PROJECT REPORT

ON

FOREGIN EXCHANGE MARKET

MASTERS OF COMMERCE DEGREE
SEMESTER- 2
ACADEMIC YEAR: 2015-16
SUBMITTED BY
MR: ODIYAR SUMANRAJ
ROLL NO: 36

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

PROJECT REPORT ON
FOREGIN EXCHANGE MARKET
MASTERS OF COMMERCE DEGREE
SEMESTER- 2
ACADEMIC YEAR: 2015-16
SUBMITTED BY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD
OF MASTER DEGREE OF COMMERCE
MR: ODIYAR SUMANRAJ
ROLL NO: 36

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE

AND COMMERCE,
N.E.S. MARG, BHANDUP (WEST), MUMBAI- 400078
CERTIFICATE
This is to certify that the project report on FOREGIN EXCHANGE
MARKET is bonafide record of project work done by MR. ODIYAR
SUMANRAJ submitted in partial fulfillment of the requirement of the award of
the Master of Commerce Degree University of Mumbai during the study in the
academic year 2015-16

INTERNAL EXAMINER:

EXTERNAL EXAMINER:
Principal

DECLARATION
3

Mrs. Rina Saha

I hereby declare that this Project Report entitled FOREGIN

EXCHANGE MARKETsubmitted by me for the award of Masters of
Commerce Degree; University of Mumbai is a record of Project work
done by me during the year 2015-16. This is entirely my own work.
NAME:ODIYAR SUMANRAJ

ROLL NO: 36

Place: Mumbai, Bhandup (W)

Date:

Signature:

ACKNOWLEDGEMENT
4

I owe a great many thanks to great many people who helped and
supported me doing the writing of this book.
My deepest thanks to lecturer, Prof. BHAVA DASof the project for
guiding and correcting various documents of mine with attention and care. He
has taken pains to go through my project and make necessary corrections as and
when needed.
I extend my thanks to the principal of NES Ratnam College of Arts
Science and Commerce, Bhandup (w), for extending her support.
My deep sense of gratitude to Principal Mrs. Rina Saha of NES Ratnam
College of Art, Science and Commerce for support and guidance. Thanks and
appreciation to the helpful people at NES Ratnam College of Arts, Science and
Commerce , for their support.

I would also thank my institution and faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to
my family and well-wishers.

Candidate Name:

ODIYAR SUMANRAJ

INDEX
5

SR.
NO.

DESCRIPTION

Page.n
o

INTRODUCTION

7-18

The Characteristics of a Foreign

Exchange Market

19-23

24-26
Advantages and
Disadvantages of Foreign
ExchangeTrading
Foreign Exchange Market Participants 27-34

4
5

Factors affecting Movement

of Exchange Rates
CONCLUSION& BIBLIOGRAPHY

FOREGIN EXCHANGE MARKET

6

35-41

CHAPATER:1
Indroduction:
The foreign exchange market (forex, FX, or currency
market) is a globaldecentralized market for the trading of currencies.
This includes all aspects of buying, selling and exchanging currencies
at current or determined prices. In terms of volume of trading, it is by
far the largest market in the world. The main participants in this
market are the larger international banks.
Financial centres around the world function as anchors of trading
between a wide range of multiple types of buyers and sellers around
the clock, with the exception of weekends. The foreign exchange
market does not determine the relative values of different currencies,
but sets the current market price of the value of one currency as
demanded against another.
The foreign exchange market works through financial institutions, and
it operates on several levels. Behind the scenes banks turn to a smaller
number of financial firms known as dealers, who are actively
involved in large quantities of foreign exchange trading. Most foreign
exchange dealers are banks, so this behind-the-scenes market is
sometimes called the interbank market, although a few insurance
companies and other kinds of financial firms are involved.
Trades between foreign exchange dealers can be very large, involving
hundreds of millions of dollars. Because of the sovereignty issue
when involving two currencies, forex has little (if any) supervisory
entity regulating its actions.
The foreign exchange market assists international trade and
investments by enabling currency conversion. For example, it permits
a business in the United States to import goods from European
Union member states, especially Eurozonemembers, and pay Euros,
even though its income is in United States dollars. It also supports
7

direct speculation and evaluation relative to the value of currencies,

and the carry trade, speculation based on the interest rate differential
between two currencies.[2]
In a typical foreign exchange transaction, a party purchases some
quantity of one currency by paying with some quantity of another
currency. The modern foreign exchange market began forming during
the 1970s after three decades of government restrictions on foreign
exchange transactions (the Bretton Woods system of monetary
management established the rules for commercial and financial
relations among the world's major industrial states after World War
II).
when countries gradually switched to floating exchange rates from
the previous exchange rate regime, which remainedfixed as per the
Bretton Woods system.
The foreign exchange market is unique because of the following
characteristics:

its huge trading volume representing the largest asset class in the
world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e.,
trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT
Friday (New York);
the variety of factors that affect exchange rates;

the low margins of relative profit compared with other markets

of fixed income; and

the use of leverage to enhance profit and loss margins and with
respect to account size.

As such, it has been referred to as the market closest to the ideal

of perfect
competition,
notwithstanding currency
intervention by central banks.
According to the Bank for International Settlements,[3] the preliminary
global results from the 2013 Triennial Central Bank Survey of
Foreign Exchange and OTC Derivatives Markets Activity show that
trading in foreign exchange markets averaged $5.3 trillion per day in
April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion
in April 2007.
Foreign exchange swaps were the most actively traded instruments in
April 2013, at $2.2 trillion per day, followed by spot trading at $2.0
trillion. According to the Bank for International Settlements, [4] as of
April 2010, average daily turnover in global foreign exchange
markets is estimated at $3.98 trillion.
A growth of approximately 20% over the $3.21 trillion daily volume
as of April 2007. Some firms specializing on foreign exchange market
had put the average daily turnover in excess of US$4 trillion. [5] The
$3.98 trillion break-down is as follows:

$1.490 trillion in spot transactions

$475 billion in outright forwards

$1.765 trillion in foreign exchange swaps

$43 billion currency swaps

$207 billion in options and other product.

