FOREX

What is it• The Foreign Exchange or Forex market refers to the

market for currencies.

• Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another.

• The largest and most liquid financial market of the world.

Size of the Market

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.

Major Players• Country: UK(London) controls maximum share in

global trading (31.3% in Apr 2008)

• Company: 73 % trading volume controlled by 10 most active traders including Deutsche Bank, UBS, Barclays and Citi.

• Currency: Major transaction currencies are USD, EUR, JPY and GBP

SOURCE: IFSL and Wall Street Journal Europe

Most traded currenciesCurrency distribution of reported FX market turnover

Rank Currencycode

(Symbol) % daily share

(April 2007)

1  United States dollar USD ($) 86.3%

2  Euro EUR (€) 37.0%

3  Japanese yen JPY (¥) 16.5%

4  Pound sterling GBP (£) 15.0%

5  Swiss franc CHF (Fr) 6.8%

6  Australian dollar AUD ($) 6.7%

7  Canadian dollar CAD ($) 4.2%

8-9  Swedish krona SEK (kr) 2.8%

8-9  Hong Kong dollar HKD ($) 2.8%

10  Norwegian krone NOK (kr) 2.2%

11  New Zealand dollar NZD ($) 1.9%

12  Mexican peso MXN ($) 1.3%

Other 16.8%

Total 200%

Top 10 currency traders % of overall volume, May 2008

Rank Name Volume

1 Deutsche Bank 21.70%

2 UBS AG 15.80%

3 Barclays Capital 9.12%

4 Citi 7.49%

5Royal Bank of Scotland

7.30%

6 JPMorgan 4.19%

7 HSBC 4.10%

Major Market Participants

• Central Banks

• Investment Management Firms

• Retail Forex Brokers

FACTORS AFFECTING THE FOREX MARKET

• INTERSET RATES• ECONOMIC GROWTH• GEO- POLITICS• TRADE &CAPITAL FLOWS• MERGERS AND ACQUISITIONS

INTEREST RATES

• Methods to generate profit

• Interest Income: Buy high interest currency Financed by low interest rate currency

• Capital Appreciation: As interest rate increases, value of your currency increases.

ECONOMIC GROWTH

• Ripple Effect High growth

High interest rates High foreign investment High demand High currency value

GEO POLITICS

• Political stability

• Thumb rule of currency market- politics always trumps economics

TRADE AND CAPITAL FLOWS

• Trade Flows Income earned through trade Eg: Canada, Japan, Germany

• Capital Flows Investment from foreign countries Eg: US, UK

MERGERS AND ACQUISITIONS

• Least important factor

• Time sensitive not price sensitive

FOREX MARKET INSTRUMENTS

SPOT• Largest share by volume• 2 day delivery transaction• Involves cash rather than contract

FORWARD• Transaction occurs on a future date• Time duration can be days, month or years• Predetermined Exchange rate

FUTURE• Standard contract sizes • Average contract plan- 3 months• Eg: 5lakh British pounds for next Nov at an

agreed rate

SWAP• Exchange of currency for a certain length of

time and agrees to reverse the transaction at a later date.

• These contracts are not standardised and not traded through an exchange

OPTION• Owner has a right but no obligation• Deepest, largest and the most liquid market

Indian Market Size• US $258.415 Bn as on Oct 24 2008

Source: Reserve Bank of India

EXCHANGE RATES• 1 USD = 47.440 INR• 1 Pound Sterling= 80.26 INR• 1 Euro= 61.170 INR• 100 Japanese Yens= 47.8 INR

As on 6th Nov 2008

SOURCE: IFSL and Wall Street Journal Europe

SUPPLY AND DEMAND OF FOREIGN CURRENCY

SUPPLY• Exports• FDI• Income from abroad• Portfolio investment• Foreign tourists

DEMAND• Imports• Income send abroad• Indian branches sending

dividends back to parent companies

• Investments made abroad

THANK YOU