foreign exchange market- final report.docx

8/14/2019 FOREIGN EXCHANGE MARKET- final report.docx

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FOREIGN EXCHANGE MARKET

OVERVIEWIn todays world no economy is self sufficient, so there is need for exchange of goods and

services amongst the different countries. So in this global village, unlike in the primitive

age the exchange of goods and services is no longer carried out on barter basis. Every

sovereign country in the world has a currency that is legal tender in its territory and this

currency does not act as money outside its boundaries. So whenever a country buys or

sells goods and services from or to another country, the residents of two countries have to

exchange currencies. So we can imagine that if all countries have the same currency then

there is no need for foreign exchange.

ABOUT

Foreign Exchange or FOREXis simultaneous purchase and sale of

the currency or the exchange of one country's currency for the one of

another country.

The Foreign Exchange Market or FOREX Market is one in which

foreign currency or foreign exchange is bought and sold, either OverThe Counter (OTC) or through currency exchanges.

It is one of the important components of the International Financial

Systems. The various commercial and financial transactions as

between countries result in receipts and payments as between them.

Such receipts and payments involve exchange of one currency for

another.

For eg.- Rupee is a legal tender in India,but an exporter in UK willhave no use for these rupees. He, therefore, wishes to receive from

the importer in India only in Pound sterling. Then the Importer have to

convert such rupees into pounds, in that transaction, Foreign

Exchange Market provides facilities for such operations. Any receipt

and payment of foreign cash, coins, claims in currencies or credit

instruments involve a foreign exchange transaction.


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HISTORY OF FOREIGN EXCHANGE MARKET

ANCIENT

Forex first existed in ancient times.[5]Money-changing people, people helping others tochange money and also taking a commission or charging a fee were living in the times of

the Talmudic writings (Biblical times).

These people used city stalls to exchange money.

In earlier times the major money exchangers were the silver smiths and the gold smiths.

Medieval and later

During the fifteenth century the Medici family were required to open banks at foreignlocations in order to exchange currencies to act for textile merchants.

To facilitate trade the bank created the account book which contained two columnedentries showing amounts of foreign and local currencies, information pertaining to the

keeping of an account with a foreign bank.

During the 17th(or 18th) century Amsterdam maintained an active forex market. During 1704 foreign exchange took place between agents acting in the interests of the

nations of England and Holland.

MODERN

Before WWII

1899 to 1913 : holdings of countries foreign exchange increased by 10.8%, whileholdings of gold increased by 6.3%. At the time of the closing of the year 1913,

nearly half of the world's forexes were being performed using sterling.

1919 to 1922: the employment of a foreign exchange brokers within Londonincreased to 17. During the 1920s the occurrence of trade in London resembled

more the modern manifestation

1923 to 1930 : In 1924 there were 40 firms operating for the purposes ofexchange.by 1928 forex trade was integral to the financial functioning of the city.

Continental exchange controls, plus other factors, in Europe and Latin America,

hampered any attempt at wholesale prosperity from trade for those of 1930's

London.
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After WWII

1953-1959 : In Japan the law was changed during 1954 by the Foreign ExchangeBank Law, so, the Bank of Tokyo was to become because of this the centre of

foreign exchange by September of that year. Between 1954 and 1959 Japanese law

was made to allow the inclusion of many more Occidental currencies in Japaneseforex.

1961-1970: During 1961-62 the amount of foreign operations by the U.S. ofAmerica's Federal Reserve was relatively low.Those involved in controlling

exchange rates found the boundaries of the Agreement were not realistic and so

ceased this in March of 1973, when sometime afterward none of the major

currencies were maintained with a capacity for conversion to gold, organisations

relied instead on reserves of currency.

1970-1973: During 1970 to 1973 the amount of trades occurring in the marketincreased three-fold. At some time (according to Gandolfoduring February-March

1973) some of the markets' were "split", so a two tier currency market was

subsequently introduced, with dual currency rates.Reuters introduced during June of 1973 computer monitors, replacing the

telephones and telex used previously for trading quotes.

After 1973

In fact 1973 marks the point to which nation-state, banking trade and controlled

foreign exchange ended and complete floating, relatively free conditions of a market

characteristic of the situation in contemporary times began (according to one

source), [although another states the first time a currency pair were given as an

option for U.S.A. traders to purchase was during 1982, with additional currencies

available by the next year.

On 1 January 1981 (as part of changes beginning during 1978 ) the Bank of China

allowed certain domestic "enterprises" to participate in foreign exchange trading.

Sometime during the months of 1981 the South Korean government ended forex

controls and allowed free trade to occur for the first time. During 1988 the countries

government accepted the IMF quota for international trade.

Intervention by European banks especially the Bundesbank influenced the forex

market, on February the 27th 1985 particularly.The greatest proportion of all trades

world-wide during 1987 were within the United Kingdom, slightly over one quarter,

with the U.S. of America the nation with the second most places involved in trading.


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CHARATERISTICS OF FOREIGN EXCHANGE MARKET

Foreign Exchange Market is widespread throughout the globe, market

participants are specialists, transactions involve immense volume and

involvement of variety of transactions.

1. Widespread Geographically : Foreign exchange market is

widespread geographically. Foreign exchange takes place in all

the countries in the world and in all geographical areas in each

country.

2. All Time Operations : Foreign Exchange market carries the

transactions 24 hours a day and 365 days a year. In fact, foreignexchange transactions take place every minute in one or the

other part of the world. All the trading centres work 24 hours a

day in view of varying time zones in various countries.

