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

DECLARATION
I hereby declare that the project work entitled Foreign Exchange Markets In The Developed Nations submitted to the THE SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS, is a genuine record of an original work done by me under the guidance of Prof. A Chougale my professor and this project work is submitted in the partial fulfilment of the requirements for the award of the degree of master of commerce. I assert that the statements made and conclusions drawn are an outcome of the project work. I further declare that to the best of my knowledge and belief that the project report does not contain any part of any work has been submitted for the award of any other degree/diploma/certificate in this university or any other university

CERTIFICATE
This is to certify that this project report entitled Foreign Exchange Markets In The Developed Nations submitted to Sydenham College Of Commerce And Economics, is a bonafide record of work done by Wagh Vivek Dinesh under my supervision.

_________________________ Internal Guide

INDEX
SR TOPIC NO. PAGE NO.

Chapter 1-Introduction

5-10

1.1

Importance Of Foreign Exchange Markets In Developed Nations Significance

1.2

1.3

Objectives

10

Chapter 2-Reasearch Methodology

11-22

2.1

Primary And Secondary Data

13

2.2

Hedging In Developed Nations

20

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

Chapter 4- Conclusion And Bibliography

31-32

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 its income 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

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 countrys development, the degree of financial market development and integration, and a countrys 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 bottomline risk in the event of adverse currency swings.

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.

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.

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.

10

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 owner has 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 currencies
Currency distribution of global foreign exchange market turnover

Rank 1 2 3 4 5 6 7 8 9 10 11 12

Currency United States dollar Euro Japanese yen Pound sterling Australian dollar Swiss franc Canadian dollar Hong Kong dollar Swedish krona New Zealand dollar South Korean won Singapore dollar

ISO 4217 code (Symbol) USD ($) EUR () JPY () GBP () AUD ($) CHF (Fr) CAD ($) HKD ($) SEK (kr) NZD ($) KRW () SGD ($)

% daily share (April 2012) 84.9% 39.1% 19.0% 12.9% 7.6% 6.4% 5.3% 2.4% 2.2% 1.6% 1.5% 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%

13

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 crossborder 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 bilateral currency 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). Exchangetraded 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
15

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. Top 10 currency traders % of overall volume, May 2013 Rank Name 1 2 3 4 5 6 7 8 9 10 Deutsche Bank Barclays Capital UBS AG Citi JPMorgan HSBC Market share 15.64% 10.75% 10.59% 8.88% 6.43% 6.26% 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 Credit Suisse Goldman Sachs Morgan Stanley 4.80% 4.13% 3.64% 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.

Royal Bank of Scotland 6.20%

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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 is going 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, the more 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 spot market. 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 potential foreign 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 with a 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 currency in 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, or protect 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 riskfree 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 nations 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

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