01 - session 1 forex

8/8/2019 01 - Session 1 Forex

1/28

Welcome to the Exiting

World of Forex

Happy Morning & all the

best


2/28

Welcome to the ExitingWorld of Forex

While welcoming you all, to the exiting Worldof Forex, let us try to understand the variousfeatures of the Forex operations.Some of the FAQs are:

< What is a foreign exchange transaction?> Who are the players in Forex Markets?< Which products are traded in Forex Markets?> What are the various types of forex

transactions?< How the exchange rates are fixed?> What are the risks involved in Forex?


3/28

Introduction to Forex World

Forex markets operate on 24x7 basis

A driving force behind the vibrantglobalised economies.

Sensitive to various factors that drivesthe market movements,especially theexchange rates/interest rates, exposedto various kinds of risks


4/28

Overview of Forex

> Foreign Exchange, a medium of exchange of twodifferent currencies, is in existence for a number ofcenturies. One of the significant milestones in theforex activities was, when the Gold Standard wasintroduced in 1880.

> Under the Gold Standard, each currency wasconvertible into gold at a fixed exchange rate, thelevel of gold reserves in a country thereforedetermined the amount of currency that could be incirculated.

> The outbreak of World war II in 1939 made thesituation worse, forcing nearly all countries tointroduce exchange controls.


5/28

The Bretton Woods System - 1

Bretton Woods system:> The next significant event was the Bretton Woods

conference. In July 1944 representatives of the Worlds major

economies met in Bretton Woods, New Hampshire,

and adopted a proposal known as The Bretton WoodsSystem.> The International Monetary Fund, was established to

monitor the new system, whose aim was to eliminateexchange controls, implement convertibility of all

currencies and establish stable exchange rates.


6/28

The Bretton Woods System - 2

> Fixed exchange rate : An exchange ratewhich is pegged to a predetermined value ofanother currency.

> After Loss of confidence in the US Dollar in

1971, it ceased to be convertible into goldand the main currencies were allowed tofloat.

> By the end of 1973 The Bretton WoodsSystem broke down due to speculative

movements of international capital forcedcentral banks to resort once more to floatingtheir currencies.


7/28

Basket of Currencies

> Many developing Countries, resorted to ManagedFloat by linking their units to Basket of currenciesto keep fluctuations in exchange rates underreasonable control.

> INR was also linked to a basket of currencies in

September 1975.The external value ofINR wasdetermined by the market value of currencies in thebasket. RBI announced the external value of rupeesin terms of Pound Sterling. Sterling was retained asthe intervention currency for purely historicalreasons.

> Due to various factors and the wild and volatilefluctuations in the world foreign exchange marketsnecessitated frequent changes in the external valueof rupee. On March 1st, 1992 the INR becamepartially convertible. The US Dollar became theofficial intervention currency.


8/28

What is Foreign Exchange ?

Foreign Exchange is an integral part ofthe world financial system. Foreign Exchange Transaction is a

contract to exchange funds in onecurrency for funds in another currencyat an agreed rate and for delivery of funds at an agreed date.


9/28

Foreign Exchange Transaction-1

Foreign exchange (Forex) is the process ofconversion of one currency into anothercurrency.

e.g.,AnIndian exporter receives payment in

Cad $ and converts the Cad $ into IndianRupees.

A Non ResidentIndian remits EUR and

instructs his banker to convert the EUR to

Indian Rupees, to be credited in his NRE

account


10/28

Foreign Exchange Transaction-2

When, US$ is converted into IndianRupees, for India it becomes moneyand a legal tender. For USA the

transaction, becomes the value of acommodity.

Foreign exchange transaction involves

exchange of two different currencies


11/28

Major Participants in ForeignExchange

Major Participants in Foreign Exchange ParticipantsRoleCentral Banks (eg. RBI)Managing

their reserves and smoothening our fluctuations inthe value of their currency.Commercial, Investmentand Merchant BanksHedging and investing on theirown and their clients fund, but also for providing themedium of exchange for international tradeForeignExchange BrokersActing as middlemen between otherparticipantsCorporationsMoving funds between unitsin different countries, trade related transactions and

hedging exchange risks Investment FundsMovingFunds from one currency and Investment vehicle toanother.


12/28

Major Participants -1

Participants in

Forex

CENTRAL

BANKS

TRADERS/

CORPORATES

Investors/Investment

Banks

COMMERCIAL/MERCHANT

BANKS

FOREXBROKERS


13/28

Major Participants - 2

Role/functions of Major Participants in Foreign Exchange Central Banks (eg. RBI): To Manage the Reserves and to

smoothen/monitor the fluctuations in the value of their currency. Commercial/ Merchant Banks: To Hedge and invest their own funds and their clients fund.

