Forex Project
Forex Project
Forex Project
BBI) SUBJECT : FOREIGEN EXCHANG RISK & ITS IMPACT ON INDIAN CAPITAL MARKET
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NAME INTRODUCTION OF FOREX MARKET HISTORY OF FOREIGN EXCHANGE MARKET THE 8 & size of foreign exchange market INTERBANK FOREIGN EXCHANGE MARKET FEATURES OF FOREIGN EXCHANGE MARKET CHARACTERSTICS OF FOREIGN EXCHANGE MARKET NEED FOR FOREIGN EXCHANGE MARKET STRUCTURE OF FOREIGN EXCHANGE MARKET ADVANTAGES OF FOREIGN EXCHANGE MARKET DISADVANTAGES OF FOREIGN EXCHANGE MARKET NUMBER OF WAYS TO INVEST IN FOREIGN EXCHANGE MARKET STRATERGIES IN FOREIGN EXCHANGE MARKET INDIAN SCENARIO ABOUT FOREIGN EXCHANGE MARKET HOW FOREIGN EXCANGE MARKET IN INDIA WORKS WHERE DOES INDIA STAND IN GLOBAL FOREX MARKET DIFFERENT TYPES OF FOREIGN EXCHANGE INSTRUMENTS FOREIGN EXCHANGE RATE & CONCEPT OF FOREIGN EXCHANGE RATE TYPES OF FOREIGN EXCHANGE RATE FACTORS AFFECTING EXCHANGE RATE FLUCTUATION IN EXCHANGE RATE METHODS OF QUOTING FOREIGN EXCHANGE RATE DEFINATION OF CURRENCY ROLE OF CURRENCY IN FOREIGN EXCHANGE MARKET METHODS OF CURRENCY TRANSLATION INDIAN CURRENCY AGAINST ANOTHER CURRENCY TABEL CURRENCY FLUCTUATION WHAT CAN AFFECT CURRENCY FLUCTUATION CURRENCY TRENDS WITH TABLE FACTORS AFFECTING INDIAN Rs. CHANGE FOREIGN EXCHANGE RISK TYPES OF EXPOSURE RISK IN FOREX TRADING FOREIGN EXCHANGE RISK MAMAGMENT HOW TO MANAGE FOREIGN EXCHANGE RISK CASE STUDY INDIAN FOREIGN EXCHANGE CONTROLS RECENT NEWS BY RESERVE BANK OF INDIA ABOUT FOREX MARKET HOW CAN WE TRADE IN FOREIGN EXCHANGE MARKET
49,50,51,52 FOREIGN EXCHANGE RISK & ITS IMPACT ON INDIAN CAPITAL MARKET
INTRODUCTION
DEFINATION OF FOREIGN EXCHANGE
The exchange of one currency for another, or the conversion of one currency in to another currency. In other words, it is the risk that relates to the gains/ losses that arises due to fluctuation in the exchange rate. an appreciation or depreciation in the exchange rate will lead to a change in the value of all those assets & liabilities that are denominated in foreign currency. To manage Forex risk banks can adopt techniques of setting levels of exposures to sustain the risk, that might arise due to exchange rate fluctuations and adopting hedging.
One of the largest financial markets in the world $4.0 trillion average daily turnover, equivalent to:
1. More than 12 times the average daily turnover of global equity markets. 2. More than 50 times the average daily turnover of the NYSE. 3. An annual turnover more than 10 times world GDP.
Spot market Forward market SWIFT (Society for World-Wide Interbank Financial Telecommunications)
The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However, foreign currency options are regulated in the United States and trade on the Philadelphia Stock Exchange. Further, in the U.S., the Federal Reserve Bank publishes closing spot prices on a daily basis.
1.
Spot markets:
Also known as the organized or OTC (over the counter) market. This is made up of cash market is known as the publish financial markets where financial tradable instruments and/or commodities are traded for immediate delivery. The spot market prices are individually agreed between the parties and therefore the prices are usually not published. The spot markets entails a two day delivery period in order to move cash from one bank to the other. The online forex trading markets is usually comprised of the spot markets as trading is purely speculative driven and transactions are done on the spot.
2.
Forward markets:
The forward markets is over the counter financial markets that dealins in the CFDs or contracts for differences for future delivery. Forward markets are also known as forward contracts and are personalized between the buyer and seller which includes the delivery time and amount which is usually determined at the time of the transaction.
3.
SWIFT:
SWIFT is an acronymn for Society for Worldwide Interbank FInancial Telecommunications. SWIFT is used to send payment orders that are usually settled via the correspondent accounts which the banks have with each other. Central banks also play a role in setting currency exchange rates by altering interest rates. By increasing interest rates they stimulate traders to buy their currency as it provides a high return on investment and this drives the value of the corresponding central bank's currency higher with comparison to other currencies.
