Global FoRex Market

Presented by :Megha Pareek

MBA 3 Semester

• Characteristics• Types• Functions• Structure• Major participants• Factor affecting• Recent trends

Contents

Global FoRex Market • The foreign exchange market ( forex, FX, or currency

market) is a global decentralized market for the trading of currencies.

• This includes all aspects of buying, selling and exchanging currencies at current or determined prices.

• In terms of volume of trading, it is by far the largest market in the world

Characteristics

• High liquidity

• Geographical dispersion

• Continuous operation : 24 hours a day except weekends

• Low margins of relative profit compared with other markets of fixed income

• The main three types of foreign exchange markets-

The spot foreign exchange market,

The forward foreign exchange market

The future foreign exchange market

Types Of FX Market

SPOT Fx Market• In Spot Market , commodity is bought or sold for an

immediate delivery or delivery in the very near future.

• The trades in the spot markets are settled on the spot.

• It is contributing about 37 percent of the total activity happening in all other types of foreign exchange markets.

• The price quoted for immediate settlement on a commodity, a security or a currency is known as The spot rate or spot price.

• Features highly paced markets volatility quick profits and losses• Spot Rate value is based on how much buyers are willing

to pay and how much sellers are willing to accept. As a result, spot rates change frequently and sometimes dramatically.

• A spot transaction refers to an exchange of currencies at the prevailing market rate. For most currencies, a spot transaction consists of a two day settlement period but for the Canadian dollar (CAD) and Mexican peso (MXN) a spot transaction is settled in one business day.

• The forward exchange market is a market for contracts that ensure the future delivery of a foreign currency at a specified exchange rate.

• The price of a forward contract is known as the forward rate.

• Forward rates are usually negotiated for delivery one month, three months, or one year after the date of the contract's creation. They usually differ from the spot rate and from each other.

• The nature of forward types of foreign exchange markets is decentralized, with participants from all over the world entering into a different types of forex deals either on a one on one basis or through forex brokers.

FORWARD Fx Market

• Generally, forward foreign exchange market deals in cash transactions only.

• The forward markets have no set terms with regard to the settlement dates and this range from 3 days to 3 years.

• A buyer & 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 forward FoRex currency markets types comprise of two currency trading instruments- futures and swaps.

• The first thing is that any one can trade in future market. It is open to all kind of traders in foreign exchange market including individual traders.

• This is the difference between the future foreign exchange market and the spot foreign exchange market, since spot market is closed to individuals traders except in case there are deals of high net worth.

• This are standardize with respect to the quality & quantity of the underlying asset .

Futures Market

• In a Swap , two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date .

• The buyer and seller are locked into a contract at a fixed price that cannot be affected by any changes in the market rates .

• These tools allow the market participants to plan more safely , since they know in advance what their FX will cost .

Swap

Spot Market Commercial banks Brokers Customers of commercial and central banks

Forward Market ArbitrageursTradersHedgers Speculators

Participants

Foreign exchange market performs the following three functions:

• Transfer Function: It transfers purchasing power between the

countries involved in the transaction. This function is performed through credit instruments like bills of foreign exchange, bank drafts and telephonic transfers.

Functions Of Fx Market

• Credit Function: It provides credit for foreign trade. Bills of exchange,

with maturity period of three months, are generally used for international payments. Credit is required for this period in order to enable the importer to take possession of goods, sell them and obtain money to pay off the bill.

• Hedging Function: When exporters and importers enter into an

agreement to sell and buy goods on some future date at the current prices and exchange rate, it is called hedging. The purpose of hedging is to avoid losses that might be caused due to exchange rate variations in the future.

Types Of Fx Market

Forex Market

Retail Market Wholesale Market

• Retail forex generally pertain to individual foreign exchange traders that typically trade currencies in smaller amounts.

• Such smaller traders will often use technical analysis-based trading methods, and they generally trade forex for speculative purposes.

• The exchange of bank notes , bank drafts , currency , ordinary and traveler’s cheques between private customers , tourists , banks takes place in retail market .

Retail Market

• The Retail forex market refers to the currency trading activities of all the non-institutional traders, businesses, investors and other organizations.

• Owing largely to the introduction of online trading, the costs associated with trading foreign currencies have fallen sharply.

• Many businesses and individual traders have entered the retail forex market through online brokers rather than trading through bank desks or other proprietary trading firms.

• It is also known as Inter-bank Market.• The interbank market is the top-level foreign exchange

market where banks exchange different currencies.• The banks can either deal with one another directly,

or through electronic brokering platforms. • The interbank market is unregulated and

decentralized. There is no specific location or exchange where these currency transactions take place

• Inter bank market have two parts direct market indirect market

Wholesale Market

• Here the banks trade between themselves in order to remain liquid and meet customer demands for deposits, withdrawals, and borrowing and for many different purposes.

• The maximum maturity term of most transactions in the interbank market is one month, and a majority of interbank activity is conducted through the real time gross settlement system (RTGS) where there is no requirement of collateral.

• In performing overnight transactions, banks use the main interest rates declared by the central bank of the nation. This rate is called the federal funds rate in the US, in the Eurozone it is the main refinancing rate.In india this is called Call Money Rate.

• Retail Clients • Commercial Banks • Foreign Exchange Brokers • Central Banks

Major Participants In FX Market

Factors Affecting FX Market • Economic Conditions Government Budget Deficits or Surplus Balance of Trade levels & Trends Inflation Levels & TrendsEconomic Growth & Health • Political Factors • Market Psychology Long Term Trends Buy the Rumor Sell the Fact Economic Numbers Technical Trading Considerations BOP Interest Rates & Speculations

• Fixed exchange rate to floating exchange rate • Elimination of government controls and restrictions• Diversified investments• Liberalization & a series of trade agreements• Technological advances (real-time transmission)• Development of many new financial instruments

and derivative products

Recent Trends in FX Market