The foreign exchange market (forex, FX, orcurrency

market) is a global decentralizedmarket for the trading of currencies.
This includes all aspects of buying, selling and exchanging currencies
at current or determined prices. In terms of volume of trading, it is by
far the largest market in the world.

Foreign Exchange Market: Meaning, Functions and Kinds!

Meaning:
Foreign exchange market is the market in which foreign currencies
are bought and sold. The buyers and sellers include individuals, firms,
foreign exchange brokers, commercial banks and the central bank.
Like any other market, foreign exchange market is a system, not a
place. The transactions in this market are not confined to only one or
few foreign currencies. In fact, there are a large number of foreign
currencies which are traded, converted and exchanged in the foreign
exchange market.
Functions of Foreign Exchange Market:
Foreign exchange market performs the following three functions:
1. Transfer Function:
10

It transfers purchasing power between the countries involved in the

transaction. This function is performed through credit instruments like
bills of foreign exchange, bank drafts and telephonic transfers.
2. Credit Function:
It provides credit for foreign trade. Bills of exchange, with maturity
period of three months, are generally used for international payments.
Credit is required for this period in order to enable the importer to
take possession of goods, sell them and obtain money to pay off the
bill.
3. Hedging Function:
When exporters and importers enter into an agreement to sell and buy
goods on some future date at the current prices and exchange rate, it is
called hedging. The purpose of hedging is to avoid losses that might
be caused due to exchange rate variations in the future.
Kinds of Foreign Exchange Markets:
Foreign exchange markets are classified on the basis of whether
the foreign exchange transactions are spot or forward
accordingly, there are two kinds of foreign exchange markets:
(i) Spot Market,
(ii) Forward Market.
(i) Spot Market:

11

Spot market refers to the market in which the receipts and payments
are made immediately. Generally, a time of two business days is
permitted to settle the transaction.
Spot market is of daily nature and deals only in spot transactions of
foreign exchange (not in future transactions). The rate of exchange,
which prevails in the spot market, is termed as spot exchange rate or
current rate of exchange.
The term spot transaction is a bit misleading. In fact, spot
transaction should mean a transaction, which is carried out on the
spot (i.e., immediately). However, a two day margin is allowed as it
takes two days for payments made through cheques to be cleared.
(ii) Forward Market:
Forward market refers to the market in which sale and purchase of
foreign currency is settled on a specified future date at a rate agreed
upon today.
The exchange rate quoted in forward transactions is known as the
forward exchange rate. Generally, most of the international
transactions are signed on one date and completed on a later date.
Forward exchange rate becomes useful for both the parties involved
in the transaction.
Forward Contract is made for two reasons:
(a) To minimize the risk of loss due to adverse changes in the
exchange rate (through hedging);
(b) To make profit (through speculation).
12

MARKET SIZE AND LIQUIDITY:

Main foreign exchange market turnover, 19882007, measured in billions of USD.

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,
otherfinancial 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).[4] Of this $3.98 trillion, $1.5 trillion was spot
transactions and $2.5 trillion was traded in outright forwards, swaps
and other derivatives.
In April 2010, trading in the United Kingdom accounted for 36.7% of
the total, making it by far the most important centre for foreign
exchange trading. Trading in the United States accounted for 17.9%
and Japanaccounted for 6.2%.[60]
13

In April 2013, for the first time, Singapore surpassed Japan in average
daily foreign-exchange trading volume with $383 billion per day. So
the rank became: the United Kingdom (41%), the United States
(19%), Singapore (5.7)%, Japan (5.6%) and Hong Kong (4.1%).[61]
Turnover of exchange-traded foreign exchange futures and options
have grown rapidly in recent years, reaching $166 billion in April
2010 (double the turnover recorded in April 2007). Exchange-traded
currency derivatives represent 4% of OTC foreign exchange turnover.
Foreign exchange futures contracts were introduced in 1972 at
the Chicago Mercantile Exchange and are actively traded relative to
most other futures contracts.
Most developed countries permit the trading of derivative products
(like futures and options on futures) on their exchanges. All these
developed countries already have fully convertible capital accounts.
Some governments of emerging markets do not allow foreign
exchange derivative products on their exchanges because they
have capital controls. The use of derivatives is growing in many
emerging economies.[62] Countries such as South Korea, South Africa,
and India have established currency futures exchanges, despite having
some capital controls.
Foreign exchange trading increased by 20% between April 2007 and
April 2010 and has more than doubled since 2004. [63]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 (see below: Retail
foreign exchange traders).
Foreign
exchange
is
an over-the-counter
market where
brokers/dealers negotiate directly with one another, so there is no
central exchange or clearing house. The biggest geographic trading
14

center is the United Kingdom, primarily London, which according

to TheCityUK estimates has increased its share of global turnover in
traditional transactions from 34.6% in April 2007 to 36.7% in April
2010. Due to London's dominance in the market, a particular
currency's quoted price is usually the London market price. For
instance, when the International Monetary Fund calculates the value
of its special drawing rightsevery day, they use the London market
prices at noon that day.

