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Terms used n forex


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terms used in forex

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Terms used n forex

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