THEORETICAL BACKGROUND

TECHNICAL ANALYSIS

Technical analysis is the examination of past price movements to forecast future price
movements. Technical analysts are sometimes referred to as chartists because they rely
almost exclusively on charts for their analysis.

BASIS OF TECHNICAL ANALYSIS

At the turn of the century, the Dow Theory laid the foundations for what was later to
become modern technical analysis. Dow Theory was not presented as one complete
amalgamation, but rather pieced together from the writings of Charles Dow over several
years. Of the many theorems put forth by Dow, three stand out:

• Price Discounts Everything

• Price Movements are not Totally Random
• What is More Important than Why

Price Discounts Everything:

This theorem is similar to the strong and semi-strong forms of market efficiency.
Technical analysts believe that the current price fully reflects all information. Because all
information is already reflected in the price, it represents the fair value and should form
the basis for analysis. After all, the market price reflects the sum knowledge of all
participants, including traders, investors, portfolio managers, buy-side analysts, sell-side
analysts, market strategist, technical analysts, fundamental analysts and many others. It
would be folly to disagree with the price set by such an impressive array of people with
impeccable credentials. Technical analysis utilizes the information captured by the price
to interpret what the market is saying with the purpose of forming a view on the future.

1
Prices Movements are not totally random:

Most technicians agree that prices trend. However, most technicians also acknowledge
that there are periods when prices do not trend. If prices were always random, it would be
extremely difficult to make money using technical analysis.

"One way of viewing it is that markets may witness extended periods of random
fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of the
chartist is to identify those periods (i.e. major trends)."

A technician believes that it is possible to identify a trend, invest or trade based on

the trend and make money as the trend unfolds. Because technical analysis can be applied
to many different timeframes, it is possible to spot both short-term and long-term trends.
The broad trend is up, but it is also interspersed with trading ranges. In between the
trading ranges are smaller up trends within the larger uptrend. The uptrend is renewed
when the stock breaks above the trading range. A downtrend begins when the stock
breaks below the low of the previous trading range.

2
What is more important than why?

"A technical analyst knows the price of everything, but the value of nothing".
Technicians, as technical analysts are called, are only concerned with two things:

1. What is the current price?

2. What is the history of the price movement?

The price is the end result of the battle between the forces of supply and demand for the
company's stock. The objective of analysis is to forecast the direction of the future price.
By focusing on price and only price, technical analysis represents a direct approach.
Fundamentalists are concerned with why the price is what it is. For technicians, the why
portion of the equation is too broad and many times the fundamental reasons given are
highly suspect. Technicians believe it is best to concentrate on what and never mind why.
Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After
all, the value of any asset is only what someone is willing to pay for it. Who needs to
know why?

GENERAL STEPS FOR TECHNICAL EVALUATION

Many technicians employ a top-down approach that begins with broad-based macro
analysis. The larger parts are then broken down to base the final step on a more
focused/micro perspective. Such an analysis might involve three steps:

1. Broad market analysis through the major indices such as the S&P 500, Dow
Industrials, NASDAQ and NSE & BSE.
2. Sector analysis to identify the strongest and weakest groups within the broader
market.
3. Individual stock analysis to identify the strongest and weakest stocks within select
groups.

3
The beauty of technical analysis lies in its versatility. Because the principles of technical
analysis are universally applicable, each of the analysis steps above can be performed
using the same theoretical background. You don't need an economics degree to analyze a
market index chart. You don't need to be a CPA to analyze a stock chart. Charts are
charts. It does not matter if the timeframe is 2 days or 2 years. It does not matter if it is a
stock, market index or commodity. The technical principles of support, resistance, trend,
trading range and other aspects can be applied to any chart. While this may sound easy,
technical analysis is by no means easy. Success requires serious study, dedication and an
open mind.

CHART ANALYSIS

Technical analysis can be as complex or as simple as you want it. The example below
represents a simplified version. Since we are interested in buying stocks, the focus will be
on spotting bullish situations.

4
Overall Trend: The first step is to identify the overall trend. This can be accomplished
with trend lines, moving averages or peak/trough analysis. As long as the price remains
above its uptrend line, selected moving averages or previous lows, the trend will be
considered bullish.

Support: Areas of congestion or previous lows below the current price mark support
levels. A break below support would be considered bearish.

Resistance: Areas of congestion and previous highs above the current price mark the
resistance levels. A break above resistance would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as MACD. If

MACD is above its 9-day EMA (exponential moving average) or positive, then
momentum will be considered bullish, or at least improving.

Buying/Selling Pressure: For stocks and indices with volume figures available, an
indicator that uses volume is used to measure buying or selling pressure. When Chaikin
Money Flow is above zero, buying pressure is dominant. Selling pressure is dominant
when it is below zero.

Relative Strength: The price relative is a line formed by dividing the security by a
benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The
plot of this line over a period of time will tell us if the stock is outperforming (rising) or
underperforming (falling) the major index.

The final step is to synthesize the above analysis to ascertain the following:

• Strength of the current trend.

• Maturity or stage of current trend.
• Reward to risk ratio of a new position.
• Potential entry levels for new long position.

5
TOP DOWN TECHNICAL ANALYSIS:

For each segment (market, sector and stock), an investor would analyze long-term
and short-term charts to find those that meet specific criteria. Analysis will first consider
the market in general, perhaps the S&P 500. If the broader market were considered to be
in bullish mode, analysis would proceed to a selection of sector charts. Those sectors that
show the most promise would be singled out for individual stock analysis. Once the
sector list is narrowed to 3-4 industry groups, individual stock selection can begin. With a
selection of 10-20 stock charts from each industry, a selection of 3-4 of the most
promising stocks in each group can be made. How many stocks or industry groups make
the final cut will depend on the strictness of the criteria set forth. Under this scenario, we
would be left with 9-12 stocks from which to choose. These stocks could even be broken
down further to find the 3-4 of the strongest of the strong.

STRENGTHS OF TECHNICAL ANALYSIS

Focus on Price: If the objective is to predict the future price, then it makes sense to focus
on price movements. Price movements usually precede fundamental developments. By
focusing on price action, technicians are automatically focusing on the future. The market
is thought of as a leading indicator and generally leads the economy by 6 to 9 months. To
keep pace with the market, it makes sense to look directly at the price movements. More
often than not, change is a subtle beast. Even though the market is prone to sudden knee-
jerk reactions, hints usually develop before significant moves. A technician will refer to
periods of accumulation as evidence of an impending advance and periods of distribution
as evidence of an impending decline.

Supply, Demand, and Price Action: Many technicians use the open, high, low and close
when analyzing the price action of a security. There is information to be gleaned from
each bit of information. Separately, these will not be able to tell much. However, taken
together, the open, high, low and close reflect forces of supply and demand.

6
The annotated example above shows a stock that opened with a gap up. Before the open,
the number of buy orders exceeded the number of sell orders and the price was raised to
attract more sellers. Demand was brisk from the start. The intraday high reflects the
strength of demand (buyers). The intraday low reflects the availability of supply (sellers).
The close represents the final price agreed upon by the buyers and the sellers. In this case,
the close is well below the high and much closer to the low. This tells us that even though
demand (buyers) was strong during the day, supply (sellers) ultimately prevailed and
forced the price back down. Even after this selling pressure, the close remained above the
open. By looking at price action over an extended period of time, we can see the battle
between supply and demand unfold. In its most basic form, higher prices reflect increased
demand and lower prices reflect increased supply.

Support/Resistance: Simple chart analysis can help identify support and resistance
levels. These are usually marked by periods of congestion (trading range) where the
prices move within a confined range for an extended period, telling us that the forces of
supply and demand are deadlocked. When prices move out of the trading range, it signals
that either supply or demand has started to get the upper hand. If prices move above the
upper band of the trading range, then demand is winning. If prices move below the lower
band, then supply is winning.

