2 MEANING OF FOREIGN EXCHANGE According to Hartly Withers, “ Foreign exchange is the art and science of international monetary exchange”The forex market is the world’s largest financial market. Over $4 trillion dollars worth of currency are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States.The main currency used for forex trading is the US dollar.
3 MEANING OF FOREIGN EXCHANGE The term Foreign exchange implies two things: a)foreign currency and b) exchange rateForeign exchange generally refers to foreign currency, eg for india it is dollar, euro, yen, etc… &the other part of foreign exchange is exchange rate which is the price of one currency in terms of the other currency.Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency.
5 FOREIGN EXCHANGE MARKET Foreign exchange market is that market in which national currencies are traded for one another..The major participants in this market are commercial banks, forex brokers, and authorised dealers and the monetary authorities.Besides, transfer of funds form one country to another , speculation is an important dimension of foreign exchange market.Its where money in one currency is exchanged for another
6 ADVANTANGES IN FOREIGN MARKET It’s already the world’s largest market and it’s still growing quicklyIt makes extensive use of information technology – making it available to everyoneTraders can profit from both strong and weak economiesTrader can place very short-term orders – which are prohibited in some other marketsThe market is not regulatedBrokerage commissions are very low or non-existentThe market is open 24 hours a day during weekdays
7 TERMS RELATED TO FOREIGN EXCHANGE Foreign exchange reserves- holdings of other countries' currenciesForeign exchange controls- controls imposed by a government on the purchase/sale of foreign currenciesRetail foreign exchange platform- speculative trading of foreign exchange by individuals using electronic trading platformsForeign exchange risk- arises from the change in price of one currency against anotherInternational trade- the exchange of goods and services across national boundariesForeign exchange company- a broker that offers currency exchange and international paymentsBureau de change- a business whose customers exchange one currency for anotherCurrency pair- the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange marketDigital currency exchanger- market makers which exchange fiat currency for electronic money
8 EXCHANGE RATESAccording to haines, “Exchange rate is the price of the currency of a country can be exchanged for the number of units of currency of another country.”Exchange rate is that rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country.It’s the the price for which one currency is exchanged for another
9 FACTORS INFLUENCING EXCHANGE RATES As with any market, the forex market is driven by supply and demand:If buyers exceed sellers, prices go upIf sellers outnumber buyers, prices go downThe following factors can influence exchange rates:National economic performanceCentral bank policyInterest ratesTrade balances – imports and exportsPolitical factors – such as elections and policy changesMarket sentiment – expectations and rumoursUnforeseen events – terrorism and natural disastersDespite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts.
11 Fixed and Floating exchange rates Fixed exchange rate is the official rate set by the monetary authorities of the Governance for one or more currencies.Under floating exchange rate, the value of the currency is decided by supply and demand factor.
12 Direct and indirect exchange rates Direct method - Under this, a given number of units of local currency per unit of foreign currency is quoted. They are designated as direct/certain rates because the rupee cost of single foreign currency unit can be obtained directly. Direct quotation is also called home currency quotation.Indirect method – Under this, a given number of units of foreign currency per unit of local currency is quoted. Indirect quotation is also called foreign currency quotation
13 Buying and selling Exchange rates are quoted as two way quotes – for purchaseand for saletransactions by the Bank
14 Spot and forwardThe delivery under a foreign exchange transaction can be settled in one of the following waysReady or cash – To be settled on the same dayTom – To be settled on the day next to the date of transactionSpot – To be settled on the second working day from the date of contractForward – To be settled at a date farther than the spot date
15 Theories of exchange rate determination Meaning:Theories which determine the prices of forex rate considering inflation, interest rate, and elasticity of price etc..Methods:Long run theoryShort run theory
16 LONG RUN THEORY OF EXCHANGE RISK DETERMINATION This are the theories which predominately take into account the fundamental changes of economy.Here fundamental changes refers to the change which are going to change the economic performance of the economy Purchasing power for all times to come.Types of theory:Purchasing power parity.1) Absolute purchasing power parity.2) Relative purchasing power parity.Interest Rate parity1) Covered Interest Rate parity2) Uncovered Interest Rate parity
17 Short Run theory of exchange rate determination This theories are based more on current information or immediate performance of economic variables.This theories try to take into account the short run factor which may be eliminated in the long run.