Slide 1: The Foreign exchange market
presented by
Name roll no
Suresh bhogu 03
Edal dias 04
Misbha patel 12
Fauzia shaikh 17
CHAPTER OVERVIEW : CHAPTER OVERVIEW I. INTRODUCTION
II. ORGANIZATION OF THE OF THE FOREIGN EXCHANGE MARKET
III. THE SPOT MARKET
1V. THE FORWARD MARKET
V. INTEREST RATE PARTY THEORY
INTRODUCTION : INTRODUCTION The Currency Market: Where money denominated in one currency is bought and sold with money denominated in another currency.
International Trade and Capital Transactions
Location
ORGANIZATION OF THE FOREIGN EXCHANGE MARKET : ORGANIZATION OF THE FOREIGN EXCHANGE MARKET PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET
A. Participants at 2 Levels
1.Wholesale Level (95%)
(Major banks).
2.Retail Level
(Business customers).
Slide 5: B. Two Types of Currency Markets
1. Spot Market: Immediate transaction.
2. Forward Market: Transactions take place at a specified future date.
C. Participants by Market : C. Participants by Market 1. Spot Market
a. Commercial banks
b. Brokers.
c. Customers of commercial & central bank 2.Forward Market
a. Arbitrageurs
b. Traders
c. Hedgers
d. Speculators
II. CLEARING SYSTEMS : II. CLEARING SYSTEMS A. Clearing House Interbank Payments System (CHIPS)
- Used in U.S. for electronic fund transfers.
B. Fed Wire
- Operated by the Fed.
- Used for domestic transfers.
THE SPOT MARKET : THE SPOT MARKET I. SPOT MARKET
A market for the immediate purchase and delivery of currencies.
II. Spot Exchange Rates
Market prices of foreign exchanges in the spot market that are the rates pertaining to the trading of foreign-currency-denominated deposits among major banks in amounts of $1 million and more.
Slide 9: III. Currency Arbitrage
1. If cross rates differ from one financial center to another, and profit opportunities exist.
2. Buy cheap in one int’l market, sell at a higher price in another
3. Role of Available Information
Slide 10: IV. Exchange Risk
1. Bankers = middlemen
a. Incurring risk of adverse exchange rate moves.
b. Increased uncertainty about future exchange rate requires
2. Demand for higher risk premium
3. Bankers widen bid-ask spread
THE FORWARD MARKET : THE FORWARD MARKET I. INTRODUCTION
A. Definition of a Forward Contract
An agreement between a bank and a customer to deliver a specified amount of currency against another currency at a specified future date and at a fixed exchange rate.
Slide 12: 2. Purpose of a Forward
Hedging
The act of reducing exchange rate risk.
3. Covered Exposure
A foreign exchange risk that has been completely eliminated with a hedging instrument.
Forward contract for foreign exchange
Derivative instruments
Slide 13: B. Forward Rate Quotations
1. Two Methods
a. Outright Rate: Quoted to commercial customers.
b. Swap Rate: Quoted in the interbank market as a discount or premium.
Slide 14: C. Forward Contract Maturities
1. Contract Terms
a. 30-day
b. 90-day
c. 180-day
d. 360-day
2. Longer-term Contracts
Slide 15: II. Covered Interest Arbitrage
1. Conditions required: Interest rate differential does not equal the forward premium or discount.
2. Funds will move to a country with a more attractive rate.
Slide 16: 3. Market pressures develop:
a. As one currency is more demanded spot and sold forward.
b. Inflow of fund depresses interest rates.
c. Party eventually reached.
CONCLUSION : CONCLUSION From this we concluded that FOREIGN EXCHANGE MARKET plays a very important role in the market.
And minor mistake can create a biggest problems .