7
Pictorial Price History: Even if you are a tried and true fundamental analyst, a price
chart can offer plenty of valuable information. The price chart is an easy to read historical
account of a security's price movement over a period of time. Charts are much easier to
read than a table of numbers. On most stock charts, volume bars are displayed at the
bottom. With this historical picture, it is easy to identify the following:

• Reactions prior to and after important events.

• Past and present volatility.
• Historical volume or trading levels.
• Relative strength of a stock versus the overall market.

Assist with Entry Point: Technical analysis can help with timing a proper entry point.
Some analysts use fundamental analysis to decide what to buy and technical analysis to
decide when to buy. It is no secret that timing can play an important role in performance.
Technical analysis can help spot demand (support) and supply (resistance) levels as well
as breakouts. Simply waiting for a breakout above resistance or buying near support
levels can improve returns.

It is also important to know a stock's price history. If a stock you thought was great for
the last 2 years has traded flat for those two years, it would appear that Wall Street has a
different opinion. If a stock has already advanced significantly, it may be prudent to wait
for a pullback. Or, if the stock is trending lower, it might pay to wait for buying interest
and a trend reversal.

WEAKNESS OF TECHNICAL ANALYSIS

Analyst Bias: Just as with fundamental analysis, technical analysis is subjective and our
personal biases can be reflected in the analysis. It is important to be aware of these biases
when analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will
overshadow the analysis. On the other hand, if the analyst is a disgruntled eternal bear,
then the analysis will probably have a bearish tilt.

8
Open to Interpretation: Furthering the bias argument is the fact that technical analysis
is open to interpretation. Even though there are standards, many times two technicians
will look at the same chart and paint two different scenarios or see different patterns.
Both will be able to come up with logical support and resistance levels as well as key
breaks to justify their position. While this can be frustrating, it should be pointed out that
technical analysis is more like an art than a science, somewhat like economics. Is the cup
half-empty or half-full? It is in the eye of the beholder.

Too Late: Technical analysis has been criticized for being too late. By the time the trend
is identified, a substantial portion of the move has already taken place. After such a large
move, the reward to risk ratio is not great. Lateness is a particular criticism of Dow
theory.

Always another Level: Even after a new trend has been identified, there is always
another "important" level close at hand. Technicians have been accused of sitting on the
fence and never taking an unqualified stance. Even if they are bullish, there is always
some indicator or some level that will qualify their opinion.

Trader's Remorse: Not all technical signals and patterns work. When you begin to study
technical analysis, you will come across an array of patterns and indicators with rules to
match. For instance: A sell signal is given when the neckline of a head and shoulders
pattern is broken. Even though this is a rule, it is not steadfast and can be subject to other
factors such as volume and momentum. In that same vein, what works for one particular
stock may not work for another. A 50-day moving average may work great to identify
support and resistance for IBM, but a 70-day moving average may work better for Yahoo.
Even though many principles of technical analysis are universal, each security will have
its own idiosyncrasies.

9
CHARTS

A price chart is a sequence of prices plotted over a specific timeframe. In statistical

terms, charts are referred to as time series plots.

VARIOUS TYPES OF CHARTS

We will be explaining the construction of line, bar, candlestick and point & figure charts.
Although there are other methods available, these are four of the most popular methods
for displaying price data.

Line Chart:

The line chart is one of the simplest charts. It is formed by plotting one price point,
usually the close, of a security over a period of time. Connecting the dots, or price points,
over a period of time, creates the line.

Some investors and traders consider the closing level to be more important than
the open, high or low. By paying attention to only the close, intraday swings can be
ignored. Line charts are also used when open; high and low data points are not available.

10
Bar Chart:

Perhaps the most popular charting method is the bar chart. The high, low and close are
required to form the price plot for each period of a bar chart. The high and low are
represented by the top and bottom of the vertical bar and the close is the short horizontal
line crossing the vertical bar. On a daily chart, each bar represents the high, low and close
for a particular day. Weekly charts would have a bar for each week based on Friday's
close and the high and low for that week.

Bar charts can also be displayed using the open, high, low and close. The only difference
is the addition of the open price, which is displayed as a short horizontal line extending to
the left of the bar. Whether or not a bar chart includes the open depends on the data
available.

11
Bar charts can be effective for displaying a large amount of data. Using candlesticks, 200
data points can take up a lot of room and look cluttered. Line charts show less clutter, but
do not offer as much detail (no high-low range). The individual bars that make up the bar
chart are relatively skinny, which allows users the ability to fit more bars before the chart
gets cluttered. If you are not interested in the opening price, bar charts are an ideal
method for analyzing the close relative to the high and low. In addition, bar charts that
include the open will tend to get cluttered quicker. If you are interested in the opening
price, candlestick charts probably offer a better alternative.

Candlestick Chart:

Originating in Japan over 300 years ago, candlestick charts have become quite popular in
recent years. For a candlestick chart, the open, high, low and close are all required. A
daily candlestick is based on the open price, the intraday high and low, and the close. A
weekly candlestick is based on Monday's open, the weekly high-low range and Friday's
close.

12
Many traders and investors believe that candlestick charts are easy to read, especially the
relationship between the open and the close. White (clear) candlesticks form when the
close is higher than the open and black (solid) candlesticks form when the close is lower
than the open. The white and black portion formed from the open and close is called the
body (white body or black body). The lines above and below are called shadows and
represent the high and low.

Point & Figure Chart:

The charting methods shown above all plot one data point for each period of time. No
matter how much price movement, each day or week represented is one point, bar or
candlestick along the time scale. Even if the price is unchanged from day to day or week
to week, a dot, bar or candlestick is plotted to mark the price action. Contrary to this
methodology, Point & Figure Charts are based solely on price movement and do not take
time into consideration. There is an x-axis but it does not extend evenly.

13
Patterns in Technical Analysis.

First of all, there are many patterns that can be used in technical analysis, and many ways
to present them. For example, the Candlesticks charting technique uses patterns, Point-
and-Figure technique uses patterns and so on.

Triangle

The "classical" triangle has at least 5 waves, and the breakthrough happens at about 2/3
of the horizontal size of a triangle. It is not enough for the price to touch the side of a
triangle, the price bar must close outside the triangle, and otherwise we might have a
false signal.

Symmetrical triangles.

14
This pattern can be considered as a sign that the market is "uncertain" in which direction
to move. Both buyers and sellers are pushing the price towards some middle value. As it
happens the volume usually is decreasing as everybody is waiting for the price to break
out of the triangle. The moment it happens, the volume is usually increasing - due to
psychological reasons.

It seems that the triangle usually does not change the trend - if the price was going up,
then it is most probable that it will break up from the triangle and vice versa.

Ascending triangles

This pattern is a variation of the Symmetrical triangle. Think of it in terms of "increasing

pressure up and constant pressure down". As the pattern is forming, the volume is
diminishing, and when the breakthrough occurs, the pattern is usually expanding. It is a
useful (but not mandatory) confirmation.

Descending triangles.

15
This pattern is a variation of the Symmetrical triangle. Think of it in terms of "increasing
pressure down and constant pressure up”. The length of the pattern should be somewhere
between few weeks and few months. As the pattern is forming, the volume is
diminishing, and when the breakthrough occurs, the pattern is usually expanding. It is a
useful (but not mandatory) confirmation. The price projection equals the maximum
height of the triangle, measured from the resistance breakout point.

