8/13/2019 507186_634193719797714930

1/24

8/13/2019 507186_634193719797714930

2/24

DEFINITIONS

Foreign Exchange

The system of converting one national

currency into another, and of transferring

money from one country to another.

8/13/2019 507186_634193719797714930

3/24

Foreign Exchange Market

Forex market is a place in which foreignexchange transactions take place.

A market in which National currencies are

bought and sold against one another

The foreign exchange market is one of the

largest markets in the world. By some

estimates, about 3.2 trillion USD worth ofcurrency changes hands every day.

8/13/2019 507186_634193719797714930

4/24

Foreign exchange reserves

8/13/2019 507186_634193719797714930

5/24

Exchange Rates

Indicative on Friday April 16, 2010

IMPORT

Currency

EXPORT

Forward Spot Spot Forward

6 months 3 months 1 month TT * Bill TT* Bill 1 month 3 months6 months

45.26 44.85 44.58 44.42 44.46 US Dollar 44.34 44.32 44.5 44.78 45.19

61.23 60.69 60.32 60.11 60.15 Euro 60.00 59.99 60.21 60.59 61.14

69.92 69.32 68.93 68.69 68.74 Pound Sterling 68.57 68.56 68.81 69.23 69.84

48.84 48.36 48.05 47.87 47.90 Japanese Yen* 47.75 47.74 47.95 48.26 48.72

42.8 42.38 42.1 41.94 41.97 Swiss Franc 41.83 41.82 42.01 42.28 42.7

8.22 8.15 8.11 8.08 8.09 Danish Kroner 8.06 8.06 8.09 8.14 8.21

32.96 32.67 32.47 32.36 32.38 Singapore Dollar 32.29 32.28 32.42 32.61 32.91

5.84 5.78 5.75 5.72 5.73 Hong Kong Dollar 5.71 5.71 5.73 5.77 5.83

41.27 41.35 41.53 41.38 41.40 Australian Dollar 41.32 41.31 41.45 41.57 41.65

31.9 31.84 31.79 31.74 31.76 New Zealand Dollar 31.68 31.68 31.79 31.92 32.08

7.65 7.61 7.59 7.57 7.58 Norwegian Kroner 7.55 7.55 7.59 7.62 7.67

6.33 6.24 6.24 6.21 6.22 Swedish Kroner 6.20 6.20 6.22 6.26 6.32

45.07 44.73 44.47 44.31 44.34 Canadian Dollar 44.21 44.20 44.39 44.66 45.06

Source: State Bank Of India, Chennai

*TT - Telegraphic Transfer

8/13/2019 507186_634193719797714930

6/24

Features of Foreign Exchange Market

The foreign exchange market is unique because of

trading volume results in market liquidity

geographical dispersion

continuous operation: 24 hours a day except

weekends

the variety of factors that affect exchange rates

the use of leverage to enhance profit margins

with respect to account size

8/13/2019 507186_634193719797714930

7/24

Participants

Individuals:

tourists, migrants

Firms: importers

and exporters

Banks: commercial

& central banks

Governments /

monetary

authorities

International

agencies

8/13/2019 507186_634193719797714930

8/24

Example

As India import rises the demand for foreign

currency increases which in result changes the

exchange rate as the value of foreign currency

increases with compared to domestic

currency.

8/13/2019 507186_634193719797714930

9/24

Functions of Forex Market

Transfer of Purchasing power

Provision of credit

Provision of hedging facilities

8/13/2019 507186_634193719797714930

10/24

Determinants of Foreign Exchange

Market

Longterm Factors Short-term Factors

8/13/2019 507186_634193719797714930

11/24

Long-term Factors

Balance of Payments

8/13/2019 507186_634193719797714930

12/24

Strength of economy

The relative strength of an

economy has effect on demand

and supply of foreign currencies.

If an economy is growing at a

faster rate, in the long-run, it is

generally expected to have a

better performance on Balance

of Trade .

8/13/2019 507186_634193719797714930

13/24

Interest rate

The capital is attracted

towards currencies yielding

higher interest rates,

provided

there is full currencyconvertibility in capital

account.

8/13/2019 507186_634193719797714930

14/24

Inflation

A higher rate of inflation will make a

countrys currency less attractive

because of the loss of real value with

inflation.

Hence, that currency woulddepreciate

against major currencies.

8/13/2019 507186_634193719797714930

15/24

Money Supply

An increase in money

supply will affect the

exchange rate through

causing inflation in thecountry. It can also affect

the exchange rate directly

in the short run.

8/13/2019 507186_634193719797714930

16/24

National Income

An increase in thenational income will lead

to an increase in

investment or in

consumption andaccordingly, its effect on

the exchange

rate will change.

8/13/2019 507186_634193719797714930

17/24

Short term factors

Central bank intervention

Buying and selling of

foreign currency in the

market by the Central

Bank with a view to

increasing the supply or

demand, there by

affecting the exchange

rate, is known asintervention.

8/13/2019 507186_634193719797714930

18/24

Export receipts and import payments

The differencebetween the total

receipts

from export bill

realizations and

import payments ona given day in a

country determines

the exchange rate to

some extent.

8/13/2019 507186_634193719797714930

19/24

Foreign investment flows

Both foreign directand portfolio

investment

inflows and outflows

affect the exchange

rates.

8/13/2019 507186_634193719797714930

20/24

Political factors

Factors like war.

Announcement of

election results, oil

price increase etc

will causeexchange rate

fluctuations.

8/13/2019 507186_634193719797714930

21/24

Speculation

If a few bigspeculators start

buying a currency

in an aggressive

manner, others

may follow suit.

Thus, the demand

of the currency

may increase.

8/13/2019 507186_634193719797714930

22/24

Capital Movements

Movement will be caused by

external

borrowings and assistance.

Large-scale external

borrowing will have favorable

effect on the exchange rate ofthe countrys currency.

8/13/2019 507186_634193719797714930

23/24

FEMA

The Foreign Exchange Management Act or in short FEMA has been introduced as areplacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came intoact on the 1st day of June, 2000.

The main objective behind the Foreign Exchange Management Act (1999) is toconsolidate and amend the law relating to foreign exchange with objective offacilitating external trade and payments and for promoting the orderly

development and maintenance of foreign exchange market in India.

FEMA is applicable to the all parts of India. The act is also applicable to allbranches, offices and agencies outside India owned or controlled by a person whois resident of India.

FEMA head-office also known as Enforcement Directorate is situated in New Delhi

and is headed by a Director. The Directorate is further divided into 5 zonal officesat Delhi, Bombay, Calcutta, Madras and Jalandhar and each office is headed by aDeputy Directors. Each zone is further divided into 7 sub-zonal offices headed bythe Assistant Directors and 5 field units headed by the Chief Enforcement Officers

8/13/2019 507186_634193719797714930

24/24

Conclusion

Liquid Investment- foreign exchange market has the advantage of beingextremely liquid. What this means is that investors would be able towithdraw from their investments at any point in time relatively easily.

This is due to the fact that the foreign exchange market has a globalmarket, which means searching for a buyer to purchase a particular

currency which you are interested to sell is usually not a big problem.

Convenience-foreign currency exchange trading is extremely convenient.Organized as an over-the-counter market, foreign exchange traders fromall over the world are brought into contact each day via the internet. Thismeans that traders would be able to trade with one another 24 hours a

day, five days a week.

FACILITATES TRADE AND DEVELOPMENT