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UNIVERSITY OF MUMBAI

Project Report on

FOREIGN EXCHANGE MARKETS IN THE DEVELOPED NATIONS

Submitted By

WAGH VIVEK

M.COM PART-I (SEMESTER II)

Roll NO.144

PROJECT GUIDANCE

PROF. A CHOUGULE

THE SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS

‘B’ ROAD, CHURCHGATE, MUMBAI – 400 020

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DECLARATION

I hereby declare that the project work entitled “Foreign Exchange Markets In The DevelopedNations” submitted to the “THE SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS”, is agenuine record of an original work done by me under the guidance of Prof. A Chougale myprofessor and this project work is submitted in the partial fulfilment of the requirements for theaward of the degree of master of commerce.

I assert that the statements made and conclusions drawn are an outcome of the project work. Ifurther declare that to the best of my knowledge and belief that the project report does not containany part of any work has been submitted for the award of any other degree/diploma/certificate inthis university or any other university

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CERTIFICATE

This is to certify that this project report entitled “Foreign Exchange Markets In The DevelopedNations”  submitted to Sydenham College Of Commerce And Economics, is a bonafide record ofwork done by “Wagh Vivek Dinesh” under my supervision. 

_________________________

Internal Guide

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INDEX

SR

NO.

TOPIC PAGE NO.

1 Chapter 1-Introduction 5-10

1.1 Importance Of Foreign Exchange Markets In DevelopedNations

8

1.2 Significance 9

1.3 Objectives 10

2 Chapter 2-Reasearch Methodology 11-22

2.1 Primary And Secondary Data 13

2.2 Hedging In Developed Nations 20

3 Chapter 3- List Of Foreign Brokers Of Developed Nations   23-30

3.1 List Of Foreign Brokers 23

3.2 Exposure Management in Foreign Exchange Risk 25

4 Chapter 4- Conclusion And Bibliography 31-32

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CHAPTER 1

INTRODUCTION

The foreign exchange market  (forex, FX, or currency market ) is a global decentralized market

for the trading of  currencies. The main participants in this market are the larger international

banks. Financial centres around the world function as anchors of trading between a wide range of

multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign

exchange market determines the relative values of different currencies.

The foreign exchange market works through financial institutions, and it operates on several levels.

Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are

actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are

banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few

insurance companies and other kinds of financial firms are involved. Trades between foreign

exchange dealers can be very large, involving hundreds of millions of dollars. Because of the

sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity

regulating its actions.

The foreign exchange market assists international trade and investments by enabling currency

conversion. For example, it permits a business in the United States to import goods from the

European Union member states, especially Eurozone members, and pay euros, even though itsincome is in United States dollars. It also supports direct speculation and evaluation relative to the

value of currencies, and the carry trade, speculation based on the interest rate differential between

two currencies.

In a typical foreign exchange transaction, a party purchases some quantity of one currency by

paying for some quantity of another currency. The modern foreign exchange market began forming

during the 1970s after three decades of government restrictions on foreign exchange transactions

(the Bretton Woods system of monetary management established the rules for commercial and

financial relations among the world's major industrial states after World War II), when countries

gradually switched to floating exchange rates from the previous exchange rate regime, which

remained fixed as per the Bretton Woods system

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As such, it has been referred to as the market closest to the ideal of  perfect competition, 

notwithstanding currency intervention by central banks. 

According to the Bank for International Settlements, the preliminary global results from the 2013

Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that

trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from

$4.0 trillion in April 2010 and $3.3 trillion in April 2007. Foreign exchange swaps were the most

actively traded instruments in April 2013, at $2.2 trillion per day, followed by spot trading at $2.0

trillion.

According to the Bank for International Settlements, as of April 2010, average daily turnover in

global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over

the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market

had put the average daily turnover in excess of US$4 trillion.

Currency trading and exchange first occurred in ancient times. Money-changing people, people

helping others to change money and also taking a commission or charging a fee were living in the

times of the Talmudic writings (Biblical times). These people (sometimes called "kollybistes") used

city-stalls, at feast times the temples Court of the Gentiles instead. Money-changers were also in

more recent ancient times silver-smiths and, or, gold-smiths.

During the fourth century, the Byzantium government kept a monopoly on the exchange of

currency.

Currency and exchange was also a vital and crucial element of trade during the ancient world so

that people could buy and sell items like food, pottery and raw materials. If a Greek coin held more

gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold

coins for more Egyptian ones, or for more material goods. This is why the vast majority of world

currencies are derivatives of a universally recognized standard like silver and gold.

Central banks intervene in foreign exchange markets in order to achieve a variety of overall

economic objectives, such as controlling inflation, maintaining competitiveness or maintaining

financial stability. The precise objectives of policy and how they are reflected in foreign exchange

market intervention depend on a number of factors, including the stage of a country’s development,

the degree of financial market development and integration, and a country’s overall vulnerability to

shocks. The precise definition of which operations in forex markets constitute “intervention” has

also been a matter of controversy. Three immediate objectives of intervention have been

important: to influence the level of the exchange rate; to dampen exchange rate volatility or supply

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liquidity to foreign exchange markets; and to influence the amount of foreign reserves. Much of the

analysis in this paper draws on central bank responses to a questionnaire on foreign exchange

market intervention and meetings with central bank officials and foreign exchange market

participants.