Double top

This is a reversal pattern that forms after an up. The important confirmation signal occurs
when the support line is broken after the second peak. The decline after the first peak is
somewhere between 10 and 20 %. The duration of the pattern is somewhere between few
weeks and few months. The size of peaks is nearly equal. The decline from the second
peak may contain gaps and the volume should expand trend. It consists of two peaks. The
price target equals the size of the peak

16
Head and shoulders.

When the stock is going up, we can use the concept of a SUPPORT line, the line below
the price, that price is constantly testing but cannot cross. Then when the trend is
changing, the support line is broken and for a short period of time the chart can be
considered horizontal - the temporary support line is called a neckline. Then the price is
trying to reach the previous support line (and to restore the trend) but failing (right
shoulder). This is the first "sell" signal. The second one is happening when the right side
of the right shoulder penetrates the neckline - this sell signal is much stronger. Again as
always, a lot of this strength the pattern gets from the fact that people know about it,
believe in it and when it happens - they begin selling, therefore pushing the price down.
The price target equals the distance between the neckline and top of the head

17
Wedges.

Unlike with the triangles, both upper and lower edges are either going up (bearish
formation) or down (bullish formation). The volume is not that important for the rising
wedge, but it is critical for the falling wedge. The volume should expand to confirm the
break of a resistance.

18
Flags.

Flags are (sort of) variations of a triangles. They can be explained using the same logic
and they predict the same thing. The pattern is considered part of the trend, which means
that on the uptrend it is a sign that price will continue to increase and on the downtrend it
is a sign that the price will fall. They are usually preceded by a sharp advance or decline
with heavy volume.

Rectangles.

19
Same as flags. A temporary slowdown in the trend that usually wouldn't change it. They
are usually preceded by a sharp advance or decline with heavy volume.

Bump and Run Reversal

While drawing a bump, the lead-in (price advice) part of a pattern should be long enough,
at least as long as one month. We should be able to draw a support line. The trend line
should not be very steep, otherwise the bump will be hard to identify. Partially, the
steepness of a trend line can be adjusted by choosing of the X-scale, of course. When the
bump forms, the angle between old and new support line should be about 50% of the
angle between the olds support line and X axis.

Cup with Handle Pattern

20
The Cup with Handle Pattern is a bullish continuation pattern. The "cup" part is a pattern,
that forms after advance (as it is a continuation pattern, we need a trend to continue), and
looks as a "round bottom" formation, which can be rephrased as "a local minimum, but
shaped as U, rather than as V". The "handle" part is a trading range (sideways price
movement) that forms after the "cup", and when the resistance of this range is broken, we
are getting a signal that the stock is continuing its move. The handle is one of
consolidation patterns, like the flag, or descending rectangle. It can go down, up to 1/3 of
the cup's advance, but the LESS it goes down, the more bullish the pattern is. The
handle's duration can be 1-4 weeks (ideally).As with most breakouts, we should expect
increase of volume after the "handle is broken”. Finally, the expected advance is equal
the depth of a cup (the distance from the bottom to the right peak).

Rounding Bottom Pattern

The Rounding Bottom is a bullish reversal pattern. It is one of the long-term patterns,
that usually takes many weeks to form - you will not find it on the intraday charts. As it is
a reversal pattern, there should be a downtrend to reverse. The bottom of a pattern is
shaped like U rather than V, and takes few weeks. The right part of the rounding bottom
pattern should take about the same time as the left part. The bullish signal is generated
when the price advances above the left high of a pattern. The volume should decline as
the price is declining and rise as price is rising. There may also be an increase in volume
at the price breakout.

21
STATEMENT OF THE PROBLEM

The system of foreign exchange is the result of the business transactions that is
carried on between the countries. Therefore the risk here is more than that compared to
domestic business.

Developments in technology have made things so easy that the individuals can
buy or sell anything sitting in front of their systems. Therefore with increasing trading
facilities, overseas trade is also increasing tremendously. So, there could be changes that
occur in the market every now and then.

This project deals with the problem as to how the government should regulate its
policies so as to check out the fluctuations in the market and bring back it to a stabilized
form and control the activities of the foreign exchange transactions. This in turns helps in
forecasting the future trend, depending upon how the market trend has carried over from
the past few days or months.

Technical analysis is one such tool where the forecasting is done using the past
data so; it has been the main subject of study in this project.

OBJECTIVES OF THE STUDY

• To find out the movement of the trend line in the market by taking into
consideration the exchanges rates of the country.
• To study the various tools available in the technical analysis.
• To be clear with the government policies, regulation and its role and intervention
in forex markets.
• To know how the technical tools have been useful in forex market for forecasting
the foreign exchange rates.

22
SCOPE OF THE STUDY
The scope of the study is limited only to the foreign exchange market of India
alone which is compared and analyzed only with the rates of US dollars, for the period of
the last five years. No other countries rates are taken into consideration for the study.

RESEARCH METHODOLOGY
Type of research:
Research design is the conceptual structure within which research is conducted. It
constitutes the blue print for the collection, measurement, and analysis of data. The type
of research adopted for the study is descriptive research, as the research does not require
any manipulation of variables and does not establish causal relationship between events;
it just simply describes the variables.
Sources of data:
The data was collected through secondary sources. As this project was a descriptive study
conducted, there was no questionnaire used to collect primary data or any other additional
data.
The secondary data sources are internet, books, annual reports, magazines and other
published data.
PLAN OF ANALYSIS:
The collected information was tabulated and analyzed in detail. Graphs and diagrams
have also been used to explain the findings clearly. Hypothesis testing has been done to
provide adequate support for the findings of the study. Some of the statistical techniques
used were as follows:
• Financial calculations
• Linear programming techniques
• T-test for equality of means
• Correlation and regression analysis.
• ANOVA.

23
Theoretical background is one of the important parts of the dissertation. The very basic
purpose of this is to gain an insight and provide an overview of the study carried on. It
helps the researcher to gain strong theoretical basis of the problem study.

LIMITATIONS OF THE STUDY:

• The data is collected only for the period of five years, and the calculation are
done only for that period.
• Exchange Rates taken are only US dollars, no other currencies are considered
in the study.
• The testing is carried on only for the last six months, and the graphs are drawn
upon that.
• The forecasting done depending on the trend may not always be accurate it
may fluctuate due to changes in economy.
• There may be changes occurring due to government policies.

24
 Glossary

Appreciation - A currency is said to 'appreciate' when it strengthens in price in response

to market demand.
Balance of Trade - The value of a country's exports minus its imports.
Bar Chart - A type of chart which consists of four significant points: the high and the
low prices, which form the vertical bar, the opening price, which is marked with a little
horizontal line to the left of the bar, and the closing price, which is marked with a little
horizontal line of the right of the bar.
Base Currency - The first currency in a Currency Pair. It shows how much the base
currency is worth as measured against the second currency. For example, if the
USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the
US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are
expressed as a unit of $1 USD per the other currency quoted in the pair. The primary
exceptions to this rule are the British Pound, the Euro and the Australian Dollar.
Bear Market - A market distinguished by declining prices
Bull Market - A market distinguished by rising prices.
Candlestick Chart - A chart that indicates the trading range for the day as well as the
opening and closing price. If the open price is higher than the close price, the rectangle
between the open and close price is shaded. If the close price is higher than the open
price, that area of the chart is not shaded
Central Bank - A government or quasi-governmental organization that manages a
country's monetary policy. For example, the US central bank is the Federal Reserve, and
the German central bank is the Bundesbank
Cross Currency Pairs or Cross Rate - A foreign exchange transaction in which one
foreign currency is traded against a second foreign currency. For example; EUR/GBP
Currency symbols
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro

25
JPY - Japanese Yen
GBP - British Pound
CHF - Swiss Franc
Currency - Any form of money issued by a government or central bank and used as legal
tender and a basis for trade.
Currency Pair - The two currencies that make up a foreign exchange rate. For Example,
EUR/USD
Currency Risk - the probability of an adverse change in exchange rates.
EURO - the currency of the European Monetary Union (EMU). A replacement for the
European Currency Unit (ECU).
Interbank Rates - The Foreign Exchange rates at which large international banks quote
other large international banks.
Margin - The required equity that an investor must deposit to collateralize a position.
Over the Counter (OTC) - Used to describe any transaction that is not conducted over
an exchange.
Resistance - A term used in technical analysis indicating a specific price level at which
analysis concludes people will sell.
Support Levels - A technique used in technical analysis that indicates a specific price
ceiling and floor at which a given exchange rate will automatically correct itself.
Technical Analysis - An effort to forecast prices by analyzing market data, i.e. historical
price trends and averages, volumes, open interest, etc.

