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FX Market Convention

Base Currency (Primary Currency)

The base currency is the frstcurrency in a currency pair; theexchange rate is alays !uote" per unit o# the base currency

e$g$% #or &''*+% the &uro is the base currency, i# the pair is

tra"ing at -$./% one &uro buys -$./ '* +ollars

Currency 0ierarchy1 &uro British Poun" (*terling) 2ustralian +ollar 3e 4ealan" +ollar 'nite" *tates +ollar Cana"ian +ollar *iss Franc5apanese 6en

7

Note: Euro is the worlds dominantbase currency, all currency pairstraded against the Euro are quote perEUR

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FX Forar"

What i you want to loc in an !" rate to satisy a utureobligation#

$ orward contract in the FX market locks in the price at

hich an entity can buy or sell a currency on a #uture "ate1

Both parties agree on an exchange rate #or a speci8c "ate inthe #uture

Money "oes not change han"s until the #uture maturity "ate

9ength o# the contract can be a couple o# "ays% months% oryears

.

Forar" Pricing1

Forar" price : *pot price Forar" (or sap) points

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FX Forar"

ne o# the most important mathematical concepts in FX1 un"erstan"ingthe basic relationship beteen FX #orar"s an" ?nterest ates

This prevents speculators #rom investing #un"s in the country ithhigher rates an" locking in a risk@#ree pro8t

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FX Forar"

A

October 14,

2010

'*+ -/%///%///

*pot rate-$/7//

eceive C2+-/%7//%/// +eposit C2+ #or

-7 months atrate o# 7$//

eceive C2+-/%

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Factors 2=ecting FXMovements Economic policies by central bans a&ect !" mo'ements(

The ability o# a country to attract capital investments ill alsoimpact the movement o# its currency$

2 strong economy2n"or

Tight monetary policy

2 eak economy

2n"or&xpansionary

monetary policy

2ttracts capital #rom overseas%More eservesCurrent account 8nancing is easyThe home currency appreciates

Capital os overseas%

Feer eservesCurrent account 8nancing is "iGcultThe home currency "epreciates

H

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?nterest rates are tools to a=ect the money supply in the marketan" conse!uently the economic activity

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Cash eserve ation (C) I Minimum ratio o# bank "eposits that banks have to maintain

ith the B? ?ncrease or "ecrease can alter the money o in the market

epo rate I ate at hich the B? len"s money to other banks +ec$ in repo rate I increases currency o in the market

(increases ination) 9oer rates increase the money supply an" boost economic

activity

everse repo rate I ate at hich B? borros #rom other banks ?nc$ in reverse repo I "ecreases currency o in the market

(ination control measure)

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INDIA US

JAPANEU

Interest rates trend 2010-15