What Are the Major Types of Foreign Exchange Risks?

With an average daily volume of over $1 trillion, the foreign exchange system is the largest market

in the world. It is used by central banks, commercial financial institutions, multinational

corporations, and individual speculators, each of which have their own specific types of risk.

History 

Today's international foreign exchange system has its roots in the global currency exchange regime

created by the 1944 Bretton Woods Agreement.

Players 

The largest players in the foreign exchange system are central banks like the European Central

Bank, Bank of Japan, and U.S. Federal Reserve. They are followed by commercial and investment

banks, global companies like Coke and McDonald's, and many different kinds of investors and

traders.

Sovereign Currency Risk  

The largest risk in Forex is that a country's currency will significantly depreciate or possibly even

devalue. This may happen in response to political turmoil, social unrest, war, or may be a long-term

consequence of the country pursuing unsustainable budget and trade deficits.

Multi-National Company Risk  

Major multinational companies like Coke, Pepsi, and McDonald's derive a considerable share of

their revenue from overseas markets. McDonald's, in particular, earns of 65 percent of its income

outside the U.S. As a result, these companies would be very badly affected if the currency values in

one or more of their major foreign markets would significantly depreciate--this would cheapen the

value of their revenues, while bolstering the value of their expenses. As a result, many of these

billion-dollar firms employ complex hedging strategies designed to significantly minimize bottom-

line risk in the event of adverse currency swings.

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Investment Risk  

Investment risk is the more classic kind of risk faced by almost every foreign exchange investor,

from billion-dollar macro hedge funds to individuals trading miniscule accounts. A currency

investor typically buys and sells two currencies simultaneously, hoping the one he buys appreciates

in value relative to the one he sold. If this doesn't happen, he'll have a loss. Given the very high

borrowing limits availed to Forex investors, sometimes in excess of $200 for every $1 on deposit,

losses of even a few percent on the underlying currencies can rapidly lead to ruinous losses in a

brokerage account.

1.1-Importance of the Foreign Exchange Market In Developed Nations 

The $1.5 trillion-per-day foreign exchange (FX) market surpasses stocks and bonds as the largest

market in the world. Foreign exchange markets are critical for setting exchange rates between

countries.

Liquidity 

In terms of international trade, liquidity is the ease in which foreign currency is converted into

domestic currency. FX markets, such as the New York Mercantile Exchange, match buyers and

sellers to bring about speedy, orderly transactions.

Rates 

Buyers and sellers set prices using the auction method in the FX market. Sellers try to earn the

highest "ask" price possible, and buyers try to purchase currency at the lowest "bid." Buyers and

sellers meet at the "spot" price, the current value and exchange rate for a particular currency

against others.

Reserves 

International governments enter the FX market to build and manage foreign exchange reserves.

They build the reserves to make official payments and influence domestic currency values.

International Trade 

Businesses rely on FX markets to buy currency that is spent to obtain overseas goods. Corporations

will also look to FX markets to convert international earnings back into the domestic currency.

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1.3-Significance

This study will provide brief description on various aspects involved in the foreign exchange

markets mainly in the developed nations. This study gives us the vast knowledge about how much

foreign exchange markets are developed in developed nations. This is very vast study which also

provides us the data of different developed nations. The proposed study is very useful for studying

of the various aspects in the foreign exchange markets in the developed countries. The proposed

study will also help teachers and professors to have a deeper understanding of the foreign

exchange markets in the developed nations. The study can also help in developing wider aspects of

foreign exchanges. This study can be helpful for studying and reviewing.

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1.3-Objective

The foreign exchange market is unique because of the following characteristics:

  its huge trading volume representing the largest asset class in the world leading to high

liquidity; 

  its geographical dispersion;

  its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on

Sunday (Sydney) until 22:00 GMT Friday (New York);

  the variety of factors that affect  exchange rates; 

  the low margins of relative profit compared with other markets of fixed income; and

  the use of  leverage to enhance profit and loss margins and with respect to account size.

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CHAPTER 2

REASEARCH METHODOLOGY

Financial instruments 

Spot  

A spot transaction is a two-day delivery transaction (except in the case of trades between the US

Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day),

as opposed to the futures contracts, which are usually three months. This trade represents a “direct

exchange” between two currencies, has the shortest time frame, involves cash rather than a

contract; and interest is not included in the agreed-upon transaction.

Forward

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this

transaction, money does not actually change hands until some agreed upon future date. A buyer

and seller agree on an exchange rate for any date in the future, and the transaction occurs on that

date, regardless of what the market rates are then. The duration of the trade can be one day, a few

days, months or years. Usually the date is decided by both parties. Then the forward contract is

negotiated and agreed upon by both parties.