26
CHAPTER SCHEME

Chapter: 1 THEORETICAL BACKGROUND OF THE STUDY

This chapter mainly deals with secondary data collected to support the study and
the reasons to problem of study.

Chapter: 2 RESEARCH DESIGN

A research design serves as a bridge between what has been done in the conduct
of study to realize the specified objectives. It is an outline of the projects working.

Chapter: 3 PROFILES
This chapter includes the profile of the industry as well as the company in which
the study is conducted. It also tries to deal with trends and prospects in the industry as
well as the company.

Chapter: 4 ANALYSIS AND INTERPRETATION

In this chapter using the analyzed data we have tried to forecast the trend
movement and how the exchange rates changes to the changes in the economy.
Hypothesis testing has been done using the T-test, regression analysis, and also ANOVA.

Chapter: 5 Summary of Findings, conclusions and Suggestions

In this chapter we will actually include all that we have analyzed and what has
been found. Finally conclude checking whether the objective of the study has been
achieved or not.

27
 INDUSTRY PROFILE

History of Foreign Exchange

The foreign exchange market (FX or forex) as we know it today originated in 1973.
However, money has been around in one form or another since the time of Pharaohs. The
Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern
moneychangers were the first currency traders who exchanged coins from one culture to
another. During the middle ages, the need for another form of currency besides coins
emerged as the method of choice. These paper bills represented transferable third-party
payments of funds, making foreign currency exchange trading much easier for merchants
and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets
were relatively stable and without much speculative activity. After WWI, the forex
markets became very volatile and speculative activity increased tenfold. Speculation in
the forex market was not looked on as favorable by most institutions and the public in
general. The Great Depression and the removal of the gold standard in 1931 created a
serious lull in forex market activity. From 1931 until 1973, the forex market went through
a series of changes. These changes greatly affected the global economies at the time and
speculation in the forex markets during these times was little, if any.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another.
Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US
Dollar/Japanese Yen (USD/J. The FX market is considered an Over The Counter (OTC)
or 'interbank' market, due to the fact that transactions are conducted between two
counterparts over the telephone or via an electronic network.
Opportunities from Around the World

Over the last three decades the foreign exchange market has become the world's largest
financial market, with over $1.5 trillion USD traded daily. Forex is part of the bank-to-
bank currency market known as the 24-hour Interbank market. The Interbank market

28
literally follows the sun around the world, moving from major banking centers of the
United States to Australia, New Zealand to the Far East, to Europe then back to the
United States. Until recently, the forex market wasn't for the average trader or individual
speculator. With the large minimum transaction sizes and often-stringent financial
requirements, banks, hedge funds, major currency dealers and the occasional high net-
worth individual speculator were the principal participants. These large traders were able
to take advantage of the many benefits offered by the forex market vs. other markets,
including fantastic liquidity and the strong trending nature of the world's primary
currency exchange rates.

Differences between other markets& forex markets.

OTHER MARKETS FOREX MARKETS

Limited floor trading hours dictated
by the time zone of the trading
location, significantly restricting the
number of hours a market is open
and when it can be accessed.
The Forex market is open 24 hours a day, 5.5
days a week. Because of the decentralized
clearing of trades and overlap of major markets in
Asia, London and the United States, the market
remains open and liquid throughout the day and
overnight.

Threat of liquidity drying up after
market hours or because many
market participants decide to stay on
the sidelines or move to more
popular markets.
Most liquid market in the world eclipsing all
others in comparison. Most transactions must
continue, since currency exchange is a required
mechanism needed to facilitate world commerce.

Traders are gouged with fees, such as Commission-Free

commissions, clearing fees, exchange
fees and government fees.

Large capital requirements, high One consistent margin rate 24 hours a day allows
margin rates, restrictions on shorting, Forex traders to leverage their capital more
very little autonomy. efficiently with as high as 100-to-1 leverage.

Short selling and stop order None.

restrictions.

Pattern day traders subject to No restrictions. Very low account balances.

restrictions requiring account
balances in excess of $50,000.
29
Forex Trading
For the investor, the goal of Forex trading is to achieve a profit following foreign
currency movements. Forex trading or currency trading is always done in currency pairs.
For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This
number is also referred to as a "Forex rate" or in short - "rate". If the investor bought
1000 Euro, s/he would have paid 1085.70 U.S. Dollars. A year later, the Forex rate was
1.2083, which means that the value of the Euro (the numerator of the EUR/USD ratio)
increased in relation to the U.S. dollar. The investor can now sell the 1000 Euro in order
to receive 1208.30 dollars. Accordingly, the investor is left with $122.60 more than what
he had started with the previous year. However, to know if the investor made a good
investment, s/he needs to compare this investment option to alternative investments. At
the very minimum, the return on investment (ROI) should be compared to the return of a
"risk-free" investment. An example of risk-free investment is long dated U.S.
Government bonds since there is practically no chance for a default, i.e. the U.S.
Government going bankrupt or being unable or unwilling to pay its debt obligation.
While trading on Forex, trade only at a time when you expect the currency you are
buying to increase in value relative to the one you are selling. If the currency you are
buying does increase in value, you must sell the other currency back in order to lock in a
profit. An open trade (or open position), therefore, is a trade in which a trader has bought
or sold a particular currency pair and has not yet sold or bought back the equivalent
amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative.
In other words, in the end, the person or institution that bought or sold the currency has
no plan to take delivery of the currency; rather, they were solely conjecturing the
movement of that particular currency.
Exchange Rate
As currencies are traded in pairs and exchanged one for the other when traded, the rate at
which they are exchanged is called the exchange rate. Majority of the currencies are
traded against the US Dollar (USD). The four next most traded currencies are the Euro
(EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF). These four

30
currencies make up the majority of the market and are called major currencies or the
majors. Some sources also include the Australian Dollar (AUD) within the group of
major currencies.
The first currency in the exchange pair is referred to as the base currency and the second
currency as the counter or quote currency. The terms currency is thus the numerator and
the base currency is the denominator. The exchange rate tells a buyer how much needs to
be paid in the counter or quote currency to obtain one unit of the base currency. The
exchange rate also tells a seller how much is received in the counter or quote currency
when selling one unit of the base currency. For example, an exchange rate EURO/USD of
1.2083 specifies to the buyer of Euro that 1.2083 USD needs to be paid in order to obtain
1 Euro.
At a given point, time and place, if an investor buys any currency and immediately sells it
(assuming no currency change has occurred), the investor will lose money. The
underlying reason is that the bid price, representing how much will be received in the
counter or quote currency when selling one unit of the base currency is always lower than
the ask price, which represents how much has to be paid in the counter or quote currency
when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency
rates at your bank can be 1.2015/1.3015, representing a spread of 1015 pips, which is
very high in comparison to a bid/ask currency rates that online Forex investors are used
to such as 1.2015/1.2020, with a spread of 5 pips. In general, lower spreads are better for
Forex investors since even they require a smaller movement in exchange rates in order to
be making money by exchanging currencies.
Margin
Banks and/or online trading providers need collateral to ensure that the investor can pay
in case of a loss. The collateral is referred to as Margin and is also known as minimum
security on the Forex. In practice, it is a deposit to the trader's account that will cover
against any currency-trading losses in the future.
Margin enables private investors to trade in markets with high minimum units of trading
by allowing traders to hold a position much larger than account value and Margin trading
enhances the rate of profit, but Margin trading has the tendency to inflate rates of loss, on
top of systemic risk.