2.
Leverage :
In forex trading, only a small margin is needed to purchase a contract of a much higher value. Leverage enables you to earn high returns while minimizing capital risks. However, leverage can be a double-edged sword. Without proper risk management, such high leverage trading may result in huge losses or profits.
3.
High liquidity :
In view of the huge trading volume in the forex market, under normal conditions, you can buy or sell currency at your desired price in a mere matter of seconds with just a simple click of the mouse. You can even setup an online trading platform to buy and sell (place order) at the right price so that you can control your profit margin and cut losses. The trading platform will execute everything for you automatically. It is fast and simple.
4.
Free service :
In addition to free simulation accounts, many trading platforms also provide news, charts and analyses free of charge. Market movements in a simulation account are the same as those in the actual forex market. Use a simulation account to build up your trading experience and confidence and find your way to success.
5.
Tools needed:
You will only need a computer with Internet access. It is that simple! There is no need for you to spend thousands of dollars in training and courses that cannot guarantee you success. We believe that you can find your pathway to wealth creation by using the free resources available in our trade simulation system!
its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.
2. In the beginning, trade took place on a barter basis. That had an obvious disadvantage: each of the parties in a transaction had to have something the other wanted. The basis of the alternative, a monetary exchange system, is a material that has an intrinsic value that is relatively stable and so is wanted by both parties in a transaction.
3. The most common examples of such a material--- the medium of exchange--- are gold and silver. When both buyer and seller accept a medium of exchange, it becomes possible to dispose of goods or services.
4. With the development of nations, each with its own monetary system, and international trade, a foreign exchange mechanism became necessary and was developed. By means of foreign exchange, goods produced in one country can be purchased in another country.
5. Regardless of its direction, such an international transaction must be denominated in a currency other than that of either the seller or buyer; that is, one party to the transaction must either buy or sell a foreign currency.
6. It does so through the international banking system, and the result is a foreign exchange transaction. The problem that then arises is convertibility, or the relative values of two different currencies.
7. Methods and procedures that have been developed by central banks and internal banking systems are the means of effecting actual foreign exchanges. Commercial transactions, in turn, are effected through the banking system. Both are international monetary system and the commercial banking constraints of each country must be thoroughly understood before the flow of financial transactions on a multinational scale to be optimized.
8. Despite the existence of an international monetary system, changes in the value of one currency in relation to another are common, and they make the management of international business more complex. Changes in monetary values are of two kinds: those that reflect supply and demand in the day-to-day market, and those that reflect an imbalance between the economies of countries.
9. This is where the Bretton Woods agreement was intended to limit fluctuations to the day-today market variety and give special consideration to the handling of imbalances between countries.
2. It is necessary to understand that the commercial banks operate at retail level for individual exporters and corporations as well as at wholesale levels in the inter bank market.
3. The foreign exchange brokers involve either individual brokers or corporations. Bank dealers often use brokers to stay anonymous since the identity of banks can influence short term quotes.
4. The monetary authorities mainly involve the central banks of various countries, which intervene in order to maintain or influence the exchange rate of their currencies within a certain range and also to execute the orders of the government.
5. It is important to recognize that, although the participants themselves may be based within the individual countries, and countries may have their own trading centers, the market itself is world wide.
6. The trading centers are in close and continuous contact with one another, and participants will deal in more than one market.
7. Primarily, exchange markets function through telephone and telex. Also, it is important to note that currencies with limited convertibility play a minor role in the exchange market.
8. Besides this, only a small number of countries have established their full convertibility of their currencies for full transactions.
9. The foreign exchange market in India consists of 3 segments or tires. The first consists of transactions between the RBI and the authorized dealers.
10. The latter are mostly commercial banks. The second segment is the interbank market in which the ADs deal with each other. And the third segment consists of transactions between ADs and their corporate customers.
11. The retail market in currency notes and travelers cheques caters to tourists. In the retail segment in addition to the ADs there are moneychangers, who are allowed to deal in foreign currencies.
12. The Indian market started acquiring some depth and features of well functioning market e.g. active market makers prepared to quote two-way rates only around 1985. Even then 2 - way forward quotes were generally not available.
13. In the interbank market, forward quotes were even in the form of near term swaps mainly for ADs to adjust their positions in various currencies.
14. Apart from the ADs currency brokers engage in the business of matching sellers with buyers. In the interbank market collecting a commission from both.
1.
Minimum or no commissions :
There are no clearing fees, no exchange fees, no government fees and no brokerage fees.
2.
Easy access :
If you compare the money you need on the market in comparison with the amount needed for entering the stock, options or futures market, its a huge difference. The amount of capital is very low and it allows numerous types of people to easily enter the foreign exchange market.
3.