Swap

The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange

currencies for a certain length of time and agree to reverse the transaction at a later date. These are

not standardized contracts and are not traded through an exchange.

Future

Futures are standardized and are usually traded on an exchange created for this purpose. The

average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest

amounts.

Option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the ownerhas the right but not the obligation to exchange money denominated in one currency into another

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currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest,

largest and most liquid market for options of any kind in the world.

Speculation 

Controversy about currency speculators and their effect on currency devaluations and national

economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that

speculators ultimately are a stabilizing influence on the market and perform the important function

of providing a market for hedgers and transferring risk from those people who don't wish to bear it,

to those who do. Other economists such as Joseph Stiglitz consider this argument to be based more

on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional

speculators. According to some economists, individual traders could act as "noise traders" and have

a more destabilizing role than larger and better informed actors.

Currency speculation is considered a highly suspect activity in many countries. While investment in

traditional financial instruments like bonds or stocks often is considered to contribute positively to

economic growth by providing capital, currency speculation does not; according to this view, it is

simply gambling that often interferes with economic policy. For example, in 1992, currency

speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per

annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir Mohamad is one

well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on

George Soros and other speculators.

Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who simply

help "enforce" international agreements and anticipate the effects of basic economic "laws" in order

to profit.

In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their

national economies, and foreign exchange speculators made the inevitable collapse happen sooner.

A relatively quick collapse might even be preferable to continued economic mishandling, followed

by an eventual, larger, collapse. Mahathir Mohamad and other critics of speculation are viewed as

trying to deflect the blame from themselves for having caused the unsustainable economic

conditions.

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2.1-Primary and secondary data 

Most traded currenciesCurrency distribution of global foreign exchange market turnover 

Rank CurrencyISO 4217 code

(Symbol)

% daily share

(April 2012)

1 United States dollar USD ($) 84.9%

2 Euro EUR (€)  39.1%

3 Japanese yen JPY (¥) 19.0%

4 Pound sterling GBP (£) 12.9%

5 Australian dollar AUD ($) 7.6%

6 Swiss franc CHF (Fr) 6.4%

7 Canadian dollar CAD ($) 5.3%

8 Hong Kong dollar HKD ($) 2.4%

9 Swedish krona SEK (kr) 2.2%

10 New Zealand dollar NZD ($) 1.6%

11 South Korean won KRW (₩)  1.5%

12 Singapore dollar SGD ($) 1.4%

13 Norwegian krone NOK (kr) 1.3%

14 Mexican peso MXN ($) 1.3%

15 Indian rupee INR ( ) 0.9%

Other 12.2%

Total  200% 

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There is no unified or centrally cleared market for the majority of FX trades, and there is very little

cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are

rather a number of interconnected marketplaces, where different currencies instruments are

traded. This implies that there is not a single exchange rate but rather a number of different rates

(prices), depending on what bank or market maker is trading, and where it is. In practice the rates

are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to

London's dominance in the market, a particular currency's quoted price is usually the London

market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called Fxmarket

space opened in 2007 and aspired but failed to the role of a central market  clearing mechanism.

The main trading centre is London, but  New York, Tokyo, Hong Kong and Singapore are all

important centres as well. Banks throughout the world participate. Currency trading happens

continuously throughout the day; as the Asian trading session ends, the European session begins,

followed by the North American session and then back to the Asian session, excluding weekends.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by

expectations of changes in monetary flows caused by changes in gross domestic product (GDP)

growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic

Fisher effect, International Fisher effect ), budget and trade deficits or surpluses, large cross-

border M&A deals and other macroeconomic conditions. Major news is released publicly, often on

scheduled date, so many people have access to the same news at the same time. However, the large

banks have an important advantage; they can see their customers' order flow. 

Currencies are traded against one another. Each currency pair thus constitutes an individual

trading product and is traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO

4217 international three-letter code of the currencies involved. The first currency (XXX) is the base

currency that is quoted relative to the second currency (YYY), called the counter currency (or quote

currency). For instance, the quotation EURUSD (EUR/USD) 1.5465  is the price of the euro expressed

in US dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange

rates against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF). The

exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar (NZD) and

the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).

The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive

currency correlation between XXXYYY and XXXZZZ.

On the spot market, according to the 2010 Triennial Survey, the most heavily traded bilateralcurrency pairs were:

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EURUSD: 28%

USDJPY: 14%

GBPUSD (also called cable): 9%

and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the yen

(19.0%), and sterling (12.9%) (see table). Volume percentages for all individual currencies should

add up to 200%, as each transaction involves two currencies.

Trading in the euro has grown considerably since the currency's creation in January 1999, and how

long the foreign exchange market will remain dollar-centred is open to debate. Until recently,

trading the euro versus a non-European currency ZZZ would have usually involved two trades:

EURUSD and USDZZZ. The exception to this is EURJPY, which is an established traded currency pair

in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the

euro as reference currency for prices in commodities (such as oil), as well as a larger component of

foreign reserves by banks, has increased dramatically. Transactions in the currencies of

commodity-producing countries, such as AUD, NZD, CAD, have also increased.