31
Leveraged Finance
Leveraged finance with credit, such as that purchased on a margin, is very common in
Forex. The loan/leveraged in the margined account is collateralized by your initial
deposit. This may result in being able to control $100,000 for as little as $1,000.
Five Ways private investors can trade directly or indirectly in FOREX:
• The spot market
• Forwards and futures
• Options
• Contracts for difference
• Spread betting
A spot transaction
A spot transaction is a straightforward exchange of one currency for another. The spot
rate is the current market price, the benchmark price. Spot transactions do not require
immediate settlement, or payment "on the spot." The settlement date, or "value date," is
the second business day after the "deal date" (or "trade date") on which the transaction is
agreed to by the two traders. The two-day period provides time to confirm the agreement
and arrange the clearing and necessary debiting and crediting of bank accounts in various
international locations.
Risks
Although Forex trading can lead to very profitable results, there are risks involved:
exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80%
of all currency transactions last a period of seven days or less, while more than 40% last
fewer than two days. Given the extremely short lifespan of the typical trade, technical
indicators heavily influence entry, exit and order placement decisions.

32
IMPORTANCE OF FOREX:
The importance of international trade in the economy of a country is too well
known to need emphasis. A number of advantages flow from international trade. Many
developed nations of the world owe their present status to international trade; many
developing countries place their hopes of development on it. A large number of these
items are either imported or some components of them are imported. Even if an item is
indigenously produced, it may be found that it is made on an imported machine.

Foreign trade and foreign exchange

International trade refers to trade between the residents of two different countries. Each
country functions as a sovereign state with its own set of regulations and currency. The
difference in the nationality of the exporter and the importer presents certain peculiar
problems in the conduct of international trade and settlement of the transactions arising
there from. Important among such problems are:
1. Different countries have different monetary units;
2. Restrictions imposed by countries on import and export of goods;
3. Restrictions imposed by nations on payments from and into their countries; and
4. Differences in legal practices in different countries.
The existence of national monetary units poses a problem in the settlement of
international transactions. The exporter would like to get the payment in the currency of
his own country. For instance, American exporters of machinery to India would like to
get the payment in US dollars. Payment in Indian rupees will not serve their purpose
because Indian rupee cannot be used as currency in the USA. On the other hand, the
importers in India have their savings and borrowings in Indian in rupees. Thus the
exporter requires payment in the currency of the exporter’s country whereas the importer
can pay only in the currency of the importer’s country. A need, therefore, arises for
conversion of the currency of the importer’s country into that of the exporter’s country.
Foreign exchange is the mechanism by which the currency of one country gets converted
into the currency of another country.
The conversion of currencies is done by banks who deal in foreign exchange. These
banks maintain stocks of foreign currencies in the form of balance with banks abroad. For

33
instance, Indian bank may maintain an account with bank of America. New York, in
which dollar balances are held,. In the earlier example, if Indian imports pay the
equivalent rupees to Indian bank, it would arrange to pay American export at New York
in dollars from the dollar balances held by it with bank of America.
Exchange rate
The rate at which one currency is converted into another currency is the rate of exchange
between the currencies concerned. In our illustration, if Indian bank exchanged USD for
Indian rupees at Rs. 44 a dollar, the exchange rate between rupee and dollar can be
expressed as USD 1 = Rs. 44
The rates in the foreign exchange market are determined by the interaction of the forces
of demand and supply are affected by a number of factors, both fundamental and
transitory, the rates keep on changing frequently, and violently too.
Forex as stock
In another sense, the term foreign exchange is used to refer to the very balance held
broad. Used in this sense, the foreign exchange refers to the stock of foreign currencies
and other foreign assets. The foreign exchange management act, 1999, defines:
Forex means foreign currency and includes-
1. Deposits, credits and balance payable in any foreign currency,
2. Drafts, travelers cheques, letters of credit or bills of exchange expressed or drawn
in Indian currency but payable in any foreign currency;
3. Drafts, traveler’s cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency.”
Balance of payments
BOP is a record of all economic transactions between residents of a country with
outsiders during a specified time period, normally a year. It constitutes the results of
demand for and supply of foreign exchange for various purposes. Since the rate of
exchange between currencies is determined by the forces of demand and supply, BOP is
the fundamental factor in determining the exchange rates. A change in the BOP of a
country will affect the exchange rate of its currency.

34
Economic transactions: - Arises from
1. Movement of goods in the form of exports and imports;
2. Rendering of services abroad and using foreign services;
3. Gifts/grants from one country to another;
4. Investments made abroad or received from abroad;
5. Income on investments received from abroad or remitted abroad or remitted
abroad;
6. Increase or decrease in the international reserves of the country.
Residents with non-residents
Residents include individuals, institutions, corporate bodies, and government departments
etc., domiciled in the country. Units or branches of multinational companies domiciled in
the country are also residents and their transactions with their parent or branches abroad
also are reflected in the BOP. If the economic transaction is between residents only, it is
not included in the BOP.
BOP accounting
In the compilation of the BOP the double entry principle of accounting is used
1. Credit is indicated by the arithmetic sign (+) and represents outflow of real assets
(exports) from the country or incurring liability abroad or decrease in the foreign
assets.
2. Debit is indicated by the arithmetic sign (-) and represents inflow of real assets
(imports) into the country or decrease in foreign liability abroad or increase in
foreign assets.
The plus sign and minus sign indicate respectively the earning and spending of foreign
exchange by the country.
Components of BOP
1. Current account
2. Capital account and
3. Official reserves account.

35
Current account
The current account of the BOP refers to transaction in goods and services, income and
current transfers. In other words, it covers all transactions between residents and non-
residents, other than financial items. It includes
1. Merchandise: - represents exports and imports of commodities from/into India.
2. Invisibles: - includes services, transfers and investment incomes.

Capital account
The capital account represents transfer of money and other capital items and changes in
the country's foreign assets and liabilities resulting from the transactions recorded in the
current account.
1. Foreign investment in India is the amount invested by non-residents in the equity
of entitles in India.
• Direct investment
• Portfolio investment
2. Loans
3. Commercial borrowings
4. Banking capital
5. Short term credit
Overall Balance
Balance on capital account is the net of inflows and outflows on capital transactions. It is
also appropriate to call this balance on private capital account as this excludes movement
in official reserves. Overall balance is the total of balance on current account and balance
on capital account. It is also called official settlements balance since it must be financed
by official reserves or by other non-reserve transactions that are substitute for reserve
transactions
Errors and Omissions
The sources of debit and credit may vary, the time of recording for each leg of the
transaction may also vary. These differences would be shown separately as errors and
omissions.