The Foreign Exchange Market:

The foreign exchange market provides the physical and institutional
structure through which the money of one country is exchanged for
that of another country, the rate of exchange between currencies is
determined, and foreign exchange transactions are physically
completed. A foreign exchange transaction is an agreement between a
buyer and a seller that a given amount of one currency is to be
delivered at a specified rate for some other currency.
3.1 Geographical Extent of the Foreign Exchange Market
Geographically, the foreign exchange market spans the globe, with
prices moving and currencies traded somewhere every hour of every
business day. The market is deepest, or most liquid, early in the
European afternoon, when the markets of both Europe and the U.S.
East coast are open. The market is thinnest at the end of the day in
California, when traders in Tokyo and Hong Kong are just getting up
for the next day. In some countries, a portion of foreign exchange
trading is conducted on an official trading floor by open bidding.
Closing prices are published as the official price, or 'fixing' for the day
and certain commercial and investment transactions are based on this
official price.
3.2 The Size of the Market In April 1992, the Bank of International
Settlements (BIS) estimated the daily volume of trading on the
foreign exchange market and its satellites (futures, options, and
swaps) at more than USD 1 trillion. This is about 5 to 10 times the
daily volume of international trade in goods and services. The market
is dominated by trading in USD, DEM, and JPY respectively. The
15

major markets are London (USD 300 billion), New York (USD 200
billion), and Tokyo (USD 130 billion).
3.3 Functions of the Foreign Exchange Market The foreign exchange
market is the mechanism by which a person of firm transfers
purchasing power form one country to another, obtains or provides
credit for international trade transactions, and minimizes exposure to
foreign exchange risk. Transfer of Purchasing Power: Transfer of
purchasing power is necessary because international transactions
normally involve parties in countries with different national
currencies. Each party usually wants to deal in its own currency, but
the transaction can be invoiced in only one currency. Provision of
Credit: Because the movement of goods between countries takes time,
inventory in transit must be financed. Minimizing Foreign Exchange
Risk: The foreign exchange market provides "hedging" facilities for
transferring foreign exchange risk to someone else.
3.4 Market Participants The foreign exchange market consists of two
tiers: the interbank or wholesale market, and the client or retail
market. Individual transactions in the interbank market usually
involve large sums that are multiples of a million USD or the
equivalent value in other currencies. By contrast, contracts between a
bank and its client are usually for specific amounts, sometimes down
to the last penny.
Foreign Exchange Dealers: Banks, and a few nonbank foreign
exchange dealers, operate in both the interbank and client markets.
They profit from buying foreign exchange at a bid price and reselling
it at a slightly higher ask price. Worldwide competitions among
dealers narrows the spread between bid and ask and so contributes to
making the foreign exchange market efficient in the same sense as
securities markets. Dealers in the foreign exchange departments of
large international banks often function as market makers.
They stand willing to buy and sell those currencies in which they
specialize by maintaining an inventory position in those currencies.
Participants in Commercial and Investment Transactions: Importers
and exporters, international portfolio investors, multinational firms,
tourists, and others use the foreign exchange market to facilitate
execution of commercial or investment transactions. Some of these
16

participants use the foreign exchange market to hedge foreign

exchange risk. Speculators and Arbitragers: Speculators and
arbitragers seek to profit from trading in the market. They operate in
their own interest, without a need or obligation to serve clients or to
ensure a continuous market. Speculators seek all of their profit from
exchange rate changes.
Arbitragers try to profit from simultaneous exchange rate differences
in different markets. Central Banks and Treasuries: Central banks and
treasuries use the market to acquire or spend their country's foreign
exchange reserves as well as to influence the price at which their own
currency is traded. In many instances they do best when they
willingly take a loss on their foreign exchange transactions. As willing
loss takers, central banks and treasuries differ in motive and behavior
form all other market participants. Foreign Exchange Brokers:
Foreign exchange brokers are agents who facilitate trading between
dealers without themselves becoming principals in the transaction.
For this service, they charge a small commission, and maintain access
to hundreds of dealers worldwide via open telephone lines. It is a
broker's business to know at any moment exactly which dealers want
to buy or sell any currency. This knowledge enables the broker to find
a counterpart for a client quickly without revealing the identity of
either party until after an agreement has been reached.
3.5 Transactions in the Interbank Market Transactions in the foreign
exchange market can be executed on a spot, forward, or swap basis.
Spot Transactions: A spot transaction requires almost immediate
delivery of foreign exchange. In the interbank market, a spot
transaction involves the purchase of foreign exchange with delivery
and payment between banks to take place, normally, on the second
following business day.
The date of settlement is referred to as the "value date." Spot
transactions are the most important single type of transaction (43 % of
all transactions). Outright Forward Transactions: A forward
transaction requires delivery at a future value date of a specified
amount of one currency for a specified amount of another currency.
The exchange rate to prevail at the value date is established at the
time of the agreement, but payment and delivery are not required until
17

maturity. Forward exchange rates are normally quoted for value dates
of one, two, three, six, and twelve months. Actual contracts can be
arranged for other lengths. Outright forward transactions only account
for about 9 % of all foreign exchange transactions.
Swap Transactions: A swap transaction involves the simultaneous
purchase and sale of a given amount of foreign exchange for two
different value dates. The most common type of swap is a spot against
forward, where the dealer buys a currency in the spot market and
simultaneously sells the same amount back to the same back in the
forward market. Since this agreement is executed as a single
transaction, the dealer incurs no unexpected foreign exchange risk.
Swap transactions account for about 48 % of all foreign exchange
transactions.
3.6 Foreign Exchange Rates and Quotations A foreign exchange
rate is the price of a foreign currency. A foreign exchange
quotation or quote is a statement of willingness to buy or sell at an
announced rate. Interbank Quotations: The most common way that
professional dealers and brokers state foreign exchange quotations,
and the way they appear on all computer trading screens
worldwide, is called European terms.
The European terms quote shows the number of units of foreign
currency needed to purchase one USD: CAD 1.5770 / USD An
alternative method is called the American terms. The American
terms quote shows the number of units of USD needed to purchase
one unit of foreign currency: USD 0.6341 / CAD Clearly, those
two quotations are highly related. Define the price of a USD in
CAD to be Also, define the price of a CAD in USD to be Then, it
must be that Because CAD 1.5770 / USD = 1 / {USD 0.6341 /
CAD}.
These rules also apply to forward rates as well. We will denote an
outright forward quote using the following notation: Direct and
Indirect Quotations: A direct quote is a home currency price of a
unit of foreign currency.