3. Largest Market: Currency Trading is the worlds largest market

consisting of almost trillion in daily volume and as investors learn

more and become more interested, the market continues to

rapidly grow in comparison to other financial markets, i.e. the

stock market, the bond market, the commodities market.4. Liquidity: All trades that take place in the foreign exchange

market involve the buying of one currency and the selling of

another currency simultaneously, which makes it most liquid

market, differentiating it from the other markets.

5. Decentralized Market: , There is no central marketplace for the

exchange of currency, but instead the trading is conducted over-

the-counter. Unlike the stock market, this decentralization of the

market allows traders to choose from a number of differentdealers to make trades with and allows for comparison of prices.

Typically, the larger a dealer is the better access they have to

pricing at the largest banks in the world, and are able to pass that

on to their clients.


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6. 50:1 Leverage : 50:1 leverage is commonly available from online FX dealers,which substantially exceeds the common 2:1 margin offered by equity brokers. At 50:1,

traders post $2000 margin for a $100,000 position, or 2%. While certainly not foreveryone, the substantial leverage available from online currency trading firms is a

powerful, moneymaking tool. Rather than merely loading up on risk as many people

incorrectly assume, leverage is essential in the Forex market. This is because the

average daily percentage move of a major currency is less than 1%, whereas a stock

can easily have a 10% price move on any given day. The most effective way to

manage the risk associated with margined trading is to diligently follow a disciplined

trading style that consistently utilizes stop and limit orders. Devise and adhere to a

system where your controls kick in when emotion might otherwise take over.

7. Lower Transaction Costs : It is much more cost-efficient to tradeForex. Most Forex Brokers offer traders access to all relevant market information and

trading tools as part of their free services. In contrast, commissions for stock trades

range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per

trade with full service brokers.Another important point to consider is the width of the

bid/ask spread. Regardless of deal size, forex dealing spreads are normally 5 pips or

less (a pip is .0005 US cents). In general, the width of the spread in a forex transaction

is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide

spread.

8. Profit and Loss Potential in Both Rising and FallingMarkets: Profit and Loss Potential In Both Rising And Falling Markets In everyopen FX position, an investor is long in one currency and short the other. A short

position is one in which the trader sells a currency in anticipation that it will depreciate.

This means that potential exists for both profits and losses in a rising as well as a

falling market.

9. Commission Free Trading: The OTC market is based on the globalmarket pricing for currencies made by banks and foreign exchange dealers rather than

just one exchange. The majority of global foreign currency dealers and banks are

compensated on the difference between the bid/ask spread in the currency price

offered to participating traders and/or the ability to accumulate positions on a

proprietary basis and assume the risk of the net open positions they carry. Futures

exchanges and their clearing members and introducers are compensated by exchange,

clearing, brokerage fees, electronic access fees, commissions, and quote fees.

10. Low Margin Rates: Forex markets offer higher leverage and lower margin

rates than those found in currency futures trading. When trading currency futures,

traders have one margin rate for "day" trades and another for "overnight" positions.

These margin rates can vary depending on transaction size.


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Functions of Foreign Exchange Market

1. Transfer of Purchasing Power: International Businesstransactions between two countries or individuals or

institutions are dealt in one currency. The individual or

institution or country should have the currency in which the

transaction takes place in order to make a purchase.Therefore, the foreign exchange market provides the currency

in which the transaction is carried out, in order to enable the

buyer to purchase the product/service. Thus,the foreign

exchange market transfers the purchasing power.

2. Credit for International Business: International

business involves transfer of goods from one country to

country. The importer cant pay for the goods until they are

received. But the exporter cant export until he receives

payment or guarantee for payment. Therefore, providing credit

when the goods are in transmit, is necessary. Foreign

exchange market provides a source of credit in the form of

instruments like bankers acceptance, letters of credit and

letter of guarantee.

3. Minimise exchange rate risks: There are a number ofrisks in dealing with foreign exchange due to fluctuations in

foreign exchange rate in addition to political risks. Foreign

exchange market transfers foreign exchange risk to others,

who are willing to carry them through hedging.


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Forex v/s other Financial Markets

The Forex (or currency) market is one of four financialmarkets. These markets include the stock, bond,commodity, and currency markets. Each market has its

own special characteristics that attract banks and

financial institutions to trade its products. Individualshave only recently been permitted to trade in thecurrency markets. Previously, the Forex market wastraded primarily by banks, large financial institutions,and governments. Individuals have been trading in theother financial markets for many years. Here are fewbasic characteristics of the other markets and theirmajor differences with the Forex market.

1.The Stock Market

The stock market is a system that permits the buying andselling (or trading) of a companys shares and derivatives.There are stock markets around the world. The worldwidestock market is valued at $51 trillion.

Key differences from the Forex Market

1.The stock market has lower liquidity.2.The stock market has lower leverage and risk (2:1 vs. 100:1 in Forex).3.The stock market has more regulation, control, and remedies.

Forex Market versus The Stock Market

Features Forex Stocks


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24-hour Trading YES NO

Commission Free Trading YES NO

Continuous Trading (No Halt Trading) YES NO

Short Selling Without Authorization YES NO

Leverage 100:1 5:1

Demo Practice Account YES NO

Liquidity MORE LESS

2.The Bond Market

The bond market is a loosely connected system in whichbuyers and sellers trade fixed income assets andsecurities. Bond and other fixed income assets are

traded informally in the over-the-counter market. Theworldwide bond market is valued at $45 trillion.

Key differences from Forex Market

1. The bond market has the worlds largest investment sector.2. The bond market has lower volatility and risk.3. The bond market has limited trading hours.4. The bond market is a decentralized market without a common

exchange.

3.The Commodities Market

The commodities market is an exchange where rawgoods or products are traded. Like the stock market,there are commodities markets around the world.

Commodities from apples to zinc are sold incommodities exchanges.


