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Course Objective

Familiarize students with conceptsrelated to Forex Management

Analyze the dynamics of the international

foreign exchange markets Understanding the mechanics,

mathematics and applications of thevarious FX Products

Interpret and quote FX spot & forward

rates Examine international market

conventions, ethics & trading terminologyused

Implement various FX risk takingconcepts and strategies

Understand how banks quote, sourceand cover positions.

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Need for Foreign

Exchange No country is self sufficient

Exchange of goods and

services not carried out onbarter basis

Every country has its ownsovereign currency

This currency is not legaltender outside its boundaries

Hence when goods are bought

and sold by people in differentcountries, currencies have tobe exchanged

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What is foreign

exchange?Section 2 of FERA 1973 states

Foreign Exchange means foreigncurrency and includes

all deposits, credits and balancespayable in any foreign currency andany drafts, travelers cheques, lettersof credit and bills of exchange,expressed or drawn in Indian currencybut payable in any foreign currency;

any instrument payable at the optionof the drawee or holder thereof or anyother party thereof or any other partythereto, either in Indian currency or inforeign currency or partly in one andpartly in the other. Thus Foreign Exchange means Foreign money and

near money instruments denominated in foreigncurrency

It includes notes, cheques, bills of exchange, bankbalances, and deposits in foreign currency.

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Forex Market Features

Global market

24 hour market

No geographical location

Dealers linked via telecomnetwork

Trust and confidentiality

Perfect market

Exporters, importers,

speculators, banks

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Participants

Customers both importers andexporters

Commercial banks buy foreign exchange

from exporters and sell it to importers andto meet requirements of their othercustomers as well as to earn profit

Central banks for Exchange rate management

Reserve management Exchange brokers

Overseas Foreign Exchangex markets

Speculators Banks to make profits

Corporates MNCs and TNCs with a view totake advantage of exchange rate movements

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Participants contd.

Governments who borrow orinvest in foreign securities and

delay coverage Individuals who buy and sell

foreign exchange for booking

short term profits. They alsobuy currencies, stocks, bondsetc.

Corporates take positions incommodities whose prices areexpressed in foreign currency

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Forex Transactions

Spot transactions

Spot Market

QuotationsCross exchange Rates

Forward transactions

Forward MarketPremium or discount on the

forward contract

Intermarket arbitrage

Measuring changes in spotexchange rates

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Types of dealings

Merchant transactions Buy / sell from / to Exporters / Importers

Transactions can be undertaken only on

account of genuine exposure of customers Speculation prohibited

Inter bank Transactions Banks deal with each other

Overseas transactions

Bank in India buys / sells foreign exchange inthe overseas market

Transactions between banks andReserve Bank of India RBI is not obliged to sell forex but buys forex

offered to it by Ads It intervenes as and when necessary

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THE TRADING DAY

TIME ZONE

0900 Tokyo almost

winding up Singapore, Hong

Kong live

1100 Middle East opens

1230 Europe opens

1700 India closing

1900 New York opening

Tokyo opening THE CYCLE CONTINUES NON

STOP

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Indian Scenario

Banks deal with each otherthrough Reuters Dealing

Systems etc. They are calledAuthorised dealers.

The main market is in Mumbaiwith markets also in Chennai,

Kolkatta, Hyderabad,Bangalore and Cochin.

The Authorised Dealers havealso been permitted by theReserve Bank of India to dealin foreign exchange marketsoverseas.

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Factors that have contributed

to growth of Indian Forex

Market Global Forex market has taken quantum jump and

India market has followedsuit The daily gross turnover in the international forex

market is more than a trillion US dollars. In contrast,the daily volume on the New York Stock Exchangeis only about US$ 20 billion, and the daily turnoverin the Indian FX market is a mere US$ 3 billion

Better communication network like telephones,telexes, swift, Reuters / telerate systems andother dealing systems

Rigid and tight exchange control regulations have

been relaxed More players have been added with opening of

the banking sector to the private sector Banks have been allowed to a small extent to

have foreign currency assets and liabilities Forex dealings have come of age in India.

Especially with the introduction of LERMS andfreedom given to corporates to book , cancel andrebook forward contracts.