Management Of Forex Exchange Transactions_1

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Define Foreign Exchange Market Exchange Rate Spot Market Quotations at The Foreign Exchange Market Direct and Indirect Quotes Relationships Between Bid and Ask prices of the currencies Spread/Cost Of Transactions Forward Market Forward Exchange Rate Quotations Of Forward Rates Premium and Discount In the Forward Market

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 Derivatives Defined  Factors Driving growth Of Derivatives  Derivative Products  Participants in the Derivative markets  Exchange Traded Vs OTC derivative markets  NSE’s Derivative Market  Participants  Turnover

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Foreign exchange means the money of a foreign country; that is foreign country bank balances,cheques,drafts and banknotes. A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of currency will be delivered for some other currency at a specified rate. That is the market where one currency is traded for another. Huge Market  Foreign exchange market:Avg traded value exceeds $1.9 trillion per day and includes all of the currencies of the world Competitive and Efficient  Many Participants ▪ Large Commercial Banks ▪ Foreign Exchange Brokers ▪ Multinational Corporations ▪ Central Banks

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 The Exchange Market All over the globe 24 hours a day Most transactions are channelized through the

world-wide interbank market-the market where banks trade with each other(multiples of $1Million US or equivalent in transaction size) The client or retail market(specific ,small amount) • • • •

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Individuals and Firms Speculators and arbitragers Foreign exchange brokers Central Bank and treasuries

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The Foreign Exchange Market  an electronically linked network of banks, foreign exchange brokers and dealers who bring together buyers and sellers of currencies Historically • Telephone • Telex

Today • Electronically Brokering 8/10/2009

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 London  New York  Tokyo  Zurich  Frankfurt  Hong Kong  Singapore  Paris  Sydney spanning most time zones 8/10/2009

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 Growth in International Trade  Regulation and control for cross-

border capital flows and exchange rates have decreased.  Huge cross-border FDI  International portfolio investments  Arbitrage  Speculation  Hedging 8/10/2009

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 The

rate at which one currency is traded for another currency.

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The spot market or cash market is a commodities or securities market in which goods are sold for cash and delivered immediately.

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Spot Forex • The spot foreign exchange market has a 2 day delivery date, originally due to the time it would take to move cash from one bank to another. Denoted by S(.) where S is the relationship between 2 currencies ,e.g. S(Rs/$)=Rs 48.10/$ means

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 1 dollar = Rs.48.10

(therefore market for purchase or sale of currencies for immediate delivery is called the spot market)

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A

quotation is the amount of a currency necessary to buy or sell a unit of another currency.  Expressed in currency terms it is called outright rate e.g. S(Rs./$)=Rs. 48.10 is an outright rate between Rs. and $  Quotes=‘buy’ and ‘sell’ OR ‘bid’ and ‘ask’ rates  Example:36.35/$ 8/10/2009

Buying Rs.35.10/$

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Selling

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 Direct

Quote: A unit of foreign currency quoted in terms of domestic currency. Example:At New York exchange market the deutsche mark(DM) is quoted as: Spot(bid) =$2.4000/DM Spot(ask) =$2.4017/DM  Indirect Quote: A unit of domestic currency quoted in terms of foreign currency. Example: London foreign Exchange Market Spot(bid)=$3.0201/BP Spot(Ask)=$3.0180/BP

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 There are two sides of all quotes:  Buy and sell(buy dollars against Rs.

Sell dollars for Rs.)  Example: PNB Spot(Rs./$)(bid/ask)= Rs. 48.0010/48.0015 /$

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 Ask and Bid differential is called  When quotes are direct:

Spread.

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Spread bid price of dollar at spot S(Rs./bid$)=35.7621 and the ask price is S(Rs./Ask$)=35.8024 Therefore the spread is ? Rs.0.0403

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A forward contract between a bank and a customer calls for delivery are a fixed future date of a specified amount of fixed currency against another at an exchange rate fixed at the time of the contract

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The contract is binding-both parties must fulfill the contract regardless of what the exchange rate is at the time of the exchange specified in the contract.

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Therefore the market where the purchases and sales of currencies are contracted in the present for receipts and delivery in future is called the Forward Market.

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Forward Exchange Rates are determined by forward demand and forward supply of various currencies.e.g.

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 Delivery

of the currencies is to take place after some-time(30 days,60 days or 90 days)  Quotations are in the form of bid and ask.

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Forward Premium: A foreign currency is said to be at a forward premium if its future value exceeds its present value in terms of domestic currency .  Example: Spot(Rs/$)=Rs. 35.70/$ and three

month forward is F(Rs/$)=Rs. 36.90 dollar is at premium and Rs is at discount.

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Forward Discount: A foreign currency is said to be at a forward discount if its future is lower than its present value in terms of domestic currency .  Example: Spot(Rs/$)=Rs. 35.70/$ and three

month forward is F(Rs/$)=Rs. 34.90 dollar is at discount and Rs is at premium.

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Derivative indicates that it has no independent value, i.e. its value is completely taken out from the value of the underlying asset.  The underlying asset can be any from the following: securities, commodities, bullion, currency, live stock or anything else.  Therefore, Derivative means a forward contract, future contract, option contract or any other hybrid contract of pre determined fixed duration,  linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. 

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 Derivatives

are included in the definition of Securities. The term Derivative has been defined in Securities Contracts Act, as: A Derivative includes:  a security is derived from an instrument of debt,

share, loan, which can be secured or unsecured, risk instrument or contract for any differences or any other form of security;  a contract whose value can be derived from the prices, or index of prices, of underlying assets.

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 Increased

volatility in asset prices in financial markets.  Increased integration of national financial markets with the international financial markets.  Marked improvement in communication facilities.

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FORWARDS: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.   FUTURES: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts   OPTIONS: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.  

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WARRANTS: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.   LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years.   SWAPS: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts.

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INTEREST RATE SWAPS: These entail swapping only the interest related cash flows between the parties in the same currency.   CURRENCY SWAPS: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

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HEDGERS-Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level-weeks or months in advance.

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In this way they attempt to protect themselves against the risk of an unfavorable price change in the short term.

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SPECULATORS 

A person who trades derivatives, commodities, bonds, equities or currencies with a higher-thanaverage risk in return for a higher-than-average profit potential.

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Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains

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A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and captures risk-free profits. 

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An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge.

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  Suppose that the exchange rates (after taking out the fees for making the exchange) in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12 = £6.  Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London, for a profit of ¥200, would be arbitrage. 

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EXCHANGE TRADED

OVER-THE COUNTER

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Traded on exchange

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standardized contract common to all participants Range of delivery dates

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Private negotiated contract Not standardized One Specified delivery dates. Credit risk

No Credit risk

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The derivatives trading on the NSE commenced with S&P CNX Nifty Futures on June 12,2000. The trading in index options commenced on June 4,2001. Trading in options on individual securities commenced on July2,2001. Single stock futures were launched on November 9,2001 Today both in terms of volume and turnover NSE is the largest derivative exchange in India.

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Currently the derivative contracts have a maximum of three months of expiration cycles. Three contracts are available for trading, with 1 month,2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of the near month contract

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 The

average daily turnover at NSE now exceeds Rs.10000 crores.  A total of 77,017,185 contracts with the total turnover of Rs.2,547,053 crore were traded during 2004-2005.

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 Thank

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You.

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