36
International Exchange Systems
We saw that the exchange rate between currencies in a foreign exchange market is
affected by a number of factors. The extent to which these fluctuations are allowed is
vastly dependent on the monetary systems adopted.
When countries were under gold standard the value of currency of a country was fixed as
the value of gold of definite weight and fineness. The exchange rate between the
currencies was determined on the relative value of gold content of currencies concerned.
For example, if the gold content of Indian rupee was 5 grains of standard purity, and that
of US dollar 60 grains of standard purity, the rate of exchange between Indian rupee and
US dollar could be determined as under:
1 Rupee = 5/60 = USD 0.0833 or, 1 USD = 60/5 = Rs. 12.
Exchange rates were stable under gold standard because any deviation in the exchange
rate would be set right automatically by the movement of gold between the countries that
such deviation caused. When the paper currency system replaced the gold standard, the
exchange rate was determined by relative purchasing power of the currencies. The
stability in exchange rates gave way to fluctuations with dynamic situation prevailing all
round.
2.1 FIXED AND FLOATING EXCHANGE RATES
Fixed Exchange Rates: - refer to the system under the gold standard where the rate of
exchange tends to stabilize around the mint par value. In present-day situation where gold
standard no longer exists, fixed rates of exchange refer to maintenance of external value
of the currency at a predetermined level. Whenever the exchange rate differs from this
level it is corrected through official intervention. For example, when IMF was instituted,
every member-country was required to declare the value of the currency in terms of gold
and US dollars (known as the par value). The actual market rates were allowed to
fluctuate only within a narrow band of margin from this level.
Floating/Flexible Exchange Rates
Free or floating rates refer to the system where the exchange rates are determined by the
conditions of demand for and supply of foreign exchange in the market. The rates are free
to fluctuate according to the changes in demand and supply forces with no restrictions on

37
buying and selling of foreign currencies in the exchange market. The central bank does
not intervene in the market and any disparity in the balance of payments is adjusted
through the changes in exchange rate that take place automatically in the market.
Flexible rates of exchange refer to the system where the exchange rate is fixed, but is
subject to frequent adjustments depending upon the market conditions. Thus, it is not a
free or floating rate with cent percent flexibility, but is any system providing for
adjustments as and when required.
Advantages of Fixed Exchange Rates
1. Promotion of International Trade - Stable exchange rates providing certainty and
confidence.
2. Promotion of International Investment
3. Facility of Long-range Planning
4. Development of Currency Areas - Proper functioning of regional arrangements
like sterling area or dollar area would be facilitated with the stable exchange rates
5. Prevention of Speculation
6. Helps Small Open Economies
Advantages of Floating Exchange Rates
1. Adjustment of BOP
2. Better liquidity
3. Gains from foreign trade
4. Cost-price relationship
5. Independence of policy.

38
FACTORS DETERMINING SPOT EXCHANGE RATES
The rate of exchange in the market is the outcome of the combined effect of a multiple of
factors constantly at play.
(1) Balance of Payments: Balance of payments represents the demand for and supply of
foreign exchange, which ultimately determine the value of the currency. Exports, both
visible and invisible represent the supply side for foreign exchange. Imports, visible and
invisible create demand for foreign exchange. When the balance of payments of a country
is continuously at deficit, it implies that the demand for the currency of the country is
lesser than its supply. Therefore its value in the market declines and vise versa.
(2) Inflation: Inflation in the country would increase the domestic prices of the
commodities. With increase in prices exports may dwindle because the price may not be
competitive. With the decrease in exports the demand for the currency would also
decline; this in turn would result in the decline of external value of the currency. It may
be noted that it is the relative rate of inflation in the two countries that cause changes in
exchange rates.
(3) Interest Rates: The interest rate has a great influence on the short-term movement of
capital. When the interest rate at a centre rises, it attracts short- term funds from other
centers. This would increase the demand for the currency at the centre and hence its
value.
(4) Money Supply: An increase in money supply in the country will affect the exchange
rate through causing inflation in the country. It can also affect the exchange rate directly.
An increase in money supply in the country relative to its demand will lead to large-scale
spending on foreign goods and purchase of foreign investments. Thus the supply of the
currency in the foreign exchange markets is increased and its value declines. The
downward pressure on the external value of the currency then increases the cost of
imports and so adds to inflation.
(5) National Income: An increase in national income reflects increase in the Income of
the residents of the country. This increase in the income increases the demand for goods
in the country. If there is underutilized production capacity in the country, this will lead
to increase in production. There is a chance for growth in exports too. But more often it

39
takes time for the production to adjust to the increased income. Where the production
does not increase in sympathy with income rise, it leads to increased imports and
increased supply of the currency of the country in the foreign exchange market. The
result is similar to that of inflation and decline in the value of the currency.
(6) Resource Discoveries: When the country is able to discover key resources, its
currency gains value. A good example can be The discovery of North Sea oil by Britain
helped pound-sterling to rise to over USD 2.40 from USD 1.60 in a couple of years.
(7) Capital Movements: There are many factors that influence movement of capital
from one country to another. Short-term movement of capital may be influenced by the
offer of higher interest in a country. If interest rate in a country rises due to increase in
bank rate or otherwise, there will be a flow of short-term funds into the country and the
exchange rate of the currency will rise. Reverse will happen in case of fall in interest
rates.
(8) Political Factors: Political stability induces confidence in the investors and
encourages capital inflow into the country. This has the effect of strengthening the
currency of the country. On the other hand, where the political situation in the country is
unstable, it makes the investors withdraw their investments. The outflow of capital from
the country would weaken the currency.
(9) Psychological Factors and Speculation: In the short run, the exchange rate is
affected mostly by the views of the participants in the market about the likely changes in
the exchange rates. These expectations are based on many of the factors listed above.
Whenever there is a discrepancy between the previously held expectation of a given
factor and actual outcome of it, exchange rates will usually be affected.

40
 ANALYSIS:

This study was concerned with forecasting carried out in a foreign exchange
market using the technical tools available. Data was collected for the past five years and
the fluctuations in the market were noted down.
Initially, analysis was done by taking differences, and the following results were
as follows:

Table 1

N Mean Std.
Deviation

FIRSTDIF 1113 2.424E-04 .1058

SECDDIFF 1112 -7.9946E-05 .1522

THIRDDIF 1111 -9.1719E-05 .2624

This table displays the number of cases, mean value, standard deviation of the first,
second and third differences. To test whether the differences were small, the one-sample
t-test was applied, as follows:

Table 2

test value= 0
t df Sig. (2-tailed)
FIRSTDIF .076 1112 .939
SECDDIFF -.018 1111 .986
THIRDDIF -.012 1110 .991

Interpretation: A low significance value (below 0.05) indicates that there is a significant
difference between the test value and the observed mean. Here in this table we can see
that as the significance value is more than 0.05, therefore the first, second and third
differences are not significant (i.e. can be taken to be 0).

41
 Next, the correlations between the exchange rate and the lags were computed, as
follows:
Table 3

EXCHRATE FIRSTLAG SECDLAG THIRDLAG

EXCHRAT Pearson 1.000 .998 .996 .994
E Correlation
Sig. (1- . .000 .000 .000
tailed)
N 1114 1113 1112 1111
FIRSTLAG Pearson .998 1.000 .998 .996
Correlation
Sig. (1- .000 . .000 .000
tailed)
N 1113 1113 1112 1111
SECDLAG Pearson .996 .998 1.000 .998
Correlation
Sig. (1- .000 .000 . .000
tailed)

Interpretation: There is significant strong correlation (very close to +1) of the exchange
rate with the first, second, and third lags.