The foreign exchange market is the most  liquid financial market in the world. Traders include large

banks, central banks, institutional investors, currency speculators, corporations, governments, 

other financial institutions, and retail investors. The average daily turnover in the global foreign

exchange and related markets is continuously growing. According to the 2010 Triennial Central

Bank Survey, coordinated by the Bank for International Settlements, average daily turnover

was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998). Of this $3.98 trillion, $1.5 trillion was

spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and

other currency derivatives. 

Trading in the UK accounted for 36.7% of the total, making UK by far the most important global

center for foreign exchange trading. In second and third places, respectively, trading in

the USA accounted for 17.9%, and Japan accounted for 6.2%.

Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent

years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-

traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures

contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded

relative to most other futures contracts.

Most developed countries permit the trading of FX derivative products (like currency futures and

options on currency futures) on their exchanges. All these developed countries already have fully

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convertible capital accounts. A number of emerging countries do not permit FX derivative products

on their exchanges in view of controls on the capital accounts. The use of foreign exchange

derivatives is growing in many emerging economies. Countries such as Korea, South Africa, and

India have established currency futures exchanges, despite having some controls on the capital

account.

Foreign exchange trading increased by 20%

between April 2007 and April 2010 and has

more than doubled since 2004. The increase in

turnover is due to a number of factors: the

growing importance of foreign exchange as an

asset class, the increased trading activity of

high-frequency traders, and the emergence of

retail investors as an important market

segment. The growth of electronic execution

methods and the diverse selection of execution

venues have lowered transaction costs,

increased market liquidity, and attracted

greater participation from many customer

types. In particular, electronic trading via

online portals has made it easier for retail

traders to trade in the foreign exchange

market. By 2010, retail trading is estimated to

account for up to 10% of spot FX turnover, or

$150 billion per day (see retail trading

platforms).

Because foreign exchange is an OTC market

where brokers/dealers negotiate directly with

one another, there is no central exchange or clearing house. The biggest geographic trading center

is the UK, primarily London, which according to TheCityUKestimates has increased its share of

global turnover in traditional transactions from 34.6% in April 2007 to 36.7% in April 2013. Due to

London's dominance in the market, a particular currency's quoted price is usually the London

market price. For instance, when the IMF calculates the value of its SDRs every day, they use the

London market prices at noon that day.

Top 10 currency traders

% of overall volume, May 2013

Rank Name Market share

1 Deutsche Bank 15.64%

2 Barclays Capital 10.75%

3 UBS AG 10.59%

4 Citi 8.88%

5 JPMorgan 6.43%

6 HSBC 6.26%

7 Royal Bank of Scotland 6.20%

8 Credit Suisse 4.80%

9 Goldman Sachs 4.13%

10 Morgan Stanley 3.64%

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Determinants of FX rates 

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In

a fixed exchange rate regime, FX rates are decided by its government):

(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity, Domestic

Fisher effect, International Fisher effect. Though to some extent the above theories provide logical

explanation for the fluctuations in exchange rates, yet these theories falter as they are based on

challengeable assumptions [e.g., free flow of goods, services and capital] which seldom hold true in

the real world.

(b) Balance of payments model (see exchange rate): This model, however, focuses largely on

tradable goods and services, ignoring the increasing role of global capital flows. It failed to provide

any explanation for continuous appreciation of dollar during 1980s and most part of 1990s in face

of soaring US current account deficit.

(c) Asset market model (see exchange rate): views currencies as an important asset class for

constructing investment portfolios. Assets prices are influenced mostly by people's willingness to

hold the existing quantities of assets, which in turn depends on their expectations on the future

worth of these assets. The asset market model of exchange rate determination states that “the

exchange rate between two currencies represents the price that just balances the relative supplies

of, and demand for, assets denominated in those currencies.” 

None of the models developed so far succeed to explain FX rates levels and volatility in the longer

time frames. For shorter time frames (less than a few days) algorithms can be devised to predict

prices. It is understood from the above models that many macroeconomic factors affect the

exchange rates and in the end currency prices are a result of dual forces of demand and supply. The

world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of

current events, supply and demand factors are constantly shifting, and the price of one currency in

relation to another shifts accordingly. No other market encompasses (and stills) as much of what isgoing on in the world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single

element, but rather by several. These elements generally fall into three

categories: economic factors, political conditions and market psychology. 

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Economic factors

These include:

(a)economic policy, disseminated by government agencies and central banks, 

(b)economic conditions, generally revealed through economic reports, and other economic

indicators. 

Economic policy comprises government  fiscal policy (budget/spending practices) and monetary

policy (the means by which a government's central bank influences the supply and "cost" of money,

which is reflected by the level of  interest rates).

Government budget deficits or surpluses: The market usually reacts negatively to widening

government  budget deficits, and positively to narrowing budget deficits. The impact is reflected in

the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for

goods and services, which in turn indicates demand for a country's currency to conduct trade.

Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's

economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically a currency will lose value if there is a high level of  inflation in

the country or if inflation levels are perceived to be rising. This is because inflation

erodes purchasing power, thus demand, for that particular currency. However, a currency may

sometimes strengthen when inflation rises because of expectations that the central bank will raise

short-term interest rates to combat rising inflation.

Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity

utilization and others, detail the levels of a country's economic growth and health. Generally, themore healthy and robust a country's economy, the better its currency will perform, and the more

demand for it there will be.

Productivity of an economy: Increasing productivity in an economy should positively influence the

value of its currency. Its effects are more prominent if the increase is in the traded sector.

Political conditions

Internal, regional, and international political conditions and events can have a profound effect on

currency markets.

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All exchange rates are susceptible to political instability and anticipations about the new ruling

party. Political upheaval and instability can have a negative impact on a nation's economy. For

example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the

value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a

political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events

in one country in a region may spur positive/negative interest in a neighbouring country and, in the

process, affect its currency.

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of

ways:

Flights to quality: Unsettling international events can lead to a "flight to quality", a type of  capital

flight whereby investors move their assets to a perceived "safe haven". There will be a greater

demand, thus a higher price, for currencies perceived as stronger over their relatively weaker

counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of

political or economic uncertainty.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies

do not have an annual growing season like physical commodities, business cycles do make

themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or

political trends.

"Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the

tendency for the price of a currency to reflect the impact of a particular action before it occurs and,

when the anticipated event comes to pass, react in exactly the opposite direction. This may also be

referred to as a market being "oversold" or "overbought".[18] To buy the rumor or sell the fact can

also be an example of the cognitive bias known as anchoring, when investors focus too much on the

relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports

and numbers take on a talisman-like effect: the number itself becomes important to market

psychology and may have an immediate impact on short-term market moves. "What to watch" can

change over time. In recent years, for example, money supply, employment, trade balance figures

and inflation numbers have all taken turns in the spotlight.

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Technical trading considerations: As in other markets, the accumulated price movements in a

currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many

traders study price charts in order to identify such patterns.

2.2- Hedging In Developed Nations 

Traders use foreign exchange derivatives, which "derive" their valuations and costs from the spotmarket. Options and futures contracts effectively lock in exchange rates for a set period, to hedge

against the risks of currency fluctuations.

How to Invest in Foreign Currency Exchange Contracts (Currency Trading)

The Foreign Exchange Market or FX market is estimated to be one of the largest markets in the

world. It is volatile and risky. The basic underlying transactions in these contracts are the purchase

and sale of currencies.

Spot and Forward currencies are the two types of foreign exchange contracts. Banks, brokers and

other financial institutions participate in this market. Historically, these contracts were used by

banks and companies but in recent years it has become a market accessible to individuals. These

are some ideas on how to buy foreign exchange contracts.

Instructions

  Decide which type of Foreign Exchange contract or Forex you want to buy. The choices are a

Spot currency trading contract or a Forward currency contract. Also, decide which currency

you are going to trade.

  Understand the rules about each type of currency trading contract. In a Spot contract the

buyer and the seller agree to buy/sell the currency at a specific price on the spot. In a

Forward contract, the buyer and the seller agree to buy/sell at a specific price on a date in

the future. The money is exchanged sometime in the future.

  If you already have a broker account, find out if it provides currency trading services. You

will need to sign a contract to be able to invest or trade in foreign currencies. Once your

contract is on file you can buy/sell currency contracts from your account.

  Open a Foreign Exchange trading account at a retail foreign exchange broker. If your broker

doesn't offer this service you will need to open a new account at a broker that does. Choose a

broker that offers training and education on foreign exchange markets. Also, make sure that

the broker has licensed customer service representatives.

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  Fund your account after it has been set up. Some brokers require a minimum account

balance to start currency trading.

  Develop a strategy and start trading foreign exchange contracts in your account. In this stage

you should decide: what currencies to trade, how much money you will invest in each

contract, the expiration date of each contract (30 days, 60 days, 90 days etc.) and trade a

spot or forward contract.  Remember that currency trading can be risky, currency prices can fluctuate often and in

large amounts. The amount you invest in Forex contracts should be in proportion to how

much money you can afford to lose.

Types of Foreign Exchange Transactions 

At its simplest, currency exchange is just the buying of the currency of one country with the

currency of another country. Individuals, businesses and traders all engage in various types of

foreign currency exchange transactions. Some participants in currency exchange do so as part of

business dealings while others speculate on the foreign exchange (Forex) market in hopes of

profiting off of exchange rate fluctuations. The main types of foreign currency exchange

transactions they employ are described below.

Basic Currency Exchange 

If you've ever traveled to a foreign country, chances are you've used some of your cash to buy

euros, yen or whatever the local currency was. The price you paid was determined by the exchange

rate between the two currencies. Your purchase is an example of the most basic type of foreign

currency exchange transaction.

Currency exchange rates change continuously, mainly in response to demand for one currency

relative to others. Demand for a currency in turn is affected by many factors, including differences

in interest rates, inflation and monetary policy.

