SYNOPSIS

ON
Measuring the Volatility of Foreign Exchange Market in
India

SUBMITTED TO
THE CO-ORDINATOR, SCHOOL OF MANAGEMENT STUDIES, IGNOU,
MAIDAN GANDHI, NEW DELHI-110068
PREPARED BY
Chintan Ganatra ()
UNDER THE GUIDANCE OF





Introduction to the Foreign Exchange Market
The foreign exchange market is the biggest financial market in the world. In forex market
everyday transactions is near about 3.98 trillion dollars. The major aim of introducing the foreign
exchange market is to facilitate international trade by enabling businesses to perform transactions
outside their local currency. The market operates round the clock from Monday through Friday.
In the foreign exchange market a trader can purchase international currencies by paying different
currency. This type of foreign exchange market started to develop in the 1970s, which was about
thirty years after foreign exchange was introduced. Some important features about the FX market
include the following:
1. It has a very large number of daily participants. This makes its liquidity one of the
highest in the world.
2. Participants come from several countries in the world.
3. The market is open from 22:00 GMT on Sunday to 20:00 GMT on Friday.
4. Exchange rates are affected by a number of factors.
Market Size and Liquidity
Liquidity in the forex market is the highest among other financial markets in the world. The
market comprises central banks, currency speculators, organizations, governments, retail
investors and international investors. Over the years, the size of the FX market has been
constantly increasing. In 2010, The Triennial Survey by the Bank of International Settlements
reported that the average daily transaction in the US for the month of April was $3.98 trillion.
This was much greater than the $1.7 trillion recorded in 1998.



Market Participant
There are three types of participants in the foreign exchange market. These are: central banks,
global funds, retail clients (or individual retailers) and corporations. The commercial and
investment banks belong to the group known as interbank market. This level constitutes about
seventy five percent of the total volume available each day.
Determinants of FX rates
For countries operating on the floating exchange rate regime, the exchange rates of their
currencies can be determined by the following theories:
1. International Parity Conditions: These include theories such as relative purchasing power
parity, interest rate parity, domestic fisher effect and international fisher effect. Although
these theories work to actually determine FX rates, they can also falter because they are
formed on assumptions that are not always true.
2. Balance of payment model: This is concerned with the exchange of goods and services
without considering the effect of the flow of money between and among nations.
It is not possible to predict FX rates within long time frames with these theories. The best that
can be done with these is predicting future prices that can occur within a few days. FX rates
cannot be judged on a single factor but rather by combining several factors in economics, politics
and market psychology.
Statement of the Problem

Measuring the Volatility of Foreign Exchange Market in
India


Objectives
To find out the volatility of four major currencies i.e.US Dollar, EURO, Britain Pound
and Japanese Yen that traded mostly in world and has allowed trading in Indian Forex
market

To measure the volatility distribution in these four currencies in Indian FOREX market.

Research Methodology

Research Design, nature and source of data
Research methodology is a way to systematically solve the research problem. Researchers not
only need to know how to develop certain indices or tests, how to calculate the mean, the mode,
the median or the standard deviation or chi square, how to apply particular research techniques,
but they also need to know which of these methods or techniques are relevant or not, and what
they mean and indicate and why. Hence, when we talk of research methodology we not only talk
about research methods but also consider the logic behind the methods we use in context of our
research study and explain why we are using a particular method or technique and why we are
not using others so that research results are capable of being evaluated either by the researcher
himself or by others.
Qualitative and quantitative research can be used here.
Qualitative researchers aim to gather an in-depth understanding of human behavior and the
reasons that govern such behavior.
Quantitative research refers to the systematic empirical investigation of social phenomena via
statistical, mathematical or computational techniques. The objective of quantitative research is to
develop and employ mathematical models, theories and/or hypotheses pertaining to phenomena.

Sample and sampling Technique
Sample Universe
The sampling universe is the total number of items/events from which you can select or
sample for statistical analysis and description. There are almost 182 different currencies
in the world.
Common Currencies traded in the FX Market.
Sample Unit
Sample Unit are the constituents of the elements i.e. the number of currencies in our research. In
our research we have taken 4 currencies to measure volatility with Indian rupees.
Sample Period
Sample Period means the time taken of the sample in the research for measuring
the volatility. Here, in our research we have taken the secondary data of past two
years of the volatility. The 2 years i.e. 24 months include:-
- 1
st
January 2011 to 31
st
December 2011 (12 months)
- 1
st
January 2012 to 31
st
December 2012 (12 months)
Tools & Techniques
Here we find the Skewness and Kurtosis with the help of descriptive statistics tool, of the given
currencies to find volatility with the help of some tools like standard deviation and the variance
of the market.
Here we will use JARQUE - BERA TEST. The Jarque-Bera test is used to check hypothesis
about the fact that a given sample.
Methods for Data Collection
There are two sources of data i.e.
1. Primary data
2. Secondary data


Limitation of the Study
Exchange rate currencies chosen for the above study is based not on the importance of
the currency but on the volumes traded in the foreign exchange market in whole world.
And are mainly allowed in India.

Sometimes it happens that the finding of volatility may not help the investor to take
decision for choosing best investment plan

Future sope
This research will help to know the impact of the behavior of Foreign Exchange rate
Indian forex market.

It will help to find out which currency is having more volatility in Indian forex market.

It will also help to know whether Indian forex market is much stable or not.

This research will help the Investor to decide in which currency to invest on the basis of
the volatility of the particular currency.

Conclusion
Here in our Research we can conclude that our primary hypothesis i.e. there is no significance
difference on volatility of selected currency in Forex market, is rejected and our alternate
Hypothesis i.e. There is significance difference on volatility of selected currency in Forex
market, is accepted. Means we can say that all Four Currency having significant volatility.