18

CHAPATER:2

The Characteristics of a Foreign Exchange Market:

The Characteristics of a Foreign Exchange Market. The foreign
exchange market is a global phenomenon with two main functions: to
convert the currency of one country into the currency of another, and
to minimize the risk of changes in foreign exchange rates. These
functions create three defining characteristics: the foreign exchange
market is decentralized, never ceases, and is constantly changing
wealth. Involving many billions of US dollars, the foreign exchange
market involves agents as large as multinational corporations to the
very small, such as an international tourist trying to change one
currency into another.

19

 No Centralized Market
The foreign exchange market does not possess a centralized
market or organizational structure. According to the Forex
Guide, a guide to foreign trading, "Foreign exchange
transactions take place without any unification of the operation
market and business network." The operation market controls
the channels through which trades occur, while the business
network provides the capital for the trades. In the foreign
exchange network, these two systems are not formally
organized. Brokers in the foreign exchange market aren't
certified or approved by a governing agency, as they are, for
example, in the U.S. stock exchange market.
Unceasing
The foreign exchange market never closes down during the
work week. It operates twenty-four hours a day, across national
boundaries. Because the time in Japan is different than in New
York, for example, tourists can be exchanging their currency in
20

one city, while in another city all the foreign exchange brokers
are asleep.
This situation allows traders to buy in one currency in the
morning, and sell it in the evening if the currency rate has
improved in their favor.
Changing Wealth
In 1998, the U.S. Federal Reserve estimated the U.S. segment of
the foreign exchange market at 351 billion dollars, more than 60
times what it was in 1977. The foreign exchange market
demonstrates changes in value among currencies. What a
currency is worth now compared to other currencies may change
drastically in the years ahead.
For example, the exchange rate of U.S. dollars to Japanese Yen
has gradually made the two more equal in wealth from the
1990s to the 2000s. Where a dealer could get many Yen for few
dollars in 1990, she could now get less Yen for the same amount
of dollars.
Being the world's largest financial market, the foreign exchange (or
forex) market offers unmatched benefits and advantages to the
prospective investor. With superior liquidity and leverage compared to
stocks and futures markets, the forex market is arguably the best
financial investment you can find.
What makes the forex market an excellent financial market? The
characteristics that make the forex market a good one are lower
trading costs, excellent transparency, superior liquidity and very
strong market trends.
LOWER TRADING COSTS
Ask anyone dealing in stocks and they will tell you that they have to
shell thousands of dollars to get started. Not so with the forex market.
21

With just a few hundred dollars (often $250 or less), you can open a
mini forex account and start trading!
The lower trading costs in the forex market has made it possible for
even small, individual investors to make decent profits from forex
trading. With lower costs, the possible losses are also much lower.
You will discover that forex trading usually has no commission fees
unlike in other investments.
The costs of forex trading are limited to the spread or the difference
between the selling and buying prices for a particular currency pair.
EXCELLENT TRANSPARENCY
Transparency means the free access to trading information. Forex
trading is a transparent process because the trader has full access to
market data and information that are necessary to perform successful
transactions.
The excellent transparency of the forex market means that forex
traders have more control over their investments and can decide what
to do based on the information available.
SUPERIOR LIQUIDITY
In a forex market, traders are free to buy and sell currencies of their
own choosing. The superior liquidity of the forex market enables
traders to easily exchange currencies without affecting the prices of
the currencies being traded.
So whether you trade a few thousand dollars or several millions, you
can be assured of the same currency prices during the time an order
was placed and then executed. The forex market's superior liquidity
allows you to get the profits you expect at the time you made the
trade.
22

STRONG MARKET TRENDS

Forex traders make money by getting accurate market data and then
analyzing the direction the market takes. To do this, forex traders rely
heavily on trends and trending in an attempt to predict the direction of
the forex market. Most traders use technical analysis to analyze past
and present forex market data and then search for trends.
Other financial markets use trends and trending but this characteristic
is much stronger in the forex market. Due to strong trending, forex
markets are much easier to analyze and identify possible entry and
exit positions during trading.
Now you already know the characteristics that make the forex
market a sound, financially-stable and profitable investment
area, maybe it's time to put your money into the forex market
and earn handsome profits.
You can just take advantage of the forex market's positive assets
and make your money work for you.

Types of Foreign Exchange Rates

:Floating Rates
Floating rates is one of the primary reasons for fluctuation of currency
in foreign exchangemarket. This is one of the most important
23

commonly and main type of exchange rate. Under this market force
all the economies of developed countries allow there currency to
flowfreely.
When the value of the currency becomes low it makes the imports
more and theexports are cheaper, so the countries domestic goods and
services are demanded more inforeign buyers. The country can
withstand the fluctuation only if the economy is strong. When the
countrys economy is able to meet the demand then it can adjust
between the foreign trade and domestic trade automatically.
Fixed Rates
Fixed exchange rates are used to attract the foreign investments and
to promote foreign trade.This type of rates is used only by small
developed countries. By Fixed exchange rates thecountry assures the
investors for the stable and constant value of investment in the
country.
Amonetary policy of the country becomes ineffective. In this type the
exchange rates theimports become expensive. The exchange value of
the currency does not move. This normally reduces the countrys
currency against foreign currencies. Pegged Rates This rate is
between the floating rate and the fixed rate. Pegged rates appropriate
more for developed country.