Forward Contracts 

Financial institutions and businesses frequently want to protect themselves against possible losses

due to changes in exchange rates. The forward contract is a way of doing this. A forward contract is

like a futures contract except it is a private agreement, rather than an exchange-traded security. In

forwards, one party agrees to buy (or sell) a foreign currency from (or to) another party. The

currency is delivered at a future date at a predetermined price. A variation of this is the forward

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window contract. Instead of delivery on a specific date, the transaction is settled during a "window"

of time between two dates.

Swaps 

Suppose you are a businessperson who needs euros to do some business in Europe, but all you have

are U.S. dollars. You don't want to convert to euros and run the risk of losing money if exchange

rates go the wrong way. A currency swap is your solution. You simultaneously borrow euros from

someone else (usually a currency dealer) and lend your dollars to the other party. You can use the

euros as you see fit until a specific date. Then you return the euros and get your dollars back at a

predetermined exchange rate.

Forex 

Most of the volume of trading on the Forex market actually is generated by speculators, not as part

of other business activity. Forex traders use forwards and swaps. The basic Forex trade, however, is

a simple currency exchange but with one crucial difference. When a Forex trader buys one currency

for another, it is a margin transaction. This means the trader puts up only a little money (often less

than $1,000 for a $100,000 lot of currency). With extreme leverage like this, even small changes in

currency exchange rates mean big profits or big losses. This makes Forex trading very attractive to

many people but also very risky.

Forex Options 

Forex options work like any other options contract. A trader pays a premium to a Forex dealer for

an option to buy or sell a currency at a specific strike price. If the exchange rate moves in the

trader's favor before the option expires, she can exercise the option for a profit. If the exchange rate

doesn't move the right way enough to cover the premium paid, the option will expire and the trader

loses her money. Unlike stock options, the buyer of a Forex option contract may choose the strike

price and expiration date

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CHAPTER-3

List Of Foreign Brokers Of Developed Nations

3.1- List of Foreign Exchange Brokers 

Foreign exchange, also known as FOREX or FX, brokers allow individuals and firms to trade

currencies in the interbank foreign exchange market. Essentially, there are three types of retail

foreign exchange brokers. The first type includes independent foreign exchange brokers such as

Oanda and Saxobank. The second type is dominated by large, multinational investment banks like

Deutsche Bank. The third type of brokers, which you should avoid, are scams. Due to a large

number of shoddy brokers, work with well-established firms.

Oanda 

Oanda is one of the best foreign exchange brokers. Mention the name of the company to any foreign

exchange trader and he will probably give positive or neutral opinion about this company. The

company is based in Toronto, Canada. The broker is a registered Retail Foreign Exchange Dealer

(RFED) with the U.S. Commodity Futures Trading Commission (CFTC) and a Forex Dealer Member

(FDM) of the National Futures Association (NFA). The firm is incorporated in Delaware.

Saxo Bank  

Saxo Bank is a technically a bank, though it engages in little activity other than foreign exchange

trading. The company is based in Denmark. It offers a wide range of FX instruments, including spots

and options. It also allows users to trade stocks and CFDs.

Deutsche Bank  

Deutsche Bank is often cited as a leading foreign exchange trader in the interbank market. The

largest bank in Germany, it is also among the biggest banks in the world. Its retail currency

brokerage division offers competitive spread on 34 currency pairs. The spread on the EUR/USD

currency pair stands at 1.7 pips, for example.

FOREX.com 

FOREX.com is another well-established foreign exchange broker. The broker's website and trading

platform comes in many languages, including Japanese, Chinese and even Russian. The firm offers a

wide range of instruments to trade, including currencies, metals, oil and indices.

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GFT FOREX 

GFT FOREX is an independent broker. It offers more than 120 currency pairs to trade. The company

allows customers to trade such exotic currencies as South African rand, Singapore dollar, Swedish

krona and Hungarian forint

What Is the Meaning of Foreign Exchange Risk Management In Developed Nations?  

Businesses that sell goods or services to customers overseas, and are paid in a foreign currency, are

exposed to foreign exchange risk. To manage that exposure effectively, they must understand the

inner workings of foreign exchange risk.

Definition 

From the point of view of a U.S. exporter, foreign exchange risk is the exposure to the risk that the

foreign currency that his client pays him in will be devalued against the U.S. dollar. This would

mean that the exporter would receive less money than he anticipated. The handling of such risk is

what makes up foreign exchange risk management.

Features 

Considering that currency markets are volatile, anyone engaged in trade with overseas

counterparties faces the risk of financial losses. The main objective of foreign exchange risk

management is to cut down on losses from potential unfavorable currency movements. The

simplest way of avoiding this sort of exposure is to ask your customer to pay in advance so that you

are not exposed to foreign exchange risk. This is not always possible and a more sophisticated way

of managing such risk is to hedge your risk by taking out a forward contract that delivers you at

some specified future time a specific dollar value for a specific amount of foreign currency.

