Good morning

Foreign exchange

Meaning of Foreign Exchange

The term Foreign exchange implies two things: a)foreign
currency and b) exchange rate
Foreign 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.

forex cntd
According to Hartly Withers, Foreign exchange is the art
and science of international monetary exchange
The forex market is the worlds 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.

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

Advantages of Forex market

Its already the worlds largest market and its still
growing quickly
It makes extensive use of information technology
making it available to everyone
Traders can profit from both strong and weak economies
Trader can place very short-term orders which are
prohibited in some other markets
The market is not regulated
Brokerage commissions are very low or non-existent
The market is open 24 hours a day during weekdays

Terms related to Foreign

Exchange
Foreign exchange reserves- holdings of other countries' currencies
Foreign exchange controls- controls imposed by a government on the
purchase/sale of foreign currencies
Retail foreign exchange platform- speculative trading of foreign exchange by
individuals using electronic trading platforms
Foreign exchange risk- arises from the change in price of one currency against
another
International trade- the exchange of goods and services across national
boundaries
Foreign exchange company- a broker that offers currency exchange and
international payments
Bureau de change- a business whose customers exchange one currency for
another
Currency pair- the quotation of the relative value of a currency unit against
the unit of another currency in the foreign exchange market
Digital currency exchanger- market makers which exchange fiat currency for
electronic money

Exchange rate
According 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.
Its the the price for which one currency is exchanged for
another

Factors influencing Exchange

Rates
As with any market, the forex market is driven by supply and demand:
If buyers exceed sellers, prices go up
If sellers outnumber buyers, prices go down
The following factors can influence exchange rates:
National economic performance
Central bank policy
Interest rates
Trade balances imports and exports
Political factors such as elections and policy changes
Market sentiment expectations and rumours
Unforeseen events terrorism and natural disasters
Despite all these factors, the global forex market is more stable than
stock markets; exchange rates change slowly and by small amounts.

Types of exchange rates

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 factors

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

Buying and selling

Exchange rates are quoted as two way
quotes
for purchase
and for sale
transactions by the Bank

Spot and forward

The delivery under a foreign exchange transaction can be
settled in one of the following ways
Ready or cash To be settled on the same day
Tom To be settled on the day next to the date of
transaction
Spot To be settled on the second working day from
the date of contract
Forward To be settled at a date farther than the spot
date

Theories of exchange rate

determination

Meaning:
Theories which determine the prices of forex rate
considering inflation, interest rate, and elasticity of price
etc..
Methods:
a) Long run theory
b) Short run theory

Long Run Theory of Exchange

rate
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 powfor all times to come.
Types of theory:
Purchasing power parity.
1) Absoulte purchasing power parity.
2) Relative purchasing power parity.
Interest Rate parity
1) Covered Interest Rate parity
2) UnCovered Interest Rate parity

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.

Purchasing power parity theory

Founder Swedish economist Gustav Cassel in 1918.

Meaning : According to this theory ,the price levels and
the changes in these price levels in different countries
determine the exchanges rates of these countries
currencies.
The basic principle of this theory is that the exchange
rates between various currencies reflect the purchasing
power of these currencies .This theory is based law of
one price.

Absolute form of PPP Theory

If the law of one price were to hold good for each and
every commodity then the theory is termed as Absolute
form of PPP Theory.
This theory describes the link between the spot
exchange rate and price levels at a particular point of
time

Relative form of PPP

This theory describes the link between the changes in

spot exchange rate and in the price levels over a period
of time.
According to this theory ,changes in spot rates over a
period of time reflect the changes in the price level over
the same period in the concerned economies.
This theory relaxes three assumptions of PPP ie
Absences of transportation cost ,transaction costs and
tarriffs.

Interest Rate Parity Theory

Definition :
The process that ensures that the annualized forward
premium or discount equals the interest rate differential on
equivalent securities in two currencies.
International Fisher effect:
Expected Rate of change = Interest rate of the exchange
rate differential
Interest Rate = Real Interest Expected Differential Rate
+ inflation rate

Modern theory: demand & supply

theory

The most satisfactory explanation of the determination

of the rate of exchange is that a free exchange rate
tends to be such as to equate the demand and supply of
foreign exchange..
The intersection of supply curve and demand curve gives
the equilibrium price
Modern theory also called balance of payments theory of
foreign exchange

Foreign Exchange Risk

Exposure to exchange rate movement.
Any sale or purchase of foreign currency
entails foreign exchange risk.
Foreign exchange transaction affects the
net asset or net liability position of the
buyer/seller.
Carrying net assets or net liability position
in any currency gives rise to exchange
risk.

Risk management
Controlling losses
You could control your losses, by mental stop or hard stop. Mental
stop means that you already set you limit of your loss. A hard stop
is your initiative to stop when you think you must to stop it.
Using correct lot size
As a beginning just use smaller lots you could stay flexible and logic
than emotions while you trade.
Tracking overall exposure
sample: you go to short on EUR/USD and long on USD/CHF, you
exposed two times for USD in the same direction. If USD goes down
, you have a double dose of pain. So, keep your overall exposure
limited, it keeps you for the long haul for trading
The bottom line
Trading is about opportunities, you must take action while the
opportunities arise.

Thank You!!!