CHAPATER:3

Advantages and
ExchangeTrading:

Disadvantages

of

Foreign

Foreign Exchange, Forex or FX is one of the worlds largest financial

markets dealing in real-time exchange of currencies of different
24

countries. This currency exchange market has a greater volume of

buyers and sellers, than in any other financial market of the world.
With major trading centers at Sydney, London, Frankfurt, Tokyo and
New York, Forex is the only financial market, which is open 24 hours
a
day,
5.5
days
a
week,
across
the
globe.
One of the most popular speculation markets, Forex is a market well
known for its huge volume, superior liquidity, as well as the steady
trading prospects. Also attractive is high levels of Leverage, one of
the
unique
features
offered
by
the
Forex
market.
AdvantagesofForextrading :
Highleverage
Starting from a minimum of 100:1, Forex markets offer its traders
with huge amounts of leverage which means that fat profits can be
produced
by
investing
small
amounts
of
deposits.
NOcommission
If dealing with a financial market on daily basis, the regular investors
or traders are the ones who are really benefited by the free of
commission trading. The currency trading market lets its traders keep
a
whole
100%
of
their
trading
profits.

Superiorliquidity
With most of the currency transactions comprising of 7 main currency
25

pairs, the huge volume and the global trading aspect helps these
currencies exhibit price stability, little slippage, narrow spreads and
highlevelsofliquidity.
Profitability
Being an over the counter market, the trading done at Forex can be
known as over the counter trading, wherein, a trader always buys
one currency and sells of the other one in real time. There is no
organizational prejudice in the market and every investor has the
equal
prospects
for
profit
in
it.
24hourstrading
Forex currency trading market offers its traders with a 24 hour trading
opening, wherein, a Forex investor can trade ant any time of the day,
whatever suits him/her, as the market is open for trading 24 hours a
day, from Sunday 5:00 pm (ET) to Friday 4:30 pm.
This gives the Forex traders a choice to opt for timing for the trade
according
to
their
convenience.
DisadvantagesofForextrading
HighLeverage
While high leverage serves as an advantage to attract traders to the
market, it can at times also act as a disadvantage for them. With such
high levels of leverage available to traders in the Forex market, comes
an
equally
high
level
of
danger.
This can be true for the high stake positions which carry along with
them, too much risk, leading to margin calls. This is where efficient
26

money

management

comes

into

play

for

playing

safe.

24hoursmarket
Although it is convenient for the trader to trade whenever it is suitable
to him, it can be a rather tough job too. This is because, at times, it is
not possible for an individual trader to keep track of the Forex market,
24
hours
a
day.
This is where a broker comes into the picture. Retail or individual
investors should try taking help from a professional broker rather than
doing all the dealings himself straight with the huge market.
The broker will be an experienced professional who will act as an
equal in your transactions, keeping you informed and updated about
minute to minute details and fluctuations, and even guide you about
the conditions, when to and when not to trade in the market.
Like every other financial market, Forex market also has its share of
advantages and disadvantages. But keeping in mind the two can
surely help a trader become more vigilant and aware of what to expect
while trading Forex.

27

CHAPATER:4

Foreign Exchange Market Participants:

Consumers and Travelers

Consumers may purchase goods in a foreign country or via the

internet with their credit card.

The amount consumers pay in the foreign currency will be

converted to their home currency on their credit card statement.

Travelers must go to a bank or currency exchange bureau to

convert one currency (their "home" currency) into another (the
"destination" currency) when using cash to pay for goods and services
in a foreign country.

Travelers need to be aware of exchange rates to ensure they

receive a fair deal.

Businesses

Businesses often need to convert currencies when they conduct

trade outside their home country.

Large companies need to convert huge amounts of currency; a

multinational company such as General Electric (GE) for instance,
converts tens of billions of dollars each year.

28

Investors and Speculators

Investors and speculators require currency exchange whenever they
deal in any foreign investment, be it equities, bonds, bank deposits, or
real estate.

Investors and speculators also trade currencies in an attempt to

benefit from movements in the currency exchange markets.

Commercial and Investment Banks

Commercial and investment banks trade currencies as a service

to their commercial banking, deposit, and lending customers.

These institutions also participate in the currency market for

hedging and speculative purposes.

Governments and Central Banks

Governments and central banks trade currencies to improve

economic conditions or to intervene in an attempt to adjust economic
or financial imbalances.

Because they are non-profit, governments and central banks do

not trade with the intention of earning a profit, but because they tend
to trade on a long-term basis, it is not unusual for some trades to earn
revenue.

29

7 Risks and Benefits of Foreign Exchange:

Forex trading is a popular alternative to earn some more money.
Millions of people in each country is recorded to be involved on such
trading. If you are interested in the business, you should consider to
study from the very basic one.
As people already know it, we recognize several risks and benefits of
foreign exchange. They can include the following issues:
1. 24 Hours Market
This business runs for 24 hours. It allows you to join the market on
more flexible times. Several traders even use special automatic
software to run their trade so when they are working somewhere else,
they are actually earning money from trading as well.
2. Bigger Possibilities
Foreign exchange trading allows you to invest in a huge size without
influencing the other parts of trading. It gives you chance to earn
more from the foreign exchange trading.
30

3. Influenced by Many Factors

Foreign exchange trading is insecure in a way that it is highly
influenced by like national debt level, political condition, and so
many changing factors. You need to be aware of the factors all the
time.
4. Can Be Your Side Earning
Foreign exchange can be done personally on brokers and this can be
your side earning source. You do not have to leave your current job
but you can earn some more money for kids education.
5. Guide to Learn
Foreign exchange trading can be learnt. You will be able to find
guides and e-book about it. If you join a broker, you will get tutorial
as well. It is helpful and you can learn to be real trader.