This suggests that it may be possible to linearly regress exchange rate on the lags.
This was performed, and the correlations were as follows:
Table 4
Unstandardized Standardized Coefficients t Sig.
Coefficients
B Std. Beta
Error
(Constant) .112 .094 1.187 .236

FIRSTLAG .950 .022 .950 43.990 .000

THIRDLAG 4.769E-02 .022 .048 2.210 .027

Dependent Variable: EXCHRATE

42
The unstandardized coefficients are the coefficients of the estimated regression model.
Often the independent variables are measures in different units. The standardized
coefficients or betas are an attempt to make the regression coefficients more comparable.
Interpretation: The exchange rate is significantly in terms of the first lag and the third
lag. Moreover, comparing their beta values, it can be said that the first lag is twenty times
more important than the third lag in explaining the exchange rate.

Table 5
R R Square Adjusted Std. Error Durbin-
R Square of the Watson
Estimate

.998 .996 .996 .1058 1.969

Model
Summary
Predictors: (Constant), FIRSTLAG, THIRDLAG
Dependent Variable: EXCHRATE

Interpretation: The regression of the exchange rate with the lags explains 99.6% of the
variation in the exchange rate.

Table 6
ANOVA

Sum of df Mean Square F Sig.

Squares

Regression 2746.546 2 1373.273 122598.567 .000

Residual 12.378 1105 1.120E-02

Total 2758.923 1107

Predictors: (Constant), FIRSTLAG, THIRDLAG

Dependent Variable: EXCHRATE

Interpretation: The regression is significant.

43
 Graph 1
Histogram
Dependent Variable: EXCHRATE
1000

800

600

400
Frequency

200 Std. Dev = 1.00

Mean = -.0
0 N = 1111.00
-2

-2

-1

-1

-1

-1

-1

-8

-6

-4

-2

0.

2.

4.

6.
0

0
2.

0.

8.

6.

2.

0.
4.

.0

.0

.0

.0
0

0
0

Regression Standardized Residual

Interpretation: The residuals were symmetrically distributed, but not quite normally.

44
 The support and resistance lines for the exchange rate series was fit using a linear
programming technique, and only six months data was taken for testing of hypothesis.

This works as
follows: Min E
subject to
constraints

 yi ≤ a + b xi + 12 E

 y i ≥ a + b xi − 12 E

 i = 1,2, .n.
 E ≥ 0

As we see in this first graph for the period 1/10/2004 to 23/11/2004 the changes in the
market occurs less frequently during certain intervals of time which shows that the
market is quiet stable for some period.

45
01/10/2004 45.3500 b=0
04/10/2004 45.3100 E=0.14
05/10/2004 45.3000
06/10/2004 45.3100
07/10/2004 45.2700
08/10/2004 45.2800
11/10/2004 45.2700
12/10/2004 45.2500
14/10/2004 45.2600
15/10/2004 45.2500
18/10/2004 45.2600
19/10/2004 45.2500
20/10/2004 45.2900
21/10/2004 45.2800
25/10/2004 45.2700
26/10/2004 45.2900
27/10/2004 45.2900
28/10/2004 45.2700
29/10/2004 45.2400
01/11/2004 45.2600
02/11/2004 45.2400
03/11/2004 45.2400
04/11/2004 45.3000
05/11/2004 45.3100
08/11/2004 45.2500
09/11/2004 45.2100
10/11/2004 45.2300
11/11/2004 45.2500
16/11/2004 45.2700
17/11/2004 45.2500
18/11/2004 45.2400
19/11/2004 45.2500
22/11/2004 45.2200
23/11/2004 45.2200
Graph 2

46
 USD RATES
01
/1
0/
06 2

42.5
43.5
44.5
45.5

42
43
44
45
/1 004
11 0/2
/1 004
0/
15 20
/1 04
20 0/2
/1 004
0
26 /20
/1 04
29 0/2
/1 004
0
03 /20
/1 04
08 1/2
/1 004
1
11 /20
/1 04
1
18 /20
/1 04
23 1/2
/1 004
1
29 /20
/1 04
02 1/2

DATE
/1 004
2
07 /20
/1 04
2
10 / 2
/1 004
2
15 /20
/1 04
20 2/2
/1 004
2
23 /20
/1 04
28 2/2
/1 004
2
31 /20
/1 04
2/
20
04
03/12/2004
02/12/2004
01/12/2004
30/11/2004
29/11/2004
25/11/2004
24/11/2004

Series1

Graph 3
43.3900
44.1200
44.7300
44.7500
44.7600
44.9300
45.1500b=0
E=1.76

47
45.5

45

44.5

44
Series1
43.5

43

42.5

42
/1 0 4
/1 0 4

/1 0 4

/1 0 4

/1 0 4

/1 0 4
/1 04

/1 04

/1 04

/1 04

/1 04

/1 04

/1 0 4

/1 04

/1 04

/1 04

/1 04

/1 04

/1 0 4

/1 04

04
06 /20
11 /20

20 /20

26 /20

29 /20

03 /20

08 /20

11 /20

18 /20

29 /20

02 /20

07 /20

10 /20

15 /20

20 /20

23 /20

31 /20
20
15 /20

23 /20

28 /20

2/
0

2
0

1
1

2
2
/1
01

Here in this second graph for the period 24/11/2004 to 03/12/2004 we can see that the
market falls down by few points due to changes in the economy which is indicated by the
red line and we can also see that it falls even more in the further coming days.

06/12/2004 43.7700 b=0.0666

07/12/2004 43.6700 E=0.59
08/12/2004 43.7800
09/12/2004 43.5600
10/12/2004 43.6200
13/12/2004 43.6500
14/12/2004 43.7600
15/12/2004 43.9000
16/12/2004 43.8900
17/12/2004 43.8600
20/12/2004 44.0000
21/12/2004 44.0000
22/12/2004 44.0400
23/12/2004 44.1600
24/12/2004 44.1800
27/12/2004 44.1800

48
 28/12/2004 44.4100
29/12/2004 44.3700
30/12/2004 44.9700
31/12/2004 44.7600

Graph 4

45.5

45

44.5

44
Series1
43.5

43

42.5

42
/1 0 4
/1 0 4

/1 0 4

/1 0 4

/1 0 4

/1 0 4
/1 04

/1 04

/1 04

/1 04

/1 04

/1 04

/1 0 4

/1 04

/1 04

/1 04

/1 04

/1 04

/1 0 4

/1 04

04
06 /20
11 /20

20 /20

26 /20

29 /20

03 /20

08 /20

11 /20

18 /20

29 /20

02 /20

07 /20

10 /20

15 /20

20 /20

23 /20

31 /20
20
15 20

23 20

28 /20
0/

2/
1/
0

2
0

2
2
/1
01

In this last graph for the year 2004 for the period 06/12/2004 to 31/12/2004 we can see
that there is a slight raise in the market due to the favorable factors and in the end there is
a high though it is not as much as it was in the beginning.

03/01/2005 44.6900 b=0.1025

04/01/2005 44.7100 E=0.425
05/01/2005 44.9500
06/01/2005 45.3400
07/01/2005 45.4200
10/01/2005 45.1200
11/01/2005 45.4400

Graph 5

49
 46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5

/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

In the beginning of the year we can see that the market is low but it starts rising higher
which is a good start. Though the period is small there is a considerable rise which makes
the trend move upwards indicating growth in the market.

50
 17/01/2005 45.2500 b = 0.038
18/01/2005 45.3300 E = 0.132
19/01/2005 45.3700
20/01/2005 45.3600
24/01/2005 45.3400
25/01/2005 45.4500
27/01/2005 45.3900
28/01/2005 45.5600

Graph 6

46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

Here in this graph we can see that the market is not stable it decreases at a point and starts
increasing every now and then between the period 17/01/2005 to 28/01/2005 though there
was a little fall in the middle it was not too much and the market has recovered quickly.