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Key differences from Commodities Market

1. The commodities market has lower liquidity.

2. The commodities market tends to have longer trends.3. The commodities market has limited trading hours.4. The commodities market has more errors and slippage (misquoted

prices).

PARTICIAPANTS IN FOREX MARKET

1.SPECULATORS

He person who trades derivatives, commodities, bonds, equities

or currencies with a higher-than-average risk in return for ahigher-than-average profit potential. Speculators take large risks,

especially with respect to anticipating future price movements, in

the hope of making quick, large gains.

Individual Retail speculative traders constitute a growing

segment of this market with the advent of retail foreign exchange

platforms, both in size and importance.

Currently, they participate indirectly through brokers or banks.

SPECULATORS

MONEYEXCHANGE

COMPANIES

RETAILFOREIGN

EXCHANGETERADERS

THE HEDGERS

THEINTERBANK

MARKET

CENTRALBANK


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Speculators also include hedge funds. With what can often bemassively sized financial portfolios which hedge funds manage,

they look to earn equally large to massive returns off of their

FOREX speculation efforts.

Because hedge fund speculators can wield such huge tradeleverage in the market, are often a target for the Central Banks

overseeing a countrys' monetary policy, who want to ensure their

trading leverage doesn't cause unwanted ripples in that policy.

2. THE HEDGERS

Making an investment to reduce the risk of adverse price movements in an

asset. Normally, a hedge consists of taking an offsetting position in a related

security, such as a futures contract.

An example of a hedge would be if you owned a stock, then sold a futures

contract stating that you will sell your stock at a set price, therefore avoiding

market fluctuations. Investors use this strategy when they are unsure of what

the market will do. A perfect hedge reduces your risk to nothing (except for

the cost of the hedge).

A hedger may try to take the speculators money, and vice versa. A

speculator, for example, may buy a contract from a hedger at a low price,

anticipating that it will be worth more. The hedger sells at that low price

because he expects the price to decline further. Hedgers transfer the risk of

price variability to others in exchange for the cost of the hedge. In International Market, mainly hedging is done by the corporations who

have span all over the planet. For eg Proctor & Gamble, Coca-Cola, BASF, etc.

Their worldwide operations entail numerous international financial

transactions with various vendors in any number of countries. And that

means having to deal with many different foreign currencies, all of which

fluctuate day-to-day.

3. THE INTERBANK MARKET

The third major foreign exchange market participant is a group of largecommercial banks and other large financial institutions who make up whats

called the Interbank Market.

Interbank Market currency trading participants handle FOREX tradetransactions with each other around the globe through electronic brokerage

systems.

The various foreign currency prices you as a trader see on trading platformsare the result of these large banks and financial firms' foreign exchange

trading activity in the Interbank market as major foreign exchange market

participants.


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Their activity sets the exchange rates/prices/quotes, as they buy and sellcurrencies at the bid/ask price throughout the day.

The interbank market is an important segment of the foreign exchangemarket. It is a wholesale market through which most currency transactions

are channeled. It is mainly used for trading among bankers. The three mainconstituents of the interbank market are:

The SPOT MARKET

The FORWARD MARKET

SWIFT (Society for World-Wide Interbank Financial Telecommunications

4. RETAIL FOREIGN EXCHANGE TRADERS

Individual Retail speculative traders constitute a growing segment of thismarket with the advent of retail foreign exchange platforms, both in size and

importance

Currently, they participate indirectly through brokers or banks.

There are two main types of retail FX brokers offering the opportunity forspeculative currency trading: brokersand dealersor market makers.

Brokersserve as an agent of the customer in the broader FX market, byseeking the best price in the market for a retail order and dealing on behalf of

the retail customer. They charge a commission or mark-up in addition to the

price obtained in the market.

Dealersor market makers, by contrast, typically act as principal in thetransaction versus the retail customer, and quote a price they are willing to

deal at.

5. MONEY TRANSFER COMPANIES AND CURRENCY EXCHANGERS :

Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country.

Bureaux de change or currency transfer companies provide low value foreignexchange services for travelers. These are typically located at airports and

stations or at tourist locations and allow physical notes to be exchanged from

one currency to another. They access the foreign exchange markets via banks

or non bank foreign exchange companies.

The largest and best known provider is Western Union with 345,000 agentsglobally followed by UAE Exchange

6. CENTRAL BANK of the COUNTRY

A country's central bank plays a very critical role as a participant in themarket.


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This participant has a huge foreign exchange reserve that can be used tostabilize the market. Some governments give control to their central banks

regarding the monitoring of target rates for their country's currency. At times

central banks would intervene in the forex market.

A central bank controls money supply, interest rates, and inflation.

They can use their often solid foreign exchange reserves to make the marketmore stable.

The effectiveness of central bank stabilizing speculation is doubtful becausecentral banks do not go bankrupt if they make large losses, like other traders

would, and there is no convincing evidence that they do make a profit

trading.

Central banks do not always achieve their objectives. The combinedresources of the market can easily overwhelm any central bank.

MARKET SIZE AND LIQUIDITY

The foreign exchange market is the most liquid financial market in the world. Traders include

large banks, central banks, institutional investors, currency speculators, corporations,

governments, other financial institutions, and retail investors. The average daily turnover in

the global foreign exchange and related markets is continuously growing. According to the

2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements,

average daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).Of this

$3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright

forwards, swaps and other derivatives.


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Foreign exchange trading increased by 20% between April 2007 and April 2010 and has

more than doubled since 2004. The increase in turnover is due to a number of factors:

the growing importance of foreign exchange as an asset class, the increased trading

activity of high-frequency traders, and the emergence of retail investors as an important

market segment. The growth of electronic execution and the diverse selection of

execution venues has lowered transaction costs, increased market liquidity, and

attracted greater participation from many customer types. In particular, electronic

trading via online portals has made it easier for retail traders to trade in the foreign

exchange market. By 2010, retail trading is estimated to account for up to 10% of spot

turnover, or $150 billion per day.