Benefits 

By taking on foreign exchange exposure and effectively managing the risks involved, a U.S. exporter

could expand his overseas markets, since overseas clients usually prefer to pay in their local

currencies. By cutting down on losses due to foreign exchange exposure, the importer would also

add to her profits.

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3.2- Exposure Management in Foreign Exchange Risk  

Foreign exchange exposure is the risk of a firm's profitability and net cash flow to potentially

change due to a change in exchange rates. Managers must limit a firm's exposure to changes in

exchange rate because profitability and cash flow are two of the main ways investors judge a firm's

value. Managers use forward contracts, options and money market transactions to hedge potentialforeign exchange risk.

Foreign Exchange Exposure 

Foreign exchange risk can significantly reduce a firm's profit margin on a business transaction. For

example, if a U.S. company makes a deal with a firm in Britain to sell it a product for 1 million

British pounds, the exchange rate play a role in exactly how many dollars the U.S. company will

receive. If the British company agrees to make the payment in three months, and the dollar

strengthens in value relative to the pound, the U.S. company will actually receive fewer dollars than

anticipated. For instance, a change in rates from $1.5 per pound to $1.2 per pound will lower the

U.S. company's revenue from $1.5 million to $1.2 million.

Hedging Risk  

To reduce the amount of risk a company faces because of a change in exchange rates, many

managers choose to hedge against that exposure. When managers hedge against a position, they do

so to reduce the risk they face by protecting themselves from a major losses and eliminating much

of the unanticipated upside of an investment. As a result, hedging decreases the variability of your

expected cash flow, both positive and negative.

Forward Contracts 

One of the common ways to reduce exposure to foreign exchange risk is to hedge, using forward

contracts. A forward contract is an agreement between two private parties to make a transaction at

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an agreed upon rate sometime in the future, at an agreed upon time. Thus, if a managers want to

hedge against foreign exchange risk, they can enter a forward contract that has an agreed-upon

future exchange rate, therefore eliminating any risk. Although forward contracts eliminate

uncertainty and foreign exchange risk, they also eliminate any additional profits that can be earned

with a favourable movement in exchange rates.

Options 

Currency option hedging is another way to manage a company's foreign exchange risk. An option is

a contract that gives the owner the right, but not the obligation, to make either a purchase or sale at

an agreed-upon price until the contract expires. Companies reduce exchange rate risk when

purchasing currency options because if a rate moves in an unfavourable direction, the company can

exercise that option to get their predetermined rate. As a result, an option creates a floor for a

company's potential profit. However, if the rates move in a favourable direction, than the company

does not need to exercise that option and can enjoy the additional profits. Thus, options create a

floor, but not a ceiling for a company's investment. On the other hand, option contracts cost a fee

and may yield less profit if exercised than a forward contract would.

Un-Hedged Positions 

Some managers choose to not protect themselves from foreign exchange risk because they argue

that currency risk management does not increase expected cash flows, but it simply consumes

resources and reduces variability. In addition, some argue that shareholders are more capable of

diversifying their risk than each individual firm can. As a result, it is more beneficial to the

shareholders to not hedge. Most managers do end up hedging against exposure to benefit

themselves and protect against potential losses.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of

speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this

trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which

are trading desks for the bank's own account. Until recently, foreign exchange brokers did large

amounts of business, facilitating interbank trading and matching anonymous counterparts for large

fees. Today, however, much of this business has moved on to more efficient electronic systems. The

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broker squawk box lets traders listen in on going interbank trading and is heard in most  trading

rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign

exchange to pay for goods or services. Commercial companies often trade fairly small amounts

compared to those of banks or speculators, and their trades often have little short term impact on

market rates. Nevertheless, trade flows are an important factor in the long-term direction of a

currency's exchange rate. Some multinational companies can have an unpredictable impact when

very large positions are covered due to exposures that are not widely known by other market

participants.

Central banks

National central banks play an important role in the foreign exchange markets. They try to control

the money supply, inflation, and/or interest rates and often have official or unofficial target rates

for their currencies. They can use their often substantial foreign exchange reserves to stabilize the

market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because

central banks do not go bankrupt if they make large losses, like other traders would, and there is no

convincing evidence that they do make a profit trading.

Forex Fixing

Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The

idea is that central banks use the fixing time and exchange rate to evaluate behaviour of their

currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks,

dealers and online foreign exchange traders use fixing rates as a trend indicator.

The mere expectation or rumour of central bank  intervention might be enough to stabilize a

currency, but aggressive intervention might be used several times each year in countries witha dirty float currency regime. Central banks do not always achieve their objectives. The combined

resources of the market can easily overwhelm any central bank. Several scenarios of this nature

were seen in the 2011-2012 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person

or institution that bought or sold the currency has no plan to actually take delivery of the currencyin the end; rather, they were solely speculating on the movement of that particular currency. Hedge

funds have gained a reputation for aggressive currency speculation since 1996. They control

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billions of dollars of  equity and may borrow billions more, and thus may overwhelm intervention

by central banks to support almost any currency, if the economic fundamentals are in the hedge

funds' favour.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such

as pension funds and endowments) use the foreign exchange market to facilitate transactions in

foreign securities. For example, an investment manager bearing an international equity portfolio

needs to purchase and sell several pairs of foreign currencies to pay for foreign securities

purchases.