Also provide a platform for the medium of exchange for InternationalTrade & Finance.

Foreign Exchange Brokers: To act as middlemen between differentparticipants.

Traders/Corporates: To facilitate the Forex markets,to bevibrant through their EXIM activities and also to move fundsbetween units in different countries. To hedge the exchange risksthrough different investment opportunities.

Investors/Investment Banks: To provide opportunity for creation ofmarket for movement of funds


14/28

Foreign RatesFundamental Factors

Balance of Payments - Surplus leads to strongercurrency, while a deficit weakens a currency

Economic Growth Rate - Rise in Imports leads to fallin the currency

Fiscal Policy - eg. Lower taxes can lead to highereconomic growth rate.

Monetary Policy The way a central bank attemptsto influence and control interest rates and moneysupply.

Interest Rates - High interest rate attracts overseascapital and appreciates currency in the short term, Inthe longer term, however, high interest rates slowthe economy down, thus weakening the currency.


15/28

Foreign RatesTechnical Factors

Government Controls - can lead to an unrealistic value ofcurrency resulting in violent exchange rate movements.

Speculation Speculative forces can have a major effect on exchange rates. Example :

There are expectations that a currency will be devalued. Speculator will start selling the currency in preparation for

buying it back later at a cheaper rate, hence selling pressurefrom speculators extends to other market participants.

This activity creates liquidity in the Foreign Exchange Market.


16/28

Foreign Exchange

Foreign Exchange

Deposits/Credits

Balance payable inany foreign

currency

Rupee DDs,TCs,

Bills of ExchangeL/Cs

Payable in any foreign

currency

DDs,TCs,

Bills of Exchange

L/Cs issued bybanks outside India

but payable in

Indian currency


17/28

Foreign Exchange Markets

Sydney

Middle

East

Europe

Tokyo

Hongkong

Singapore

Mumbai

London

Newyork

Toronto


18/28

Forex Markets - Products

Letters of Credit

Bank Guarantees

Negotiable Instruments (Promissory Notes

Bills of Exchanges/Cheques/DemandDrafts/Traveller Cheques)

Credit cards

Derivative Products like Forward ExchangeContracts,Interest Rate Swaps,

Futures and Options


19/28

Forex Types of Deals

Cash

Forward

Spot

Forex

Deals

Tom


20/28

Forex Types of Deals

Types of Forex

deals

Purchases Sales

Exports ImportsInward

Remittances

Outward

Remittances


21/28

Forex Rates 1

Forex markets operate on two way pricing

system

Direct Rates: When exchange rates are

quoted as a number of units of domesticcurrency against per unit of foreign currency

e.g., US$1 = 40.00.

This type of quotation is also known asHome currency quotation


22/28

Forex Rates 2

Indirect Rates:

When exchange rates are quoted as anumber of units of foreign currency per

unit of domestic currencye.g., Rs.100 = US$ 2.5000

This type of quotation is also known as

Foreign currency quotation


23/28

Forex Rates 3

Fixed Rates: In a country if theGovernment/Monetary

Authorities/Regulators fixes the value of

Currencies, as official rate it is called asfixed rate

Floating Rates: When market forces(demand and supply factors) determinethe exchange rates, it is called asfloating rate.


24/28

Forex Risks -1

What is Risk?A risk is an uncertain/unplanned event

which might result in a loss or reduced

earnings. Risk arises due to volatile movements

happening in the markets due tovarious

reasons

International Trade and Finance aresubject to many risks


25/28

Forex Risks -2Types of Risks

Exchange

Rate Risk

Mismatch

Risk

Country

Risk

Credit

Risk

Liqudity

Risk

Interest

Rate

Risk

Operational

Risk

Reputation

Risk


26/28

Dealing Room Operations-1

An Authorised Dealer (AD) in Forex,under takes the activities of buying andselling

of foreign currencies/exchange from/to the customers

(exporters/importers/banks

and others) in the inter bank market. To enable an AD to deal comfortably

Banks provide a place called dealing

room.


27/28

Dealing Room Operations-2

Front Office Back Office

Forex

Dealing

Mid

Office


28/28

ALL THE BEST & THANK YOU

T.M.C.VARADARAJAN

TEL : 022-25638965 (R)

9869134706 (M)

e.mail: [email protected]

01 - session 1 forex

Documents