TRADING CHARACTERISICS

There is no unified or centrally cleared market for the majority of trades, and there is

very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency

markets, there are rather a number of interconnected marketplaces, where different

currencies instruments are traded.

Top 10 currency traders

% of overall volume, May 2012

RANK NAME MARKET SHARE

1 Deutsche Bank 14.57%

2 Citi 12.26%
http://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Citihttp://en.wikipedia.org/wiki/Citihttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Citihttp://en.wikipedia.org/wiki/Deutsche_Bank


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3 Barclays Investment Bank 10.95%

4 UBS AG 10.48%

5 HSBC 6.72%

6 JPMorgan 6.6%

7 Royal Bank of Scotland 5.86%

8 Credit Suisse 4.68%

9 Morgan Stanley 3.52%

10 Goldman Sachs 3.12%

In Foreign Market trading there is not a singleexchange rate but rather a number of

different rates (prices), depending on what bank or market maker is trading, and where

it is. In practice the rates are quite close due to arbitrage. Currency trading happens

continuously throughout the day.

How Currency Trading happen in the Market:

Currencies are traded against one another in pairs.

Each currency pair thus constitutes an individual trading product and is

traditionally noted XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217

international three-letter code of the currencies involved.

The first currency (XXX) is the base currency that is quoted relative to the

second currency (YYY), called the counter currency (or quote currency).

The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causespositive currency correlation between XXXYYY and XXXZZZ.

For instance, the quotation EURUSD (EUR/USD) 1.5465is the price of the euro

expressed in US dollars, meaning 1 euro = 1.5465 dollars.

Most traded currencies by value

Currency distribution of global foreign exchange market turnover
http://en.wikipedia.org/wiki/Barclays_Investment_Bankhttp://en.wikipedia.org/wiki/Barclays_Investment_Bankhttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/Barclays_Investment_Bank


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On the spot market, according to the 2010 Triennial Survey, the most heavily traded

bilateral currency pairs were:

EURUSD: 28%

USDJPY: 14%

GBPUSD (also called cable): 9%

and the US currency was involved in 84.9% of transactions, followed by the euro (39.1%),

the yen (19.0%), and sterling (12.9%) (see table). Volume percentages for all individual

currencies should add up to 200%, as each transaction involves two currencies.

FINANCIAL INSTRUMENTS USED IN EXCHANGE MARKET


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1.SPOT : A spot transaction is a two-day delivery transaction (except in thecase of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and

Russian Ruble, which settle the next business day), as opposed to the futures

contracts, which are usually three months. This trade represents a direct

exchange between two currencies, has the shortest time frame, involves cashrather than a contract; and interest is not included in the agreed-upon

transaction.

2.FORWARD : One way to deal with the foreign exchange risk is to engage ina 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 bothparties.

3.SWAP : The most common type of forward transaction is the swap. In aswap, two parties exchange currencies for a certain length of time and agree to

reverse the transaction at a later date. These are not standardized contracts and

are not traded through an exchange. A deposit is often required in order to hold

the position open until the transaction is completed.

4.FUTURE : Futures are standardized forward contracts and are usuallytraded on an exchange created for this purpose. The average contract length is

roughly 3 months. Futures contracts are usually inclusive of any interestamounts.

5.OPTION : A foreign exchange option (commonly shortened to just FXoption) 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 options market is the deepest,

largest and most liquid market for options of any kind in the world.

MEANING OF RESEARCH


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According to Clifford Woody research comprises defining and redefining problems, formulatinghypothesis or suggested solutions; collecting, organising and evaluating data; making deductionsand

reaching conclusions; and at last carefully testing the conclusions to determine whether they fit the

formulating hypothesis.

The term research refers to the systematic method consisting of enunciating the problem,formulating a hypothesis, collecting the facts or data, analysing

the facts and reaching certain conclusions either in the form of solutions(s) towards the concernedproblem or in certain generalisations for some theoretical formulation.

NEED AND PURPOSE FOR CONDUCTING A RESEARCH

Extension of knowledge

Establish generalizations and general laws which contributes to theory building Verify and test the existing facts and theories. Analyze interrelationships between variables and to derive causal explanations Find solutions to problems Develop new tools, concepts and theories Aid in planning and contributes to national development Disseminate research findings to create awareness of current situations and

problems.

Formulate strategies and policies Promote progress of the society.

TYPES OF RESEARCH FOR DATA COLLECTION


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RESEARCH METHODOLOGY FOR THIS REPORT

Every research work in supported by number of information

and relevant data for analyzing the work done. The information

has taken from secondary sources. To complete this research, I

have heavily relied on the secondary data as the t op ic needs

a number o f pub l i shed in fo rmat ion r egard ing fo rex

ma rke t , recen t developments in it etc. So keeping in view

the requirement of the information for this topic, I have relied

on a number of magazines, journals, newspapers, books etc.

OBJECTIVES OF THE STUDY

To study thebasic concept of Foreign Exchange Market .

To have the basic knowledge of regulations and organisation of

Foreign Exchange market in India.

To study the past 5 years reasons of appreciation and

depreciation of the Indian Rupee in context withDollar,Euro and Yen.

LIMITATIONS

(i) Not much primary data could be collected onaccount of the fact that the study is very vast

and collection of primary data is impossible.

(ii) For collection of primary data of vast study its veryimpossible to integrate all the resources and give out the

required output.


