Welcome to the Exiting

World of Forex

Happy Morning & all the

best
Welcome to the Exiting
World of Forex
• While welcoming you all, to the exiting World
of Forex, let us try to understand the various
features of the Forex operations.
Some of the FAQs are:
< What is a foreign exchange transaction?
> Who are the players in Forex Markets?
< Which products are traded in Forex Markets?
> What are the various types of forex
transactions?
< How the exchange rates are fixed?
> What are the risks involved in Forex?
Introduction to Forex World
• Forex markets operate on 24x7 basis
• A driving force behind the vibrant
globalised economies.
• Sensitive to various factors that drives
the market movements,especially the
exchange rates/interest rates, exposed
to various kinds of risks
Overview of Forex
> Foreign Exchange, a medium of exchange of two
different currencies, is in existence for a number of
centuries. One of the significant milestones in the
forex activities was, when the Gold Standard was
introduced in 1880.
> Under the Gold Standard, each currency was
convertible into gold at a fixed exchange rate, the
level of gold reserves in a country therefore
determined the amount of currency that could be in
circulated.
> The outbreak of World war II in 1939 made the
situation worse, forcing nearly all countries to
introduce exchange controls.
The Bretton Woods System - 1
• Bretton Woods system:
> The next significant event was the Bretton Woods
conference.
 In July 1944 representatives of the World’s major
economies met in Bretton Woods, New Hampshire,
and adopted a proposal known as The Bretton
Woods System.
> The International Monetary Fund, was established to
monitor the new system, whose aim was to eliminate
exchange controls, implement convertibility of all
currencies and establish stable exchange rates.
The Bretton Woods System - 2
> Fixed exchange rate : An exchange rate
which is pegged to a predetermined value of
another currency.
> After Loss of confidence in the US Dollar in
1971, it ceased to be convertible into gold
and the main currencies were allowed to
float.
> By the end of 1973 The Bretton Woods
System broke down due to speculative
movements of international capital forced
central banks to resort once more to floating
their currencies.
Basket of Currencies
> Many developing Countries, resorted to “Managed
Float” by linking their units to “Basket of currencies” to
keep fluctuations in exchange rates under reasonable
control.
> INR was also linked to “a basket of currencies” in
September 1975.The external value of INR was
determined by the market value of currencies in the
basket. RBI announced the external value of rupees in
terms of Pound Sterling. Sterling was retained as the
intervention currency for purely historical reasons.
> Due to various factors and the wild and volatile
fluctuations in the world foreign exchange markets
necessitated frequent changes in the external value of
rupee. On March 1st, 1992 the INR became partially
convertible. The US Dollar became the official
intervention currency.
What is Foreign Exchange ?

Foreign Exchange is an integral part of

the world financial system.
 Foreign Exchange Transaction is a
contract to exchange funds in one
currency for funds in another currency
at an agreed rate and for delivery of
funds at an agreed date.
Foreign Exchange Transaction-1
• Foreign exchange (Forex) is the process of
conversion of one currency into another
currency.
• e.g.,An Indian exporter receives payment in
• Cad $ and converts the Cad $ into Indian
Rupees.
• A Non Resident Indian remits EUR and
• instructs his banker to convert the EUR to
• Indian Rupees, to be credited in his NRE
• account
Foreign Exchange Transaction-2
• When, US$ is converted into Indian
Rupees, for India it becomes money
and a legal tender. For USA the
transaction, becomes the value of a
commodity.
• Foreign exchange transaction involves
exchange of two different currencies
Major Participants in Foreign
Exchange
• Major Participants in Foreign Exchange
• ParticipantsRoleCentral Banks (eg. RBI)Managing
their reserves and smoothening our fluctuations in
the value of their currency.Commercial, Investment
and Merchant BanksHedging and investing on their
own and their client’s fund, but also for providing the
medium of exchange for international tradeForeign
Exchange BrokersActing as middlemen between
other participantsCorporationsMoving funds between
units in different countries, trade related transactions
and hedging exchange risks Investment
FundsMoving Funds from one currency and
Investment vehicle to another.
 Major Participants -1