6. Forex Broker Help

Many people join the brokers to find more helps. They will help you
manage your account and your trading so it becomes more
comfortable. They ask for commission tough and security fees. Be
careful in how you choose brokers. You need to consider several
aspects.
7. Liquidity
This can be both the benefits and risks. In a matter of minutes or
seconds, we can earn a huge pile of profit. On the other side, if we are
not very careful, we can lose the entire money on the same duration.
Now, you already know parts of the risks and benefits on foreign
exchange trading. It takes a lot of understanding and experience to
join the business. If you think you are able to learn to solve the risk,
31

then you are perfect candidate for this business. There are still many
you should learn about foreign exchange trading.

The Economic Importance of Currency Markets

LE:
Before we turn to monetary theory (gulp!) in Chapter 20, Money
Demand, there is one more real-world financial market we need to
investigate in this and the next chapter, the market for foreign
currencies or foreign exchange, where the relative prices of national
units of account or exchange rates are determined. Why should you
care how many U.S. dollars (USD) it takes to buy a euro or a yen, a
pound (sterling) or a dollar (of Canada or Australia, respectively)? If
you plan to travel to any of those places, youll want to know so you
can evaluate prices. Is 1,000 a good price for a hotel room? How
about 1,000?[181] But even if you remain your entire life in a small
village in Alaska, one of Hawaiis outer islands, Michigans Upper
Peninsula, or the northern reaches of Maine, the value of USD will
affect your life deeply, whether you know it or not. Come again? How
could that possibly be?+ Every nation in the world trades with other
nations. Some trade more than others (little islands like Iceland,
32

Mauritius, and Ireland lead the way, in percentage of gross domestic

product [GDP] terms anyway) but all do it, even illicitly, when the
United Nations says that they cant because theyve been bad.[182]
We know from Chapter 3, Money that conducting trade via barter
isnt practical in most circumstances. So we use money. But what
happens when people who want to trade use different types of money,
when their units of account are not the same? There are several
solutions to that problem. The most frequent solution today is for one
party, usually the buyer, to exchange the money of his or her country
for the money of the sellers country, then to consummate the
transaction.+ How does this affect you? Well, when the unit of
account of your country, say, U.S. dollars (USD or plain $), is strong,
when it can buy many units of a foreign currency, say, Canadian
dollars (C$), Canadian goods look cheap to you. And we all know
what happens when goods are cheap. So you stop drinking Bud and
start drinking Moosehead. Instead of going to Manhattan to shop, you
go to Toronto, and check out some Maple Leafs, Raptors, and Blue
Jays games while youre at it. (You go in April, that magical month
for sports fans.) When the Blue Jays game gets snowed out, you go
instead to the Canadian ballet. (Do you have any sense of humor at
all?) You might even consider buying a Canadian computer or
automobile. (Okay, lets not get crazy.) The point is you and your
fellow Americans import more from Canada.+ The Canadians are
very happy about this, but they are not so thrilled with American
goods, which look dreadfully expensive to them because they have to
give up many of their dear loonies to buy USD. So they too eschew
Manhattan for Toronto and drink Moosehead rather than Bud.In other
words, U.S. exports to Canada fall. And because Canada is a major
U.S. trading partner, that does not bode well for the U.S. economy
overall, or U.S. residents, even those in remote villages. If USD were
to continue to appreciate (strengthen, buy yet more C$), the situation
would grow increasingly worse. Were the dollar to depreciate
(weaken, buy fewer C$), the situation would ameliorate and
eventually reverse, and youd go back to Bud, Manhattan shopping
sprees, and the Yankees, Mets, Knicks, Nets, Islanders, and Rangers.+
Stop and Think Box A chain of pizza parlors in the southwestern part
of the United States accepts Mexican pesos in payment for its pizzas.
33

Many U.S. retail stores located near the Canadian border accept
Canadian currency. (Many Canadian businesses accept U.S. dollars,
too.) Why do these businesses accept payment in a foreign currency?
Well, maybe they are good folks who want to help out others and
maybe some of them need foreign currencies to purchase supplies.
But those are at best ulterior motives in most instances because the
exchange rate offered usually heavily favors the retailer. For example,
the pizza parlors exchange rate was 12 pesos to the dollar when the
market exchange rate was closer to 11. So a $10 pizza costs 120 pesos
(10 12) instead of 110 pesos (10 11). In short, it makes a tidy and
largely riskless profit from the offer. Or imagine you dont have many
assets or a high income, but you need an automobile. You see a
commercial that says that there are three V-dubs (German-made
Volkswagen automobile models) under $17,000. You think you can
afford that and begin to make arrangements to buy a Rabbit.
But look in Figure 18.1, The dollar price of a 17,000 Rabbit and the
euro price of a $10 computer fan

at what happens to the dollar price of a Rabbit when the exchange

rate changes. Say that the Rabbit of your dreams costs 17,000. When
34

the dollar and the euro are at parity (1 to 1), the Rabbit costs $17,000.
If the dollar depreciates (buys fewer euro, and more USD are needed
to buy 1), the Rabbit grows increasingly costly to you.
If the dollar appreciates (buys more euro, and fewer USD are needed
to buy 1), that cool automotive bunny gets very cheap indeed!+
Figure 18.1. The dollar price of a 17,000 Rabbit and the euro price of
a $10 computer fan + Now imagine that in your remote little town you
make fans for French computers that you can sell profitably for
$10.00.
The dollars movements will affect you as a producer, but in precisely
the opposite way as it affected you as a consumer. When the dollar
appreciates against the euro, your computer fans grow more
expensive in France (and indeed the entire euro zone), which will
undoubtedly cut into sales and maybe your salary or your job. When
the dollar depreciates, the euro price of your fans plummet, sales
become increasingly brisk, and you think about buying a Cadillac (a
more expensive American car).