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OVERVIEW

The history of forex market in India owes its origin to an important decision taken by the Reserve

Bank of India (RBI) in the year 1978 which allows banks to undertake intra-day trading in foreign

currency exchange. As a result of this step, the agreement of maintaining square or near

square position was to be complied with only at the close of business every day.

The history of currency trading in India also clearly shows that during the initial period when

these economic reforms started, the exchange rate of national currency i.e. Indian rupee used to

be determined by the RBI in terms of a weighted basket of currencies of Indias major trading

partners.

During early nineties, more economic reforms were introduced which witnessed the important

two-step downward adjustment in the exchange rate of the Indian rupee in order to place it at a

suitable level in line with the inflation differential so that the competitiveness in exports could be

maintained. With these economic reforms which resulted in the unification exchange rate of the

rupee heralded the commencement of the new era of market determined forex currency rate

regime of rupee in the Indian forex history which was based on the demand and supply principle

in the forex market.

Another landmark in Forex history of India came with the appointment of an Expert Group

committee on Forex currency in 1994. This committee was made to study the forex market in

detail so that step can be taken out to develop, deepen and widen the forex market in India. The

result of this exercise was that banks were significant freedom in many of its market operations

related to like forex market development and liberalization. The freedom was granted to banks in

term of fixing their trading limits, allowed to borrow and invest funds in the overseas markets up

to specified limits, accorded freedom to make use of derivative products for asset-liability

management purposes.

National Stock Exchange of India popularly known as NSE was the first recognized

exchange in Indian forex history to launch forex currency futures trading in India. These

currency futures are beneficial over overseas forex trading especially to comparatively

small traders and retail investors. Another important point to know is that before

discussing the history of forex market in India, it is important to know the central

government of India has the powers to control transactions in foreign exchange and hence

forex transactions in India are managed by the government authorities.

The foreign exchange currency trading in India is growing at a really good pace however it is said

that the forex market is still in the early phase in India. Nevertheless there are already several bigplayers in the Indian forex market.

The corporate were granted the flexibility to book forward cover based on previous turnover and

were given freedom to make use of financial instruments like interest rates and currency swaps in

the international currency exchange market. The other feature of forex history in India is that a

large sum of foreign exchange in India came through the large Indian population working in

foreign countries. However, the common man was not much interested in forex trading. the

things are changing now and with the growing economy more and more people are showing

interest in forex trading and are looking out for hedging currency risks.


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FOREIGN EXCHANGE REGULATORY REGIMES

Soon after independence, a complex web of controls were imposed for all

external transactions through a legislation i.e. Foreign Exchange RegulationAct (FERA), 1947. These were put into more rigorous framework of controls

through FERA, 1973. Severe restrictions on current account transactions had

continued till mid-1990s when relaxations were made in the operations of

FERA, 1973. The control framework was essentially transaction based in

terms of which all transaction in foreign exchange including those between

residents and non residents were prohibited, unless specifically permitted.

FEMA, which replaced Foreign Exchange Regulation Act(FERA), had become

the need of the hour since FERA had become incompatible with the pro-

liberalisation policies of the Government of India. FEMA has brought a new

management regime of Foreign Exchange consistent with the emerging

framework of the World Trade Organisation (WTO). It is another matter that

the enactment of FEMA also brought with it the Prevention of Money

Laundering Act 2002, which came into effect from 1 July 2005.

ACT REGULATING FOREIGN EXCHANGE IN INDIA

FOREIGN EXCHANGE MANAGEMENT ACT

INTRODUCTION:

The Foreign Exchange Regulation Act, 1973 was reviewed in 1993 and

several amendments were enacted as part of the ongoing process of

economic liberalisation relating to foreign investment and foreign trade for

closes interaction with the world economy. Significant development have

taken place since 1993 such as substantial increase lours foreign exchange

reserves , growth in foreign trade, nationalization of tariffs ,current account

convertibility, liberalization of Indian investments abroad increase access to

external commercial borrowings by Indian corporate and participation of

foreign institutional investing in our stock markets. At that stage the central

government decided that a further review of the Foreign Exchange


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Regulation Act would be undertaken in the light of subsequent

developments and experiences in relation to foreign trade and investment.

Keeping in view the changed environment, the central Government decided

to introduce. The Foreign Exchange Management Bill and repeat the Foreign

Exchange Regulation Act, 1973. The Foreign Exchange Management Bill was

passed by both the House of parliament and received the assent of the

parliament on 29 December 1999.

OBJECTIVES

To regulate import and export of currency.

To Regulate acquisition, holding etc., of immovable property in India

by non-residents.

To regulate holding o immovable property outside India.

To regulate dealings in foreign exchange and securities.

To regulate certain payments.

To regulate foreign companies.

To regulate the transactions indirectly officiating foreign exchange.

To regulate employment of foreign nationals.

To conserve the foreign exchange resources of the country and to

utilise the same in the interest of the economic development of the

country.

CHARACTERISTICS

Foreign exchange Management act (FEMA) was formulated to repeal

foreign exchange regulation act (FERA), 1975 because the conditionshad changed a lot major characteristics of FEMA are as follows.

There is a major shift under FEMA. Under FEMA 1973, all transaction

in foreign exchange and all transactions with non residents [in foreign

currency or in rupees] were absolutely prohibited except where

specific relaxations were made. Similarly non residents were also not

permitted to have any dealings in India. Under FEMA 1990, how was,

the major focus is on transactions dealings foreign exchange and

foreign securities. Restrictions over dealings with non residents and by


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non-residents in India have been, substantially diluted through

eliminated.

Major change under FEMA is that only a monetary penalty will be

slopped on the convicted and a there is no punishment by way of

imprisonment for contraction of any of the provisions. The only

circumstance under which imprisonment can be imposed is for non

payment of such penalty. Under FERA however of the enforcement

directorate had sweeping process to arrest anyone suspected in

indulging in foreign exchange violations naturally, individual in are

particularly employees of companies would welcome the new

provision of FEMA. Foreign Exchange Management Act. Causes under

the Exchange Management Act will also have to refer by Reserve Bankof India.

