stock market basics chapter 2

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Chapter 2 – Introduction toCurrency Markets.

A foreign exchange deal is always done in currency pair, forexample:-

US dollar – Indian Rupee ( USD-INR )

British Pound – Indian Rupee ( GBP-INR )



Curren cy code ▲▼ Currency name ▲▼ Units per INR INR per UnitEUR Euro 0.0128043564 78.0984194517

USD US Dollar 0.0167632849 59.6541790150

GBP British Pound 0.0110179423 90.7610487447

INR Indian Rupee 1.0000000000 1.0000000000

AUD Australian Dollar 0.0182799538 54.7047334662

CAD Canadian Dollar 0.0174555539 57.2883566654

AED Emirati Dirham 0.0615715473 16.2412679748

Currency Table: INR - IndianRupee Mid-market rates as of 18-07-2013

http://www.xe.com/currency/eur-euro

http://www.xe.com/faq/rates_buyorsellrates.php




http://www.xe.com/currency/aed-emirati-dirham

http://www.xe.com/currency/cad-canadian-dollar

http://www.xe.com/currency/aud-australian-dollar

http://www.xe.com/currency/inr-indian-rupee

http://www.xe.com/currency/gbp-british-pound

http://www.xe.com/currency/usd-us-dollar

http://www.xe.com/currency/eur-euro



Fixed Exchange Rate Regime andFloating Exchange Rate Regime

There are mainly two methods employed bygovernment to determine the value of domesticcurrency vis-à-vis other currencies :-

Fixed and Floating Exchange Rate.



Fixed Exchange Rate Regime

Fixed exchange rate, Also known as Pegged ExchangeRate, is when a currency value is maintained at a fixed ratioto the value of other currency or to the basket tocurrencies or to any other of value.

Example-

Gold, in order to maintain a fixed exchange rate, a govt.participates in a open currency market.



Floating Exchange Rate Regime

It is determined by a market mechanism through supplyand demand of currency.

Example-

If the demand of the currency is low, its value will decreasethus making imported goods more expensive and exportsrelatively cheaper.



Factors Affecting ExchangeRates

There are many factors affecting a exchange rate of thecurrency. They can be classified as fundamental factors,technical factors, political factors and speculative factors.



Fundamental Factors

The fundamental factors are basic economic policiesfollowed by government in relation to inflation, balance ofpayment position, unemployment, capacity utilization,

trends in imports and export etc.



Technical Factors

• Interest rate

Rising interest rates in the country may lead to inflow ofhot money in the country thereby raising demand for the

domestic currency.



• Inflation Rate

High inflation rate in the country reduces the relativecompetitiveness of the export sector of that country.



• Exchange Rate Policy and Central bank Interventions

Government sometimes participate in foreign exchangemarket through its central bank in order to control thedemand and supply of domestic currency.



Political factor

Political stability influences the exchange rate. Exchangerates are susceptible to political instability and can be very

volatile during times of political crises.



Speculation

Speculative activities by traders worldwide also affectexchange rate movement.

Example :-

If a speculator thinks that the currency of the country is

over valued and will devalue in the neat future, they willput out there money from that country resulting in reduceddemand for that currency and depreciates its value.



Quotes

In currency market, the rates are generally quoted in termsof USD. The price of a currency in terms of anothercurrency is called “Quote”.

A Quote where USD is considered as base currency is

called “Direct Quote” While the Quote where USD isconsidered as term currency is known as “Indirect Quote”.



Tick Size Tick size refers to the minimum price differential at which

trader can enter Bids and Offers.Example :-

The currency future contracts traded at the NSE have thetick size of ₹ 0.0025 . So if the prevailing futures price is₹ 48.5000, the minimum permissible price movement cancause the new price either ₹ 48.4975 or ₹ 48.5025



Spreads

Spreads or the dealer’s margin is the difference between theBID price (the price at which a dealer is willing to buy aforeign currency) and ASK price (the price in which the

dealer is willing to sell the foreign currency).



Spot Transaction

The spot market transaction does not imply immediateexchange of currency, rather the settlement takes place ona value date, which is usually two business days after thetrade date. The price at which the deal takes place is knownas the spot rate.

stock market basics chapter 2

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