: 1 THE FOREIGN EXCHANGE MARKET CHAPTER OVERVIEW : 2 CHAPTER OVERVIEW INTRODUCTION
NEED OF THE MARKET
III. PARTICIPANTS OF THE FOREIGN EXCHANGE MARKET
IV. TYPES OF THE MARKET INTRODUCTION : 3 INTRODUCTION The Currency Market:
The market in which individuals, firms and banks buy & sell foreign currencies or foreign exchange.
The market which accommodates the currency preferences of the parties involved and helps convert one currency into the other currency. Slide 4: It is the largest financial market in the world, and includes trading b/w banks, central banks, governments and other financial institutions.
The major world’s trading centers are in Tokyo, Singapore, New York, London and San Francisco. 4 The need for such market arise because: : The need for such market arise because: Tourism
The buying & selling of goods internationally
Investment across international boundaries 5 Global Foreign Exchange Market Turnover(average daily turnover) : Global Foreign Exchange Market Turnover(average daily turnover) 6 PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET : 7 PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET Individuals
Speculators INDIVIDUALS: : INDIVIDUALS: The demand for foreign currencies arises when tourists visit another country and need to exchange their national currency for the currency of the country they are visiting, when a domestic firm wants to import from other nations, when an individual wants to invest abroad and so on.
On the other hand, a nation’s supply of foreign currencies arises from foreign tourist expenditures in the nation, from export earnings, from receiving foreign investments. 8 Firms: : Firms: Transfer of purchasing power is necessary because international trade and capital transactions usually involve parties living in countries with different national currencies. Each party wants to trade and deal in his own currency but since the trade can be invoiced only in a single currency, the parties mutually agree on a currency beforehand. The currency agreed could also be any convenient third country currency such as the US dollar.
If an Indian exporter sells machinery to a UK importer, the exporter could invoice in pound, rupees or any other convenient currency like the US dollar. 9 BANKS: : BANKS: A nation’s commercial banks operate as clearing houses for the foreign exchange demanded and supplied in the course of foreign transactions by the nation’s residents.
If the nation’s total demand for foreign exchange in the course of its foreign transactions exceeds its total foreign exchange earnings, the rate at which currencies exchange for one another will have to change to equilibrate the total quantities demanded and supplied. 10 ARBITRAGEURS: : ARBITRAGEURS: They want to earn a profit without any kind of risk
They are market participants who thrive on market imperfections and are in the business to take advantage of a discrepancy between prices in two different markets.
Consider a stock which is traded on both the Bombay Stock Exchange (BSE) and the Delhi Stock Exchange (DSE). If the stock price is Rs 200 in BSE and Rs 220 in DSE, then the arbitrageur would profit by buying shares in BSE and simultaneously selling them at DSE. 11 HEDGERS: : HEDGERS: Traders/Parties wishing to manage their risks are called hedgers.
hedgers do not want to take risk while participating in the market, they want to insure themselves against the exchange rate changes.
For example- a firm who knows that a certain amount of foreign currency will be received at a certain time in the future can hedge the foreign exchange risk by taking a short position in a forward contract. Similarly, a long position can be taken in a forward contract by a company who expects to purchase a certain amount of foreign currency at a certain time in future. Hedging provides an option to the firm to make the outcome more certain by deciding on the forward rate in advance. 12 SPECULATORS: : SPECULATORS: Speculators are those persons, think they know what the future exchange rate of a particular currency will be, and they are willing to accept exchange rate risk with the goal of making profit. 13 Types of Currency Markets: : 14 Types of Currency Markets: 1. Spot Market:
2. Forward Market SPOT MARKET: : 15 SPOT MARKET: The spot market or cash market is a market in which goods are sold for cash and delivered immediately or two days. Forward Market: : Forward Market: The forward market are made to buy and sell currencies for future delivery.
It says that after 15 days, one month, two month and so on. 16 Slide 17: THANK YOU
PGDM 3rd Sem. 17