rate swaps, currency swap, future and forward contract,..
    Liberalisation of regulations in financial markets
    Increased foreign ownership
  • LERMS : (Liberalised Exchange Rate Management System)
    After the liberalisation in 1992, dual exchange system was followed in India. One fixed by RBI and other by market.
    It was the beginning of moving towards market oriented rate
    40/% of the amount was to be converted at RBI rate and the rest by market rate