Some investment management firms also have more speculative specialist  currency

overlay operations, which manage clients' currency exposures with the aim of generating profits as

well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a

large value of assets under management (AUM), and hence can generate large trades.

Retail foreign exchange traders

Individual Retail speculative traders constitute a growing segment of this market with the advent

of  retail forex platforms, both in size and importance. Currently, they participate indirectly

through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by

the CFTC and NFA have in the past been subjected to periodic foreign exchange scams. To deal with

the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in

relation to the amount of Net Capitalization required of its members. As a result many of the

smaller and perhaps questionable brokers are now gone or have moved to countries outside the US.

A number of the forex brokers operate from the UK under FSA regulations where forex trading

using margin is part of the wider over-the-counter derivatives trading industry that

includes CFDs and financial spread betting. 

There are two main types of retail FX brokers offering the opportunity for speculative currency

trading: brokers and dealers or market makers. Brokers serve as an agent of the customer in the

broader FX market, by seeking the best price in the market for a retail order and dealing on behalf

of the retail customer. They charge a commission or mark-up in addition to the price obtained in

the market. Dealers or market makers, by contrast, typically act as principal in the transaction

versus the retail customer, and quote a price they are willing to deal at.

Non-bank foreign exchange companies

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Non-bank  foreign exchange companies offer currency exchange and international payments to

private individuals and companies. These are also known as foreign exchange brokers but are

distinct in that they do not offer speculative trading but rather currency exchange with payments

(i.e., there is usually a physical delivery of currency to a bank account).

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange

Companies. These companies' selling point is usually that they will offer better exchange rates or

cheaper payments than the customer's bank. These companies differ from Money

Transfer/Remittance Companies in that they generally offer higher-value services.

The primary factor that influences the direction of the euro/U.S. dollar pair is the relative strength

of the two economies.

Because of Japan's large amount of trade with the United States, Asia, Europe, and other countries,

multinational corporations have a regular need to convert local currency into yen and vice versa.

The Japanese central bank has been kept its interest rates very low to spur economic growth

following a long period of economic decline. These low interest rates have made the Japanese yen

extremely popular in the carry trade. 

The U.S. dollar/Japanese yen pair features low bid-ask spreads and excellent liquidity. As such, it is

an excellent starting place for newcomers to the currency market as well as a popular pair for more

experienced traders.

Although the U.K. is a member of the European Union, the country remains outside the Eurozone

(the European Monetary Union, or EMU) and maintains its own currency, the British pound sterling

(known as the pound).

The British pound/U.S. dollar pair is one of the most liquid in the currency market.

As with the euro/U.S. dollar, the most important factor in determining the relationship between the

U.S. dollar and the British pound is the relative strength of the countries' respective economies.

One unique aspect of trading the British pound is that there is often conjecture that the U.K. may

choose to join the eurozone (or European Monetary Union, known as the EMU). If this were to

happen, the U.K. would have to give up the pound and use only the euro.

Although the country remains outside the European Union to maintain its neutrality, Switzerland

does enjoy extensive trade with its European neighbours, the United States and other countries

around the world.

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Because of Switzerland's historic political neutrality and reputation for stable and discreet banking,

the Swiss franc is commonly viewed as a safe haven in international capital markets.

currency to trade. 

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CONCLUSION

It is evident that foreign exchange markets are well developed in developed nations. And can help

in the growth of economy and is the backbone of the large and developed economies of the world

The development of such nations is due to development in the foreign exchange markets. Foreign

exchange markets can yield great incomes.

The currency markets are the largest and most actively traded financial markets in the world with

daily trading volume of more than $3 trillion. Each transaction in the currency market involves two

different trades: the sale of one currency and the purchase of another. As the world's reserve

currency, the U.S. dollar is the most actively traded currency; pairs involving the dollar make up the

majority of transactions. Most currency trading strategies fall into two broad categories: hedging

and speculating.  To avoid possible loss from fluctuating currencies, companies can hedge, orprotect themselves, by trading currency pairs. In arbitrage trades, an investor simultaneously buys

and sells the same security (or currency) at slightly different prices, hoping to make a small risk-

free profit. Another popular category of currency trade is the carry trade, which involves selling the

currency of a country with very low interest rates and investing the proceeds in the currency of a

country with high interest rates. There are several markets available to currency traders, including

the forex market, derivatives markets and exchange-traded funds. 

The foreign exchange markets in the developed nations are well developed and are vastly helpful in

bringing the nation’s economy and making it developed.

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BIBLIOGRAPHY

Marianna Belloca -“Foreign Exchange Markets” 

C Van Marrewik- Introduction To International Foreign exchange markets 

Investopedia.com

Eduzearch.com

Wikipedia

Isba.edu