Foreign Exchange

Work Term Project

By Ankit Bhatnagar
11D408
 Objective

To understand and analyse the Foreign Exchange Market

 Investment Banking

An investment bank is a financial institution that assists individuals,

corporations and governments in raising capital by underwriting and/or
acting as the client's agent in the issuance of securities.

 Mergers and Acquisitions

 Market making
 Trading of derivatives
 Fixed income instruments
 Foreign exchange
 Commodities
 Equity securities
 Fx: Introduction

The foreign exchange market (forex, FX, or currency market)

is a global decentralized market for the trading of currencies.

Includes :
 Buying
 Selling
 Exchange Currencies

Participated by:
Larger International Banks and Financial Centers

“Largest Market in the world in term of trading “

 FX Trade

Trades are conducted (via internet over the wire)

 OTC Over the counter

 Exchange Traded

 $1.490 trillion in spot transactions

 $475 billion in outright forwards
 $1.765 trillion in foreign exchange swaps
 $43 billion currency swaps
 $207 billion in options and other products

From Wikipedia
Top 10 Market Participants
 Market Participants

Commercial companies
Central banks
Foreign exchange fixing
Hedge funds as speculators
Investment management firms
Retail foreign exchange traders
Non-bank foreign exchange companies
Money transfer/remittance companies and
bureaux de change
Most Traded Currencies By Value
 Main Trading Hub

London
New York City
Tokyo
Hong Kong
Singapore
Most Heavily Traded Bilateral Currencypairs

EURUSD: 24.1%
USDJPY: 18.3%
GBPUSD : 8.8%
 Determinants of Exchange Rates

Economic factors
Political conditions
Market psychology
 Financial Instruments

Spot
Spot market is where currencies are bought and sold according to the
current price. That price, determined by supply and demand, is a
reflection of many things, including current interest rates, economic
performance, sentiment towards ongoing political situations (both
locally and internationally), as well as the perception of the future
performance of one currency against another. When a deal is finalized,
this is known as a "spot deal". It is a bilateral transaction by which one
party delivers an agreed-upon currency amount to the counter party
and receives a specified amount of another currency at the agreed-upon
exchange rate value. After a position is closed, the settlement is in cash.
 Financial Instruments

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.
 Financial Instruments

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.
 Financial Instruments

Futures
Futures are standardized forward contracts 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. Currency futures contracts are contracts specifying a
standard volume of a particular currency to be exchanged on a specific
settlement date. Thus the currency futures contracts are similar to
forward contracts in terms of their obligation, but differ from forward
contracts in the way they are traded. They are commonly used by MNCs
to hedge their currency positions. In addition they are traded by
speculators who hope to capitalize on their expectations of exchange
rate movements.
 Financial Instruments

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 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.
 Financial Instruments

Read A Quote

USD/JPY = 119.50

Bid and Ask

 Bid price (buy)
 Ask price (sell).
 USD/CAD = 1.2000/05 Bid = 1.2000 Ask= 1.2005
 Financial Instruments

 Spreads and Pips

 The difference between the bid price and the ask price is called a spread
 EUR/USD = 1.2500/03
 Spread: .0003 or 3 pips or points
Quote
USD vs INR
USD vs INR
Reuters
 Thanks you

Question & Answers