Foreign Exchange Management Act 1998 attempts to simplify the

provision of Foreign Exchange Regulation Act 1973.In fact there are

several major changes with immediate effect and relevance,

particularly those relation to certain substantive matters and

contraventions and Punishments.

PROVISIONS IN FEMA

Provisions in FEMA, 1999 regarding regulation and management of foreign

exchange. The provision under the act was us follows:- Provisions regarding current account transactions[section 5]

Provision regarding dealing in foreign exchange (section 3)

Provision regarding capital account transaction(section 6)

Provision regarding goods and services(section 7)

Provision regarding and repatriation of foreign exchange (section 8)

Provision regarding the exemptions from realization and repatriation in

certain cases (section 9) Provision regarding the exemption from the realisation and repatriation


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in certain cases.

Provision regarding dealing in foreign exchange:

Without the general or specific permission of the Reserve Bank of India, no

person shall:

a) Deal in or transfer any foreign exchange or foreign security to any person

not being an authorised person.

b) Make any payment to or for the credit of any person resident outside

India in any manner.

c) Receive otherwise through an authorised person, any payment by order or

on behalf of any person resident outside India in any manner.

d) Enter into any financial transition in India as consideration for or in

association with acquisition or creation or transfer of a right to acquire any

asset outside India by any person.

Provision regarding holding of foreign exchange

No person resident in India shall acquire, hold, own, possess or transfer any

foreign exchange, foreign security or any immovable property situated

outside India.

Provision regarding current account transactions

Any person may sell or draw foreign exchange to or from an authorised

person if such sale or drawl is a current account transaction. It alsoempowers the Central Government to prescribe in public interest and in

consultation with the RBI, the restrictions for such transactions as may be

considered reasonable.

Provision regarding capital account transactions

Any person may sell or draw foreign exchange to or from an authorised

person for capital account transaction (see 6(1)).The Reserve Bank of India


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may in consolation with the central Government specify any class or classes

of capital account which are permissible; the limit up to which foreign

exchange shall be admissible for such transactions (sec 6(2)).

REGULATING AUTHORITY OF FOREIGN EXCHANGE IN INDIA

RESERVE BANK OF INDIA

The Reserve Bank of India(RBI) is India's central banking institution, which

controls the monetary policy of the Indian rupee. It was established on 1

April 1935 during the British Raj in accordance with the provisions of the

Reserve Bank of India Act, 1934.The share capital was divided into shares of

100 each fully paid which was entirely owned by private shareholders in

the beginning.Following India's independence in 1947, the RBI was

nationalised in the year 1949.

The Reserve Bank of India, the nations central bank, began operations on

April

01, 1935. It was established with the objective of ensuring monetary stabilityand operating the currency and credit system of the country to its

advantage.

Its functions comprise monetary management, foreign exchange and

reserves

management, government debt management, financial regulation and

supervision, apart from currency management and acting as banker to the

banks and to the Government. In addition, from the beginning, the Reserve

Bank has played an active developmental role, particularly for the

agriculture


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and rural sectors. Over the years, these functions have evolved in tandem

with

national and global developments.

The Reserve Bank oversees the foreign exchange market in India. Itsupervises

and regulates it through the provisions of the Foreign Exchange

Management

Act, 1999. Like other markets, the foreign exchange market has also evolved

over time, and the Reserve Bank has been modulating its approach towards

its

function of supervising the market.

ROLE OF RBI IN FX MARKET

To manage the exchange rate mechanism.

Regulate inter-bank forex transactions and monitor the foreign

exchange risk of the banks.

Keep the exchange rate stable.

Manage and maintain country's foreign exchange reserves.

RBI has imposed foreign exchange exposure limits on banks (FE 12 of

1999).

The limits are tied with the Paid up capital of the bank.

Previously banks had NOP limit, which was based on foreign exchange

volume handled by the bank.

TREASURYOPERATIONS AT RBI

All Central Banks have treasuries to implement policy objectives vis a

vis EXCHANGE RATE & INTEREST RATES

Dealing room catered to the FX market only

Money market was being looked after by the Securities department


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It soon became apparent that the two cannot work in isolation with

each other as the linkage between the money market & exchange

market became pronounced

Finally the dealing room and securities department were merged to

form EDMD to from first ever Treasury of RBI.

INTERVENTION

To keep exchange rate in line with macro objectives RBI has to

intervene from time to time

Intervention is a process where FX is sold or purchased to keep the

right amount of liquidity available in the FX market so that demand /

supply equilibrium is maintained Intervention can be in READY or FORWARD

LIBERALISED APPROACH TOWARDS FOREIGN EXCHANGE

The Reserve Bank issues licences to banks and other institutions to actas Authorised Dealers in the foreign exchange market. In keeping with

the move towards liberalisation, the Reserve Bank has undertaken

substantial elimination of licensing, quantitative restrictions and other

regulatory and discretionary controls.

Apart from easing restrictions on foreign exchange transactions interms of processes and procedure, the Reserve Bank has also provided

the exchange facility for liberalised travel abroad for purposes, such

as, conducting business, attending international conferences,

undertaking technical study tours, setting up joint ventures abroad,

negotiating foreign collaboration, pursuing higher studies and training,

and also for medical treatment.

Moreover, the Reserve Bank has permitted residents to hold foreigncurrency up to a maximum of USD 2,000 or its equivalent. Residents

can now also open foreign currency accounts in India and credit

specified foreign exchange receipts into it.

