FOREIGN EXCHANGE

FOREIGN EXCHANGE

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  FOREIGN EXCHANGE PGDM Batch 2018-20 PUSHPENDRASINGH
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  Meaning of FOREX Theterm foreign exchange implies two things: foreign currency and exchange rate  It is considered to be the largest financial market in the world. Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the forex market also enables currency conversion for international trade and investments.  Open 24 Hours a Day, 5 Days a Week 2
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  3 Continued… • The ForeignExchange market is the 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 GPD of USA. • The main currency used for trading $ US Dollar.
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  Traders This global markethas two tiers.  The first is the interbank market. It's where the biggest banks exchange currencies with each other, even though it only has a few members, the trades are enormous. As a result, it dictates currency values.  The second tier is the over-the-counter market. That's where companies and individuals trade. The OTC has become very popular since there are now many companies that offer online trading platforms. 4
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  Types of Foreign Exchangerates Fixed Exchange rates  A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate.  A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies).  In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. Floating Exchange rates  Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self- correcting," as any differences in supply and demand will automatically be corrected in the market.  Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market.  A floating exchange rate is constantly changing. 5
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  Types of Foreign Exchangerates Direct Exchange rates Quote  The quote is direct when the price of one unit of foreign currency is expressed in terms of domestic currency.  Now, a lower exchange rate in a direct quote implies that the domestic currency is appreciating in value.  In a direct quotation, the foreign currency is the base currency and the domestic currency is the counter currency. Indirect Exchange rates Quote  The quote is indirect when the price of one unit of domestic currency is expressed in terms of foreign currency.  a lower exchange rate in an indirect quote indicates that the domestic currency is depreciating in value as it is worth a smaller amount of foreign currency.  In an indirect quotation, it’s the other way around. The domestic currency is the base and the foreign currency is the counter. 6
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  7 Spot Exchange RateForward Exchange Rate  The spot exchange rate is the current exchange rate at any given point in time.  The forward exchange rate refers to the exchange rate that is stated and traded upon as of today but earmarked for payment and delivery at a future date. Types of Foreign Exchange Exchange rates can also be classified into two types, namely spot, and forward exchange rates.
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  8 Major Currency Traded •In forex trading, four major currency pairs are the most popular: • EUR/USD: The euro and the U.S. dollar • USD/JPY: The U.S. dollar and the Japanese yen • GBP/USD: The British pound sterling and the U.S. dollar • USD/CHF: The U.S. dollar and the Swiss franc
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  9 Biggest Forex Reserves Source: IMF,2018; *Central Bank of the Republic of China) 3210 1259 804 501 460 459 424 403 0 500 1000 1500 2000 2500 3000 3500 IN US DOLLARS(BILLION) COUNTRIES Biggest Forex Reserves Asian nations dominate foreign currency reserves. The United States had foreign currency reserves of $123.5 billion as of August 2018. The United Kingdom, which did not make the list, had $187.4 billion in foreign reserves as of August 2018.
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  10 Factors Influencing Foreign Exchange Aswith any market the forex market is driven by supply and demand • If buyers exceed sellers, the prices go up • If sellers outnumber buyers, prices go down Affected by hedger, arbitrator, speculator
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  11 Factors Influencing Foreign Exchange Thefollowing factors can influence exchanging rates: • Central bank policy • Balance of Payment • Inflation Rate • Interest rate • Economic stability of the Country • The Fiscal policy of the Government • Political Affairs/Condition of the Country • Terrorism and natural disasters
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  India’s Forex reserves atits peak India's foreign exchange (forex) reserves increased by $3.15 billion during the week in November 1, official data showed on Friday. According to the Reserve Bank of India (RBI)'s weekly statistical supplement, the overall forex reserves increased to $446.08 billion from $442.24 billion reported for the week ended November 3. 12
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