FOREIGN EXCHANGE MARKET

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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).

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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.

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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

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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.

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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

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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.

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C. Forward Contract Maturities 1. Contract Terms a. 30-day b. 90-day c. 180-day d. 360-day 2. Longer-term Contracts

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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.

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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 .