As a step towards further simplification and liberalisation of the

foreign exchange facilities available to the residents, the Reserve Bank


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has permitted resident individuals to freely remit abroad up to USD

200,000 per financial year for any permissible purposes.

EXCHANGE RATE POLICY

Indias exchange rate policy has evolved in tandem with thedomestic as well as international developments. The period afterindependence was marked by a fixed exchange rate regime,which was in line with the Bretton Woods system prevalent then.

After the breakdown of Bretton Woods System in the early

seventies, most of the countries moved towards a system offlexible/managed exchange rates.

The Reserve Banks exchange rate policy focuses on ensuringorderly conditions in the foreign exchange market. For thepurpose, it closely monitors the developments in the financialmarkets at home and abroad. When necessary, it intervenes inthe market by buying or selling foreign currencies. The marketoperations are undertaken either directly or through publicsector banks.

In addition to the traditional instruments like forward and swapcontracts, the Reserve Bank has facilitated increased availabilityof derivative instruments in the foreign exchange market. It hasallowed trading in Rupee-foreign currency swaps, foreigncurrency-Rupee options, cross-currency options, interestrate,swaps and currency swaps, forward rate agreements andcurrency futures.

DETERMINATION OF EXCHANGE RATES

With liberalization and development of foreign exchange and

assets markets, variables such as capital flows, volatility in

capital flows and forward premium have also became important

in determining exchange rates. Furthermore, with the growingdevelopment of foreign exchange markets and a rise in the


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trading volume in these markets, the micro level dynamics in

foreign exchange markets increasingly became important in

determining exchange rates.

Exchange Rate Models

1.PURCHASING POWER PARITY

The earliest and simplest model of exchange rate determination, known as the PurchasingPower Parity (PPP) theory, represented the application of ''the law of one price''. This

states that arbitrage forces will lead to the equalization of goods prices internationally once

the prices are measured in the same currency.

PPP theory provided a point of reference for the long-run exchange rate in many of the

modern exchange rate theories. It was observed initially that there were deviations fromthe PPP in short-run, but in the long-run, PPP holds in equilibrium.

There is Two forms of PPP:i. Absolute PPP

ii. Relative PPP

Absolute Purchasing Power Parity

This concept posits that the exchange rate between two countries will

be identical to the ratio of the price levels for those two countries.This concept is derived from a basic idea known as the law of one

price, which states that the real price of a good must be the same

across all countries.

To illustrate why this makes sense, suppose that soybeans are

currently priced at $5 a bushel in the U.S., that soybeans are priced at

5.50 per bushel in Europe, and that the exchange rate is 1.10 euros

per dollar. Suppose that the price of soybeans goes up to 6.05 per

bushel (a 10% increase) in Europe, while the price of soybeans in the

U.S. only goes up on 5%, to $5.25 a bushel. If there is no depreciation

in the euro to offset the 5% difference, then European soybeans will

not be competitive on the international market and trade flowing

from the U.S. to Europe will greatly increase.

If we take weighted averages of prices for all goods within an economy, absolute

purchase power parity maintains that the currency exchange rate between two countries

should be identical to the ratio of the two countries' price levels.

This relationship can be expressed as:S=P P*


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Where Sis the spot exchange rate between two countries (the rate of the amount of

foreign currency needed to trade for the domestic currency), P is the price index for a

domestic country and P*is the price index for a foreign country. Note that the exchange

rate used here is an indirect quote.

The following conditions must be met for this relationship to be true:1.The goods of each country must be freely tradable on the international market.2.The price index for each of the two countries must be comprised of the same basket of

goods.

3.All of the prices need to be indexed to the same year.

Even if the law of one price holds for each individual good across countries, differences in

weighting will cause absolute purchasing power parity. Determining comparable average

national price levels is actually quite difficult and is rarely attempted. Analysts usually

examine changes in price levels (indexes), which are easier to calculate; this gets around

some of the problems of comparability

RELATIVE PURCHASING PARITY Relative purchasing power parity relates the change in two countries' expected inflation

rates to the change in their exchange rates. Inflation reduces the real purchasing power

of a nation's currency. If a country has an annual inflation rate of 10%, that country's

currency will be able to purchase 10% less real goods at the end of one year. Relative

purchasing power parity examines the relative changes in price levels between two

countries and maintains that exchange rates will change to compensate for inflation

differentials.

The relationship can be expressed as follows, using indirect quotes:S1/ S0= (1 + Iy) (1 + Ix)

Where,

S0is the spot exchange rate at the beginning of the time period (measured as the "y"

country price of one unit of currency x)

S1is the spot exchange rate at the end of the time period.

Iyis the expected annualized inflation rate for country y, which is considered to be the

foreign country.

Ixis the expected annualized inflation rate for country x, which is considered to be the

domestic country.

2. INTEREST RATE PARITY

As early as the period of the gold standard, monetary policymakers found thatexchange rates were influenced by changes in monetary policy. The rise of the

home interest rate is usually followed by the appreciation of the home currency,

and a fall in the home interest rate is followed by a depreciation of the home

currency. This indicates that the price of assets plays a role in exchange rate

variations. The interest rate parity condition was developed by Keynes (1923), as

what is called interest rate parity nowadays, to link the exchange rate, interest rateand inflation. The theory also has two forms: covered interest rate parity (CIRP)


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and uncovered interest rate parity (UCIRP). CIRP describes the relationship of the

spot market and forward market exchange rates with interest rates on bonds in two

economies.

UCIRP describes the relationship of the spot and expected exchange rate withnominal interest rates on bonds in two economies.

