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FOREIGN EXCHANGE MARKET Done by: Arunesh Dwivedi Pawan Soni Nishit Ratthe Varun Gulati Kapindra Chaudhary 1

Agenda : 

Agenda What is foreign exchange market? The dynamics Different players History Relevant acts Need Types Factors influencing foreign exchange rate Derivatives Turnover Foreign exchange reserves Risk 2

Foreign Exchange Market : 

Foreign Exchange Market It is the place where one currency is bought or sold for another currency The foreign exchange market (forex) is a worldwide decentralized over-the-counter financial market for the trading of currencies 3

The Dynamics : 

The Dynamics Most common contact with foreign exchange occurs when we travel or buy things in other countries. 4

Different Players : 

Different Players 5

History: Pre Liberalisation : 

History: Pre Liberalisation India was under fixed exchange rate regime till March 1992; it was adjusted by the Central Bank The exchange rate was continuously adjusted by small margins to adjust with a) Changing inflation rates b) International economic changes c) Trade requirements 6

History: Post Liberalisation : 

History: Post Liberalisation Rupee was made partially convertible on the current account Dual exchange rate system: a) 40% at official exchange rate b) 60% at market exchange rate In 1993, this dual exchange rate system was removed and a single market determined exchange rate prevailed 7

Slide 8: 

Relevant Acts FERA 1973 8

Need for Foreign Exchange Market : 

Need for Foreign Exchange Market 9

Types of Foreign Exchange Market : 

Types of Foreign Exchange Market 10

Features of Spot Market : 

Features of Spot Market Simplest way to meet foreign currency requirements Risk of exchange rate fluctuations No certainty of the rate until the transaction is carried out Larger the amount being dealt, better the spot rate that can be received Spot deal settles in two working days after the deal is struck 11

Features of Forward Market : 

Features of Forward Market Requires a more complicated calculation Protects against unfavorable movements Contracts are available for any period up to two years 12

Factors Influencing Forex rate : 

Factors Influencing Forex rate Business cycles Political development New tax laws Stock market news Inflationary expectations International investment patterns Government and central bank policies 13

Evolution of Derivatives in India : 

Evolution of Derivatives in India Economic liberalization provided the rationale for introduction of Forex derivatives Source of capital and direct investment opportunities Introduction of limited convertibility on the trade account in 1993 14

Forex Derivatives Types : 

Forex Derivatives Types Currency futures Currency forwards Currency swaps Currency options 15

Turnover Per Day : 

Turnover Per Day 16

Foreign Exchange Reserves : 

Foreign Exchange Reserves Foreign Exchange Reserves of various countries (July 2010) 17

Foreign Exchange Reserves of India : 

Foreign Exchange Reserves of India 18

Risk : 

Risk Risk refers to variability in investment’s value due to changes in currency exchange rates Managing risk is central to successful investment in the forex market Types of Risks: a) Transaction b) Economic c) Translation 19

Risk (Contd.) : 

Risk (Contd.) Transaction Risk: 1.Trade Transactions : Export and Import 2.Financial Transactions : Borrowing and lending 3.Payment & Receipt of dividend and interest 20

Risk (Contd.) : 

Risk (Contd.) Translational Risk: 1.Known as Consolidation Risk also 2.It refers to assets and liabilities of a Balance Sheet denominated in Foreign Risk 3.Comes into picture when foreign subsidiary is transferred to domestic country 21

Risk (Contd.) : 

Risk (Contd.) Economic Risk: Risk involved due to the future change in exchange rate Methods to calculate Risk 1.Current / Non current method 2.Monetory / Non monetary method 3. Closing rate method 4.Temporal method 22

Slide 23: 

Thank You 23

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