Participants in
Forex

COMMERCIAL/ FOREX Investors/

CENTRAL TRADERS/
BANKS
MERCHANT BROKERS
CORPORATES
Investment
BANKS Banks
 Major Participants - 2
• Role/functions of Major Participants in Foreign Exchange
• Central Banks (eg. RBI): To Manage the Reserves and to
smoothen/monitor the fluctuations in the value of their currency.
• Commercial/ Merchant Banks:
• To Hedge and invest their own funds and their client’s fund.
Also provide a platform for the medium of exchange for International
Trade & Finance.
• Foreign Exchange Brokers: To act as middlemen between different
participants.
• Traders/Corporates: To facilitate the Forex markets,to be
vibrant through their EXIM activities and also to move funds
between units in different countries. To hedge the exchange risks
through different investment opportunities.
• Investors/Investment Banks: To provide opportunity for creation of
market for movement of funds
Foreign Rates–Fundamental Factors
• Balance of Payments - Surplus leads to stronger
currency, while a deficit weakens a currency
• Economic Growth Rate - Rise in Imports leads to fall
in the currency
• Fiscal Policy - eg. Lower taxes can lead to higher
economic growth rate.
• Monetary Policy – The way a central bank attempts to
influence and control interest rates and money supply.
• Interest Rates - High interest rate attracts overseas
capital and appreciates currency in the short term, In
the longer term, however, high interest rates slow the
economy down, thus weakening the currency.
Foreign Rates–Technical Factors

• Government Controls - can lead to an unrealistic value of

currency resulting in violent exchange rate movements.
• Speculation
• Speculative forces can have a major effect on exchange rates.
• Example :
• There are expectations that a currency will be devalued.
• Speculator will start selling the currency in preparation for
buying it back later at a cheaper rate, hence selling pressure
from speculators extends to other market participants.
• This activity creates liquidity in the Foreign Exchange Market.
Foreign Exchange

Foreign Exchange

DDs,TCs,
Rupee DDs,TCs,
Deposits/Credits Bills of Exchange
Bills of Exchange
Balance payable in L/Cs issued by
L/Cs
any foreign banks outside India
Payable in any foreign
currency but payable in
currency
Indian currency
Foreign Exchange Markets

Toronto Sydney

Newyork Tokyo

London Hongkong

Europe Singapore

Middle
Mumbai
East
Forex Markets - Products
• Letters of Credit
• Bank Guarantees
• Negotiable Instruments (Promissory Notes
• Bills of Exchanges/Cheques/Demand
Drafts/Traveller Cheques)
• Credit cards
• Derivative Products like Forward Exchange
Contracts,Interest Rate Swaps,
• Futures and Options
Forex – Types of Deals

Forex
Deals

Cash Tom Spot

Forward
Forex – Types of Deals

Types of Forex
deals

Purchases Sales

Inward Outward
Exports Imports
Remittances Remittances
Forex Rates 1
• Forex markets operate on two way pricing
system
Direct Rates: When exchange rates are
quoted as a number of units of domestic
currency against per unit of foreign currency
e.g., US$1 = 40.00.
This type of quotation is also known as
Home currency quotation
Forex Rates 2
• Indirect Rates:
• When exchange rates are quoted as a
number of units of foreign currency per
unit of domestic currency
e.g., Rs.100 = US$ 2.5000
This type of quotation is also known as
Foreign currency quotation
Forex Rates – 3

• Fixed Rates: In a country if the

Government/Monetary
• Authorities/Regulators fixes the value of
• Currencies, as official rate it is called as
fixed rate
Floating Rates: When market forces
(demand and supply factors) determine
the exchange rates, it is called as
floating rate.
Forex – Risks -1
• What is Risk?
• A risk is an uncertain/unplanned event
which might result in a loss or reduced
earnings.
• Risk arises due to volatile movements
happening in the markets due to various
reasons
International Trade and Finance are
subject to many risks
Forex – Risks -2
Types of Risks
Reputation Exchange
Risk Rate Risk

Operational Credit
Risk Risk

Country Liqudity
Risk Risk

Interest
Mismatch
Rate
Risk
Risk
Dealing Room Operations-1
• An Authorised Dealer (AD) in Forex, under
takes the activities of buying and selling
• of foreign currencies/exchange from/to
• the customers (exporters/importers/banks
• and others) in the inter bank market.
• To enable an AD to deal comfortably
• Banks provide a place called dealing room.
Dealing Room Operations-2

Forex
Dealing

Mid
Office

Front Office Back Office

ALL THE BEST & THANK YOU
• T.M.C.VARADARAJAN
• TEL : 022-25638965 (R)
• 9869134706 (M)
• e.mail: [email protected]