3.Supply and Demand

The exchange rate, just like commodities, determines its priceresponding to the forces of supply and demand8. Therefore, if for

some reason people increase their demand(shift of the curve from D

to D1) for a specific currency, then the price will rise from A to B,

provided the supply remains stable. On the contrary, if the supply10 isincreased (shift of the curve from S to S1), the price will decline from A

to C, provided the demand remains stable.

P

D1 S

D B S1

A

C

O Q

P: shows the exchange rate, Q: shows the mount of currency demandedand supplied A, B, C: Show the equilibrium exchange rate.

Any excess supply (above the equilibrium point) or excess demand(below the equilibrium point) will increase or decrease temporarily

foreign currency reserves accordingly. Finally, such disequilibrium

situations will be eliminated through the pricing, e.g. the market itself.


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4.The Balance of Payments (BOP) Approach

The balance of payments approach is another method that explainswhat the factors are that determine the supply and demand curves of a

countrys currency. As it is known from macroeconomics, the balance of

payments is a method of recording all the international monetary

transactions of a country during a specific period of time. The

transactions recorded are divided into three categories: the current

account transactions, the capital account transactions14, and the central

bank transactions.

The aforementioned categories can show a deficit or a surplus, buttheoretically the overall payments (the BOP as a whole) should be zero

which rarely happens.

As stated earlier, a currencys price depreciation or appreciation (thechange in the value of money), directly affects the volume of a countrys

imports and exports and, consequently, a likely fluctuation in the

exchange rates can add to BOP discrepancies.

For example, a likely depreciation will increase the value of exports inhome currency terms (the larger the exports demand elasticity the

greater the increase).

Conversely, the imports will become more expensive and their value

will be reduced in home currency (the larger the imports demandelasticity the greater the decrease).

The J curve effect illustrates that in the short-term a depreciation of thecurrency can initially worsen (from A to B) the current account balance

before it improves its position (figure P2). This is due to the low price

elasticity of demand for imports and exports in the immediate outcome of

an exchange rate change.

BOP

A

B

TIME


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FACTORS AFFECTING IN DETERMINING EXCHANGE RATES

1) International trade- Trade of goods and services between countries isthe major reason for the demand and supply of foreign currencies. The

value or strength or weakness of a countries currency in terms of othercurrencies depends on its trade with those countries. If a countrys

imports are higher, the demand for foreign currency in this country will

be high. Higher demand for foreign currency means high value of

foreign currency and low value of the domestic currency. This is a

typical case for underdeveloped countries which rely on imports fordevelopment needs. The current account balance (deficit or surplus)

thus reflects the strength and weakness of the domestic currency.

2) Capital movements- International investments in the form of Foreign

direct investment (FDI) and Foreign institutional investments (FII)have become the most important factors affecting the exchange rate in

todays open world economy. Countries which attract large capitalinflows through foreign investments, will witness an appreciation in its

domestic currency as its demand rises. Outflow of capital would mean

a depreciation of domestic currency.

3) Change in prices- Domestic inflation or deflation affects the exchangerate by affecting the demand and supply of domestic currency in theforeign exchange market. For example, if prices in India go up, making

Indian goods costlier, the demand for Indian goods will do down.When exports go down, the demand for rupee will fall, causing

depreciation in its exchange value.

4) Speculations- Uncertainties are always there in the financial market.Speculators predict about the future exchange rate based on varioushappenings in the world, in various countries. Speculators study the

various ups and downs of a country and its resilience to international

happenings and forecast the possible future exchange rate based on a

particular countries economic strengths and weaknesses. If the

speculators expect a fall in the value of a currency in the near future,

they will sell that currency and start buying the other currency that theyexpect to appreciate. The selling of the former currency will thus

increase its supply in the foreign exchange market and bring down its

value. The other currency appreciates as its demand increases.

5) Strength of the economy- If the economic fundamentals of a countryare strong, the exchange rate of its domestic currency remains stable

and strong. Fiscal balance, international current account balance,

international liabilities, foreign exchange reserves, resilience to

international trade fluctuations, GDP, inflation rate all are indicators of

a countrys economic strength.


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6) Government policies- In countries where there is fixed or managedfloat, the central bank becomes an important player in the foreign

exchange market. The bank influences the value of the currency by its

market operations like buying and selling of bills and currencies. The

bank rate also influences the exchange rate by influencing investmentsand thereby the demand and supply of the domestic currency.

7) Stock exchange operations- Stock exchange operations in foreignsecurities, debentures, stocks and shares, influence the demand and

supply of related currencies, thus influencing their exchange rate.

8) Political factors- Political scenario of the country ultimately decidesthe strength of the country. Stable efficient government at the centrewill encourage positive development in the country, creating

successful-investors investor and a good image in the international

market. An economy with a strong, positive image will obviously have

a strong domestic currency. This is the reason why speculations rise

considerably during the parliament elections, with various predictions

of the future government and its policies. In 1998, the Indian rupee

depreciated against the dollar due to the American sanctions after India

conducted the Pokharan nuclear test.

9) Gross Domestic Product (GDP): GDP is considered the broadestmeasure of a country's economy, and it represents the totalmarket value of all goods and services produced in a countryduring a given year. Since the GDP figure itself is often

considered a lagging indicator, most traders focus on the tworeports that are issued in the months before the final GDPfigures: the advance report and the preliminary report.Significant revisions between these reports can causeconsiderable volatility. The GDP is somewhat analogous to thegross profit margin of a publicly traded company in that they areboth measures of internal growth.

10) Consumer Price Index (CPI) : The CPI is a measure of thechange in the prices of consumer goods across over 200

different categories. This report, when compared to a nation'sexports, can be used to see if a country is making or losingmoney on its products and services. Be careful, however, tomonitor the exports - it is a focus that is popular with manytraders because the prices of exports often change relative to acurrency's strength or weakness.

foreign exchange market- final report.docx

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