foreign exchange management

1. Foreign exchange management

2. WHAT IS FOREX? The foreign exchange market (FOREX) is a worldwide decentralized over-the-counter financial market for the trading of currencies. In simple words, it is a place where one currency is exchanged with another currency based on fluctuation rates.

3. Codes for selected Currenciesrequired for quotes USD – US Dollar EUR – Euro GBP – British Pound IEP – Irish Pound JPY – Japanese Yen CHF – Swiss Franc CAD – Canadian Dollar AUD – Australian Dollar SEK – Swedish Kroner MEP – Mexican Peso DKK – Danish Kroner NZD – New Zealand $ INR – Indian Rupee SAR – Saudi Riyal

4. CHARACTERISTICS OF FOREIGN EXCHANGE MARKET 2. Only market open 24 hours - FX Market is a 24 hour market - It starts when a calendar business day opens in Sydney, Tokyo, Hong Kong, Singapore and then moves to Middle East to Europe to New York to the West Coast of United States where the calendar business comes to a close - FX Market operates seven days a week (Middle East Markets function on Saturdays and Sundays) - Effectively it is a 24 hour a day / seven days a week / 365 days a year Market!

5. Currency appreciation/depreciation Increase in foreign currency price From Rs.46 to Rs.48/ USD Foreign currency appreciation Home currency depreciation From USD 0.0217 to USD 0.0208/ Re

6. ©2004 Prentice Hall 8-6 A Day of Foreign-Exchange Trading

8. Only a small fraction of daily transactions in foreign exchange involve trading of currency.

10. Foreign exchange market Foreign exchange market Retail wholesale Bank and money changes (currencies and bank note, cheques) Interbank (Bank account or deposits) Central bank Direct Indirect (Through broker) Spot Derivatives (Future options etc.) Forward

11. Interbank Foreign Exchange Trading About 90% of foreign exchange trading is in the Interbank part of the market.

12. Interbank Foreign Exchange Trading Provides continuous information on the foreign exchange market— Talking with traders at other banks. Observing prices (exchange rates) being quoted.

13. Foreign Exchange and Forward Contracts What is a forward foreign exchange contract? (An agreement to exchange one currency for another on some date in the future at a price set now [the forward exchange rate]).

14. Participants of FE Market The participants in the foreign exchange market are:- Individuals Firm Banks Governments International Agencies

15. How a Foreign Exchange Transaction is Conducted

16. Balance of Payments B of P – is a record of the value of all economic transactions between residents of a country

18. Tom- Settlement of funds takes place on the next working day of the date of the deal.

20. Theory of Purchasing Power Parity (PPP) The prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes Occurs because process of buying goods in a cheap market and reselling them in expensive market affects demand for (and price of) the foreign currency and the market price of the good in the two product markets in question ©2004 Prentice Hall 8-18

21. The prices these Mexican shoppers pay for foreign-made goods are affected by fluctuations in the value of the peso in the foreign-exchange market ©2004 Prentice Hall 8-19