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Every sovereign country has a currency which is legal tender within its territory Whenever a country buys or sells goods/services from or to another country the residents exchange currencies Thus the need for foreign exchange which simply means foreign money
Exchange rate
Rate of exchange means price of one currency in terms of another currency OR Rate at which number of units of one currency can be exchanged for number of units of another currency e.g.. USD/INR --- 1 USD = 45.25 INR EUR/USD --- 1 EURO = 1.2335 USD Two way quotations Direct and Indirect rates Bid and Offer rates 24 hour x 5 day market (except USD/INR market)
Market participants
Customers those who buy and sell forex for their trade requirements and other needs Commercial banks are those authorized to deal in forex Hedge Funds Invest and speculate on the forex movements Central banks control volatile and undue movements of their currency Exchange brokers who act as intermediary between banks for doing the deals
Market participants
Customers who are engaged in foreign trade avail these services provided by the banks exporters need to convert their receivables importers need to remit their payables may also need forex for settlement of other international obligations are allowed to trade with some limitations
Market participants
Commercial banks deal with international trade transactions offer services for converting one currency into another specialized in international trade transactions and have branch/correspondent network have the authority to trade in forex besides merchant transactions Exchange brokers deal on behalf of banks act as intermediaries
Market participants
Hedge funds manage huge funds for their investors have the mandate to trade a certain percentage of this fund invest based on the forecast of currency movements and also try to move the market Central banks have the responsibility to maintain the external value of their currency ensure that there is orderliness in exchange movements through intervention
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Quotes in Forex
Direct Quotes A foreign currency quoted in terms of the local currency e.g..USD/INR -- 1 USD = INR 45.25 Indirect Quotes Local currency unit quoted in terms of number of foreign currency e.g.. INR/USD -INR100=USD2.2099
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USD/PKR 57.10/25
USD/PHP 56.17/21
USD/TWD 33.22/29
USD/KRW 1172.50/80
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USD/INR Forwards
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Premium/discount
Determined by the interest rate differential between the two countries e.g. : Spot USD/INR 45.25 EUR/USD 1.2325 INT rate USD 1.00% INT rate USD 1.00% INT rate INR 6.00% INT rate EUR 2.00% Fwd prem(for 6 mths) 0.10 paise Fwd disc 59 pips The currency associated with the higher interest rate will be at a discount The currency associated with the lower interest rate will be at a premium
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Forward rates
Derived by adding or deducting the premium or discount to the spot rate e.g. : Spot $/INR 45.25 Euro/$ 1.2325 Aug end +0.085(Pr) (-) 0.0049 (Dis) 2004 ---------------------------45.3350 1.2276
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Examples
To calculate a rate for an importer value cash in USD/INR with spot at 45.2525 / 2625 Cash/spot is 0.35 / 0.40 Cash rate is 45.2625 0.35 = 45.2590 To calculate a rate for an exporter value tom in USD/INR with spot at 45.2475 / 2550 Tom / spot is 0.20 / 0.30 Tom rate is 45.2475 0.30 = 45.2445
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Examples
To book a forward contract for an import transaction in USD/INR value 30st Nov,04 Spot USD/INR 45.2550 / 2650 Fwd (sp/Nov) 14.50 / 15.50 Rate is 45.2650 + 15.50 = 45.4200 To book a forward contract for an exporter in USD/INR value 31st Aug,04 Fwd (sp/Aug) 8.50 / 9.50 Rate is 45.2550 + 8.50 = 45.3400
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Examples
To book a contract to cover Euro export value 31 Oct , 2004 (Euro dollar at discount) Spot USD/INR Fwd 45.25 / 27 11.5 / 12.5 EUR/USD 1.2335 / 38 72 / 70
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A swap transaction is a simultaneous exchange of two currencies at a specified rate and at an agreed date
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Fundamental Analysis
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Data Releases
Non farm payrolls Housing starts CPI / PPI Retail Sales Business Confidence Index Jobless Claims Inflation Data Trade deficit
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QJP Y= , 3/ 9/ 04 QJP Y= , 3/ 9/ 04
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Q.BS ES N, Clo se(Last Trad e), S ig n al 1 2 , 2 6 , 9 3 / 1 0 / 0 4 -4 .4 3 Q.BS ES N, Clo se(Last Trad e), M A CD 1 2 , 2 6 3 / 1 0 / 0 4 1 .7 2
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Thank You
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