The document discusses foreign exchange markets. It provides information on: 1) The foreign exchange market is a global network that allows currencies to be exchanged. Exchange rates are the prices of currencies relative to each other, such as $1 = Rs. 48.50. 2) Arbitrage is the process of exploiting price differences between markets. If exchange rates differ, arbitragers can buy currency where it's cheaper and immediately sell it where it's more expensive. 3) Foreign exchange transactions involve converting one currency to another and carry exchange rate risk if rates change before settlement. Transactions are settled through payment systems like nostro/vostro accounts and SWIFT.

1. FOREIGN EXCHANGE If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.—Henry David ThoreauPRESENTED BY:ASHISH MAKHIJAPGD/FM/026

2. FOREXForeign currency.The Foreign Exchange Market: a market for converting the currency of one country into that of another country.Price of each currency is determined in term of other currencies.

3. THE NATURE OF FOREIGN EXCHANGE MARKET.The foreign exchange market is: A global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. 3

4. The Exchange Rate: is the price of one country's currency expressed in another country's currency.In other words, the rate at which one currency can be exchanged for another. e.g. Rs. 48.50 per one USD

5. If the exchange rates quoted in different markets are not the same.

6. There would be an opportunity for Arbitrage

7. The process of buying a currency low and selling it high,

8. The US dollar is often used as a vehicle currency.

9. To facilitate the exchange of other currenciesMaking two markets, by buying and selling between them, a single market.An arbitrager, usually a large bank, may notice that in.An agent will buy pounds in London (for $2.4 billion) and sell them in N.Y. (for $2.42 billion), earning a quick $20 million.WHAT IS FOREIGN EXCHANGE TRANSACTION.???Any financial transaction that involves more than one currency is a foreign exchange transaction.Most important characteristic of a foreign exchange transaction is:Exchange Risk.

10. Foreign exchange transactions are settled through:NostroVostroLoroSWIFT (Society for Worldwide Interbank Financial Telecommunications)

11. THE FUNCTIONS OF FOREIGN EXCHANGE MARKETCurrency ConversionInsurance for exchange risk

12. .

13. E.g.: 1 Pound = 1.8 DollarsA bottle of whisky in UK is for 30 pounds =$54.A bottle of whisky in US is for $45.It costs more in UK$10,000 = Rs 5,00,000 @ ($1=Rs50)An American came to India.During the trip exchange rate changed $1=Rs45.He spent Rs50,000 in India.And left with Rs 4,50,000.He converted the dollars to Rupee.Rs 4,50,000 = $10,000.He spent no money???

14. CURRENCY CONVERSION.

15. CURRENCY SPECULATIONe.g.:$ overvalued against Rupees.

16. Expect $ depreciate over Rupee.

17. Current exchange rate $1=Rs50.

18. Company exchange $10M=Rs500M

19. 3 months later $ depreciated.

20. Exchange rate $1=Rs40

21. Company converts Rs500M=$12.5M.

22. Made $2.5 M profit from this exchange rate movement !The short term movement of funds from one currency to another.In the hopes of profiting from shifts in exchange rates.

23. REDUCING RISKS.The foreign exchange market can be used to provide insurance to protect against foreign exchange risk..Spot exchange rate : The rate at which a foreign exchange dealer converts one currency into another currency on a particular day.Spot ex rate depends upon S&D.

24. Forward Exchange Rate: Two parties agree to exchange currencies on a specific future date @ predetermined exchange rate.US co. imports laptops from IndiaMust pay in 30 days on the arrival of the shipmentCost : Rs70,000 at $1=Rs50 ex. Rate70,000/50 = $ 1400 / laptopHe can sell at $1600 $1400-$1600 = $200 / laptop profitHe doesn’t have money to pay Until he sells the laptopWhat If $ depreciates in next 30 days ?$1 = Rs42US co still have to pay Rs70,000/laptopNow cost: 70,000/42= $1,667He sell at $1600$1667-1600 = $ -67 loss

25. What if the US co. enter a forward exchange rate?30 day forward ex. Rate @ $1 = $45Guarantee that he pays no more than 70,000/45 = $1555.5Now he sell the laptop at $1600Makes $1600-$1555.5=$44.5 profitThis profit is guaranteed.Insured against unexpected change in $/Rs ex. Rate

26. Spot rate @ $1=Rs 50 vs. Forward rate @ $1=Rs 45The difference : reflects the expectations of future currency movements.You can buy more Rs at spot rate than the forward rate.$ is selling at a ‘discount’ on the 30 day forward marketIndicates $ expected to ‘depreciate’ in the next 30 days.What if the 30 day forward rate is @ $1=Rs 55 ?$ is selling at a ‘premium’ on the 30 day forward marketThe dealers expect $ to ‘appreciate’.

27. Currency Swap: Simultaneous purchase and sale of given amount of foreign exchange for two different value dates.An FX swap is a contract to buy an amount of currency for one value date at an agreed rate, and to simultaneously resell the same amount of currency for a later value date, also at an agreed rate.It does not involve exchange risk.

28. What is Hedging???