Foreign Exchange

2. foreign exchange market is a place
where foreign money are bought and
sold. It is a institutional arrangement
for buying and selling of foreign
currencies. Exporter sell the Foreign
currencies and importers buy them.

3. ⦁ Electronic market
⦁ Geographical dispersal
⦁ Transfer of purchasing power
⦁ Intermediary
⦁ Provision of credit through letter of credit
⦁ Minimization of risk

4. ⦁ Transfer function
⦁ Credit function
⦁ Hedging function

5. Retail
market
Bank and money
changers(currencies
,bank notes, cheque)
Wholesale
market
Inter bank(bank
account and
deposits)
central bank

6. 1. Retail clients
2. Commercial banks
3. Foreign exchange brokers
4. Central banks

7. ⦁ It is an agreement between two parties to
exchange one currency for another at an
agreed exchange rate on an agreed date. It
also provides protection against unfavourable
exchange rates .

8. 1. Hedging to avoid loss
2. Arbitrage to purchase currency of two or
more countries.
3. Speculation price less purchase high sell

9. Spot Transaction: The spot transaction is when the
buyer and seller of different currencies settle
their payments within the two days of the deal. It
is the fastest way to exchange the currencies.
Here, the currencies are exchanged over a two-
day period, which means no contract is signed
between the countries. The exchange rate at
which the currencies are exchanged is called
the Spot Exchange Rate. This rate is often the
prevailing exchange rate. The market in which
the spot sale and purchase of currencies is
facilitated is called as a Spot Market.

10. ⦁ Forward Transaction: A forward transaction is
a future transaction where the buyer and
seller enter into an agreement of sale and
purchase of currency after 90 days of the
deal at a fixed exchange rate on a definite
date in the future. The rate at which the
currency is exchanged is called a Forward
Exchange Rate. The market in which the deals
for the sale and purchase of currency at some
future date is made is called a Forward
Market.

11. ⦁ Future Transaction: The future transactions
are also the forward transactions and deals
with the contracts in the same manner as that
of normal forward transactions. But however,
the transactions made in a future contract
differs from the transaction made in the
forward contract on the following grounds:

12. ⦁ The forward contracts can be customized on the
client’s request, while the future contracts
are standardized such as the features, date, and
the size of the contracts is standardized.
⦁ The future contracts can only be traded on the
organized exchanges, while the forward
contracts can be traded anywhere depending on
the client’s convenience.
⦁ No margin is required in case of the forward
contracts, while the margins are required of all
the participants and an initial margin is kept
as collateral so as to establish the future
position.

13. ⦁ The Swap Transactions involve a simultaneous
borrowing and lending of two different currencies
between two investors. Here one investor borrows the
currency and lends another currency to the second
investor. The obligation to repay the currencies is used
as collateral, and the amount is repaid at a forward
rate. The swap contracts allow the investors to utilize
the funds in the currency held by him/her to pay off the
obligations denominated in a different currency without
suffering a foreign exchange risk.

14. The foreign exchange option gives an investor
the right, but not the obligation to exchange
the currency in one denomination to another
at an agreed exchange rate on a predefined
date. An option to buy the currency is called
as a Call Option, while the option to sell the
currency is called as a Put Option.

15. . Settlement Date is a securities industry term
describing the date on which a trade (bonds, equities,
foreign exchange, commodities, etc.) settles. That is,
the actual day on which transfer of cash or assets is
completed and is usually a few days after the trade
was done. The number of days between trade date
and settlement date depends on the security and the
convention in the market it was traded. For example
when settling a share transaction on the London
Stock Exchange this is set at trade date + 2 business
days.

16. Spot transaction
1.Here the transaction takes place on T+2 basis i.e in spot
exchange transaction settlement usually takes two
working days.
2.Ready or cash transaction in these types of
transaction is settled on same day i.e on the trade day .
3.Tomorrow transaction in these types of contract
settlement of underlying is to be done on the next day .
Tomorrow
4.future or forward contract these contract are settled
on a specific futures date at a fixed price

17. ⦁ An exchange rate is the rate at which one
currency will be exchanged for another. It is also
regarded as the value of one country’s currency
in relation to another currency.
⦁ For example, an interbank exchange rate of
114 Japanese yen to the United States
dollar means that ¥114 will be exchanged for
each US$1 or that US$1 will be exchanged for
each ¥114. In this case it is said that the price of
a dollar in relation to yen is ¥114, or equivalently
that the price of a yen in relation to dollars is
$1/114.

18. Demand for foreign exchange:
⦁ When Indian people and business firms want to make payments to
the US nationals for buying US goods and services or to make gifts
to the US citizens or to buy assets there, the demand for foreign
exchange (here dollar) is generated. In other words, Indians demand
or buy dollars by paying rupee in the foreign market.
A country releases its foreign currency for buying imports. Thus, what
appears in the debit side of the BOP account is the sources of
demand for foreign exchange. The larger the volume of imports the
greater is the demand for foreign exchange

19. ⦁ we can determine supply of foreign exchange. Supply
of foreign currency comes from its receipts for its
exports. If the foreign nationals and firms intend to
purchase Indian goods or buy Indian assets or give
grants to the Government of India, the supply of
foreign exchange is generated.

20. It is the amount of currency that is exchanged
for a unit of another currency .for example
the exchange rates of rupees in India may be
quoted in terms of dollar. E.g. RS/$=60

21. Bid and Ask prices
Direct rates
Spot rates
Inter bank quotations
Indirect rates /quotes
Cross currency rates
Forward rates

22. A quotation is the amount of currency
necessary to buy or sell a unit of another
currency.
When it is expressed in currency terms it is
called outright rate. e.g RS/$=45 is an
outright rate b/w rupee and dollar.
Buy is called bid where exchanger is ready
to buy a currency for which quote is made
and sell is ask price to exchange the
currency.

23. Direct rates : a unit of foreign currency is
quoted in term of domestic currency.
Direct quote :bid rate<ask rate
1) Bid rate : it is the rate at which an buyers is
ready to buy the currency that is constant.
2) Ask rate : it is the rate at which an seller is
ready to sell the currency that is constant.
Indirect rate it is the price of one unit of home
currency in terms of foreign currency.

24. ⦁ Indirect rate it is the price of one unit of
home currency for an indirect quote
⦁ A lower exchange rate implies that the
domestic currency is depreciating or
becoming weaker, since it is worth a smaller
amount of foreign currency.
example, if the Canadian dollar (direct)
quotation now changes to US$1 =
C$1.2700, the indirect quote would be C$1
= US$ 0.7874 = 78.74 US cents.

25. A foreign exchange spot transaction, also
known as FX spot, is an agreement
between two parties to buy
one currency against selling
another currency at an agreed price for
settlement on the spot date. The
exchange rate at which the transaction
is done is called the spot exchange rate.

26. ⦁ The forward exchange rate (also referred to
as forward rate or forward price) is
the exchange rate at which a bank agrees
to exchange one currency for another at a
future date when it enters into
a forward contract with an investor.

27. ⦁ A cross rate is the currency exchange rate
between two currencies when neither are
official currencies of the country in which the
exchange rate quote is given. Foreign
exchange traders use the term to refer to
currency quotes that do not involve the U.S.
dollar, regardless of what country the quote
is provided in.

28. ⦁ Relative inflation rate
⦁ Income levels
⦁ Relative quality
⦁ Relative interest rate
⦁ International trade
⦁ Capital movements
⦁ Change in prices
⦁ Speculation
⦁ Strength of the economy
⦁ Stock exchange operations
⦁ Political factors