Financial Instruments of foreign exchange market:

Spot Market
Spot market involves the quickest transaction in the foreign exchange
market. This involves immediate payment at the current exchange rate
is called as spot rate. The spot market accounts for 1/3rdof all the
currency exchange, trades in Federal Reserve that takes place within
two days of the agreement.
The traders open to the volatility of the currency market, which can
raise or lower the price between the agreement and the trade.
Futures Market
These kind transactions involve future payment and future delivery at
an agreed exchange rate. Future market contracts are standardized, it
is non-negotiable and the elements of the agreement are set.
35

It also takes the volatility of the currency market, specifically the spot
market, out of the equation. This type of market is popular for Steady
return on their investment that is done on large currency transactions.
Forward Market
the terms are negotiable between the two parties. The terms can be
changes according to the needs of the participants. It allows for more
flexibility. Two entities swap currency for an agreed amount of time,
and then return the currency at the end of the contract.
Swap Transactions In swap two parties are involves where they
exchange the currencies for certain time and agree to reserve the
transaction at a later date. Swap is the most commonly used forward

CHAPATER:5

Factors affecting Movement of Exchange Rates:

1. Aside from factors such as interest rates and inflation
,exchange rate is one of the most important determinants of a
country's relative level of economic health. Exchange rates play
a vital role in a country's level of trade, which is critical to
every free market economy in the world. For this reason,
exchange rates are among the most watched ,analyzed and
governmentally manipulated economic measures. But exchange
rates matter on a smaller scale as well: they impact the real
return of an investor's portfolio. Here we look at some of the
major forces behind exchange rate movements. Before we look
at these forces, we should sketch out how exchange rate
movements affect a nation's trading relationships with other
nations. A higher currency makes a country's exports more
expensive and imports cheaper in foreign markets; a lower
currency makes a country's exports cheaper and its imports
more expensive in foreign markets. A higher exchange rate can
36

be expected to lower the country's balance of trade, while a

lower exchange rate would increase it. Numerous factors
determine exchange rates, and all are related to the trading
relationship between two countries. Remember, exchange rates
are relative, and are expressed as a comparison of the currencies
of two countries. The following are some of the principal
determinants of the exchange rate between two countries. Note
that these factors are in no particular order; like many aspects of
economics ,the relative importance of these factors is subject to
much debate. . Differentials in Inflation As a general rule, a
country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to
other currencies. During the last half of the twentieth century,
the countries with low inflation included Japan ,Germany and
Switzerland, while the U.S. and Canada achieved low inflation
only later. Those countries with higher inflation typically see
depreciation in their currency in relation to the currencies of
their trading partners. This is also usually accompanied by
higher interest rates.
. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly
correlated. By manipulating interest rates, central banks exert
influence over both inflation and exchange rates, and changing
interest rates impact inflation and currency values. Higher interest
rates offer lenders in an economy a higher return relative to other
countries. Therefore, higher interest rates attract foreign capital
and cause the exchange rate to rise. The impact of higher interest
rates is mitigated, however, if inflation in the country is much
higher than in others, or if additional factors serve to drive the
currency down. The opposite relationship exists for decreasing
interest rates - that is, lower interest rates tend to decrease
exchange rates.
Current-Account Deficits

37

The current account is the balance of trade between a country and

its trading partners, reflecting all payments between countries for
goods, services, interest and dividends. A deficit in the current
account shows the country is spending more on foreign trade than
it is earning, and that it is borrowing capital from foreign sources
to make up the deficit. In other words, the country requires more
foreign currency than it receives through sales of exports, and it
supplies more of its own currency than foreigners demand for its
products. The excess demand for foreign currency lowers the
country's exchange rate until domestic goods and services are
cheap enough for foreigners, and foreign assets are too expensive
to generate sales for domestic interests.
Public Debt
Countries will engage in large-scale deficit financing to pay for
public sector project sand governmental funding. While such
activity stimulates the domestic economy ,nations with large
public deficits and debts are less attractive to foreign investors.
The reason? A large debt encourages inflation, and if inflation is
high, the debt will be serviced and ultimately paid off with cheaper
real dollars in the future. In the worst case scenario, a government
may print money to pay part of a large debt, but increasing the
money supply inevitably causes inflation. Moreover, if a
government is not able to service its deficit through domestic
means (selling domestic bonds, increasing the money supply), then
it must increase the supply of securities for sale to foreigners,
thereby lowering their prices. Finally, a large debt may prove
worrisome to foreigners if they believe the country risks defaulting
on its obligations. Foreigners will be less willing to own securities
denominated in that currency if the risk of default is great. For this
reason, the country's debt rating (as determined by Moody's or
Standard& Poor's, for example) is a crucial determinant of its
exchange rate
Terms of Trade