51
 31/01/2005 45.4500 b=0
01/02/2005 45.4200 E=0.47
02/02/2005 45.3100
03/02/2005 45.1900
04/02/2005 45.0600
07/02/2005 45.0900
08/02/2005 44.9800

Graph 7

46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

The increasing trend in the previous graph does not stay for a long period as we said
that there is no stabilization existing in the market so the trend also keeps on changing.
We can notice a slight fall during the period 31/01/2005 to 08/02/2005.

52
 09/02/2005 45.0700 b=0.095
10/02/2005 45.0900 e=0.075
11/02/2005 45.2600
14/02/2005 45.2800
15/02/2005 45.3900
16/02/2005 45.5400
17/02/2005 45.6300
18/02/2005 45.8200

Graph 8

46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

As we see in this graph after a fall the market is rising to an extent. There is a drastic rise
as compared to the last graph where we see only minor rise or fall. By seeing this we can
also forecast that the market will raise further to an extent with the favorable conditions
affecting them.

53
 21/02/2005 46.2000 b= -0.00813
22/02/2005 46.0600 E=.3375
23/02/2005 45.8300
24/02/2005 45.9000
25/02/2005 45.8400
28/02/2005 45.9600
01/03/2005 45.9800
02/03/2005 45.8800
03/03/2005 45.9600
04/03/2005 45.7500
07/03/2005 45.9800
09/03/2005 45.9500
10/03/2005 45.7300
11/03/2005 45.7600
14/03/2005 45.6400
15/03/2005 45.8200
16/03/2005 45.9400

Graph 9

46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

As in the last graph where we saw the trend line increasing to an extent, here it continues
the flow and reaches a peak after which it falls and rises frequently (line showing the
period between 21/02/2005 to 16/03/2005). In this we can also see that there are two
higher peaks created and 2 or more lowers ones.

54
 17/03/2005 43.6300 b=0.13333
18/03/2005 43.6900 E=0.0133
21/03/2005 43.6700
22/03/2005 43.7700
23/03/2005 43.7400
24/03/2005 43.8300
28/03/2005 43.8100
29/03/2005 43.7900
30/03/2005 43.8200
31/03/2005 43.7500

Graph 10

46.5
46
45.5
45
44.5 Series1
44
Series2
43.5
43
42.5
42
/0 0 5

/0 0 5
/0 0 5

/0 05
/0 0 5
/0 0 5

/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 0 5
/0 05
/0 05

/0 05

05
07 /20

14 /20
18 /20
13 20
19 /20
27 1/20
02 /20
08 /20

24 20
02 /20

09 /20
15 /20
21 /20
28 /20
20
1/

2/

3/
1

1
2
2
2

3
3
3
3
1

2
/0
03

In this last graph we can see that a market falls to a greater extent during the period
17/03/2005 to 31/03/2005 after a series of peaks (rise in the market) as indicated in the
previous graph but here we can also see that after some time the market is coming to a
stabilized form at the end where we can forecast that the market will raise in the next few
days.

55
Testing of hypothesis:

Null hypothesis (Ho): b = 0, which states that there is no significant trend.

Alternate hypothesis (H1): b ≠ 0, which states that there is significant trend.

 b 
The test statistic is t =  s 

 b/ n 

Table 7

Descriptive Statistics
N
Minimum Maximum Mean Std. Deviation
b 9
-.008130 .13333333 ******** 5.3584E-02
E 9
.01333333 1.760000 ******** .5334594585
9
Valid N (listwise)

Table 8

56
 One-Sample Test

Test Value = 0
95% Confidence
Interval of the
Mean Difference
t
df Sig. (2-tailed) Difference Lower Upper
b 8
2.659 .029 ********* ******** ********
E 8
2.464 .039 ********* ******** ********

Interpretation: The p-value (the significance value) was found to be less than 0.05,
indicating that there is a significant positive trend.
Therefore by seeing the above graphs and hypothesis we can say that the market
is not the same at all the times or for a longer period, but it changes frequently due to the
ups and downs that occur in the economic transactions in the country which makes the
exchange rate to raise or fall.

The point in which the trend lines falls or rises is the point where there is a need for
government intervention, where they need to control the currency fluctuations which
have an adverse effect on the economy. The ways in which government interferes and
stabilizes are explained before in the theoretical backgrounds.

It is through such activities that the central bank has been able to deal with the
challenge of excess liquidity created by the accretion of excess foreign reserves. But this
implies that dollars flowing into the country and earning relatively high rates of return in
dollar terms end up in the hands of the central bank, which parks them at extremely low
rates of interest in liquid investment, including US government Treasury Bills. The
difference in the rate of return earned on the inflow by foreigners and that earned by the
RBI on its investments constitute a net foreign exchange outflow from the country.

57
Summary of findings:

For anyone active in the markets, market contacts and dialogue are necessary to
have a good read on the market. Through dialogue, one gains a sense of what others are
thinking and are likely to do. This in turn helps form one’s own opinion about what is
important and what is likely to occur. Newcomers to such forecasting need to determine,
what basic framework is required for forecasting. Anyone attempting to forecast the
markets should also trade the market at the some time. Some of the findings are:

• Every market whether stock market or foreign market has its own swings, it is

clear that markets can’t be beaten on a consistent basis.

• Markets movements are influenced by various factors, so not necessarily markets

should always behave rationally.

58
• There is always market factors at work of which one is unaware. Sometimes they

help; sometimes they do not.

• Depending upon someone else’s market decision is of little value, unless one is

actually taking charge and assumes responsibility for the decision.

• The changes in economy and government policies effect to a greater extent while

determining the exchange rates.

• One should first identify the key bullish and bearish market.

• There are fluctuations in the exchange rates sometimes very often & sometimes it

is stable over a period of time.

• Forecasting will not work if the markets are inefficient.

Suggestions:

• The fundamentals of the foreign exchanges are very important and

necessary while dealing with the foreign exchange markets, there fore

every individual should have sound basics of the foreign market

transactions.

• We can predict the future using technical analysis for particular set of

range, so it is very important to track market and various other factors

affecting the market movements.

• Exchange rates reflect all the information about the markets, so

information regarding the government regulations and policies, various

59
 other factors regarding the forex market has to be clear while

forecasting.

• We should keep a track of the variations that occur in various currencies

and their movements in order to make significant forecasting of

exchange rates.

• Government intervention plays a major role in the movement of foreign

exchange rates, hence it is necessary to have knowledge regarding its

movements with respect to the foreign exchange markets.

CONCLUSION

The exchange rate is a critical price in an economy, and active management of the
rate may be considered important, not only for the economy in question, but in some
cases, for the global economy.
Markets do get carried away by many political events, such as elections and
budgets, which usually cause a currency to weaken because of the uncertainty involved.
On some occasions, the market may be very sure of the outcome, and will trade based on
that expected outcome and what it means for the currency. It is difficult to justify a move
in the market. Good business decisions sometimes become bad ones simply because of

60
unfavorable currency movements. International economy growth is facilitated by stable
prices, which central banks have a responsibility to try to achieve. Central banks may
seek only to reduce volatility, or they may attempt to nudge the rate in a particular
direction.
Therefore after considering all the various factors and situation we can say that
the study carried on in this project would be helpful to understand how to forecast a
market by the help of technical analysis through the help of graphs and thus predict the
future movement of the trend. And it also helps us to know how the government
regulations favor the exchange rates.

BIBLIOGRAPHY
Websites:
www.rbi.org

www.easyforex.com

www.gftforex.com

www.stockscharts.com

www.indiainfoline.com

61
 www.ac-markets.com

www.etgmr.com

www.forex.com

Journals and books referred:

Financial Risk Management Published By ICFAI.

Risk Management In Foreign Exchange.

-by Jeevanandham

62