38

Trade of goods and services between countries is the major reason

for the demand and supply of foreign currencies. A ratio
comparing export prices to import prices, the terms of trade is
related to current accounts and the balance of payments. If the
price of a country's exports rises by a greater rate than that of its
imports, its terms of trade have favorably improved. Increasing
terms of trade shows greater demand for the country's exports.
This, in turn, results in rising revenues from exports, which
provides increased demand for the country's currency (and an
increase in the currency's value). If the price of exports rises by a
smaller rate than that of its imports, the currency's value will
decrease in relation to its trading partners. This is a typical case for
underdeveloped countries which rely on imports for development
needs. The current account balance(deficit or surplus) thus reflects
the strength and weakness of the domestic currency. 6.
Fundamental Factors viz. Political Stability and Economic
Performance Fundamental factors include all such events that
affect the basic economic and fiscal policies of the concerned
government. These factors normally affect the long-term exchange
rates of any currency. On short-term basis on many occasions,
these factors are found to be rather inactive unless the market
attention has turned to fundamentals. However, in the long run
exchange rates of all the currencies are linked to fundamental
causes. The fundamental factors are basic economic policies
followed by the government in relation to inflation, balance of
payment position, unemployment ,capacity utilization, trends in
import and export, etc. Normally, other things remaining constant
the currencies of the countries that follow the sound economic
policies will always be stronger. Similar for the countries which
are having balance of payment surplus, the exchange rate will
always be favourable. Conversely, for countries facing balance of
payment deficit, the exchange rate will be adverse. Continuous and
ever growing deficit in balance of payment indicates over
valuation of the currency concerned and the dis-equilibrium
created can be remedied through devaluation. Foreign investors
inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such
39

positive attributes will draw investment funds away from other

countries perceived to have more political and economic risk.
Political turmoil, for example, can cause a loss of confidence in a
currency and a movement of capital to the currencies of more
stable countries.
Political and Psychological factors
Political and psychological factors are believed to have an
influence on exchange rates.Many currencies have a tradition of
behaving in a particular way for e.g. Swiss Franc asa refuge
currency. The US Dollar is also considered a safer haven currency
whenever there is a political crisis anywhere in the world.

Speculation
Speculation or the anticipation of the market participants many a
times is the prime reason for exchange rate movements. The total
foreign exchange turnover worldwide is many times the actual
goods and services related turnover indicating the grip of
speculators over the market. Those speculators anticipate the
events even before the actual data is out and position themselves
accordingly in order to take advantage when the actual data
confirms the anticipations. The initial positioning and final profit
taking make exchange rates volatile. These speculators many times
concentrate only on one factor affecting the exchange rate and as a
result the market psychology tends to concentrate only on that
factor neglecting all other factors that have equal bearing on the
exchange rate movement. Under these circumstances even when
all other factors may indicate negative impact on the exchange rate
of the currency if the one factor that the market is concentrating
comes out positive the currency strengthens.
Capital Movement
40

The phenomenon of capital movement affecting the exchange

rate has a very recent origin. Huge surplus of petroleum
exporting countries due to sudden spurt in the oil prices could
not be utilized by these countries for home consumption
entirely and needed to be invested elsewhere productively.
Movement of these petro dollars, started affecting the exchange
rates of various currencies. Capital tended to move from lower
yielding to higher yielding currencies and as a result the
exchange rates moved. 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 capital inflows 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.

Intervention
Exchange rates are also influenced in no small measure by
expectation of changes in regulation relating to exchange markets
and official intervention. Official intervention can smoothen an
otherwise disorderly market but it is also the experience that if the
authorities attempt half-heartedly to counter the market sentiments
through intervention in the market, ultimately more steep and
sudden exchange rate swings can occur.
In the second quarter of 1985 the movement of exchange rates of
major currencies reflected the change in the US policy in favour of
co-ordinated 19 exchange market intervention as a measure to
bring down the value of dollar.
Stock Exchange Operations
41

Stock exchange operations in foreign securities, debentures,

stocks and shares, influence the demand and supply of related
currencies, thus influencing their exchange rate
. Political Factors
Political scenario of the country ultimately decides the strength of
the country. Stable efficient government at the centre will
encourage positive development in the country, creating successf
ul investor confidence 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
.
Others
The turnover of the market is not entirely trade related and hence
the funds placed at the disposal of foreign exchange dealers by
various banks, the amount which the dealers can raise in various
ways, banks' attitude towards keeping open position during the
course of a day, at the end of the day, on the eve of weekends and
holidays ,window dressing operations as at the end of the half year
to year, end of the month considerations to cover operations .
The returns that the banks have to submit the central monetary
authorities etc. - all affect the exchange rate movement of the
currencies. Value of a currency is thus not a simple result of its
demand and supply, but a complex mix of multiple factors
influencing the demand and supply.

42

Its a tight rope walk for any country to maintain a strong, stable
currency, with policies taking care of conflicting demands like
inflation and export promotion, welcoming foreign investments
and avoiding an appreciation of the domestic currency, all at the
same time.

CONCLUSION:
Foreign exchange market is the market in which foreign currencies
are bought and sold. The buyers and sellers include individuals, firms,
foreign exchange brokers, commercial banks and the central bank.
Foreign Exchange, Forex or FX is one of the worlds largest financial
markets dealing in real-time exchange of currencies of different
countries. This currency exchange market has a greater volume of
buyers and sellers, than in any other financial market of the world.
Large companies need to convert huge amounts of currency; a
multinational company such as General Electric (GE) for instance,
converts tens of billions of dollars each year.

43

Being an over the counter market, the trading done at Forex can be
known as over the counter trading, wherein, a trader always buys
one currency and sells of the other one in real time.
The foreign exchange market never closes down during the work
week. It operates twenty-four hours a day, across national boundaries.
Because the time in Japan is different than in New York

BIBLIOGRAPHY:
https://en.wikipedia.org/wiki/Foreign_exchange_market
https://en.wikipedia.org/wiki/Foreign_exchange_market
www.investopedia.com/terms/forex/f/foreign-exchange-markets.
www.colorado.edu/Economics/courses/boileau/4999/sec3
www.yourarticlelibrary.com/foreign.../foreign-exchangemarket...functi.
www.preservearticles.com/.../what-are-the-functions-of-the-foreignexch...

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www.economicsdiscussion.net/foreign-exchange/...foreignexchange...fo.

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