No middlemen :
Spot currency trading is decentralized and eliminates middlemen, allowing you to trade directly.
4.
On the internet you can find huge opportunities for learning how the Forex market works and what you need to become a good trader. Also, most online Forex brokers offer demo accounts to practice trading and build your skills, using real-time charts and news feeds. They are more valuable than you could even imagine and, before starting your real money on the market, try to see if you are built and ready for it by practicing with these types of software.
5.
The market is open 24 hours each day, so you dont have to match your schedule with the one of the market. It doesnt require a full-time engagement and you can choose the hours that suit your best. Also, you can operate from any corner of the world, as long as you have an Internet connection.
6.
The transaction cost, determined by the bid/ask spread, is usually less thanand it can go even lower in the case of large dealers.
7.
The market is huge, so is extremely liquid. Around 4 trillion dollars are exchanged every day, according to the latest figures released by the Bank of International Settlements (BIS). That becomes an advantage, as you dont have to struggle so much until you will find someone who wants to buy your currency or sell you one. You cant get stuck and, by using features like stop lose, you will close your position automatically, while not even being in front of the computer.
8.
Leverage :
With a little investment you can move large amounts of money. Leverage gives the trader the ability to make nice profits and keep risk capital to a minimum.
9.
No forced deadlines :
No one and no rule is forcing you to close a position. You can stay open as long as you consider necessary.
11. Transparency :
Due to multi-day market movement, its size and the high number of participants, it is virtually impossible to market manipulation.
There are a number of ways to invest in the foreign exchange market, including:
1. Forex :
The Forex market is a 24-hour cash (spot) market where currency pairs, such as the Euro/US dollar (EUR/USD) pair, are traded. Because currencies are traded in pairs, investors and traders are essentially betting that one currency will go up and the other will go down. The currencies are bought and sold according to the current price or exchange rate.
1. Trending market :
As the name suggest the trend following strategies follows the trends of the markets and are changed according to the trends as well. These market strategies in foreign exchange online are designed to take any kinds of big or small trend moves that may occur. The main feature for designing a trend following strategy is to make sure that no single big move in the market is ever missed. And this factor can be accomplished by always being present in the market.
2. Directionless market :
The support and resistance (S/R) market strategies in foreign exchange take advantage of the directionless market. The main focus in support and resistance strategy is to make profit from the price fluctuations in the directionless market. The price movements opposite to those used in trend following strategies are acquired or used under this strategy of S/R taking the fact into consideration that markets are directionless 85% of the time.
many folds also gave the individual and retail investor a chance to trade at the Forex market, that was till this time remained a forte of the banks and large corporate. Indian Forex market got yet another boost recently when the SEBI and Reserve Bank of India permitted the trade of derivative contract at the leading stock exchanges NSE and MCX for three new currency pairs. In its recent circulars Reserve Bank of India accepting the proposal of SEBI, permitted the trade of INRGBP (Indian Rupee and Great Britain Pound), INREUR (Indian Rupee and Euro) and INRYEN (Indian Rupee and Japanese Yen). This was in addition with the existing pair of currencies that is US$ and INR. From inclusion of these three currency pairs in the Indian Forex circuit the Indian Forex scene is expected to boost even further as these are some of the most widely traded currency pairs in the world.
2. Currency features :
A currency future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a future exchange rate. A futures contract is similar to a forward contract, with some exceptions. Futures contracts are traded on exchange markets, whereas forward contracts typically trade on over-the-counter markets (OTC). Also, futures contracts are settled daily on marked-to-market (M2M) basis, whereas forwards are settled only at expiration. Most contracts have physical delivery, so for those held till the last trading day, actual payments are made in respective currencies. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date. Investors enter into currency futures contract for hedging and speculation purpose.
3. Currency swap :
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps A foreign currency swap is an "exchange of borrowings", where the principal and interest payments in one currency are exchanged for principal and interest payments in another currency. Mostly corporates with long-term foreign liability enters into currency swaps to get cheaper debt and to hedge against exchange rate fluctuations. The best example of swap transaction is paying fixed rupee interest and receiving floating foreign currency interest.
4. Currency option :
like futures or forwards, which confer obligations on both parties, an option contract confers a right on one party and an obligation on the other. The seller of the option grants the buyer of the option the right to purchase from, or sell to, the seller a designated instrument (currency) at specified price within a specified period of time. If the option buyer exercises that right, the option seller is obligated. Investors can hedge against foreign currency risk by purchasing a currency option put or call. For example, assume that an investor believes that the USD/INR rate is going to increase from 45.00 to 46.00, implies that it will become more expensive for an Indian investor to buy U.S dollars.
2. Fixed Rates :
The smaller economies of developing countries use fixed foreign exchange rates to promote trade and attract foreign investments. For example, by fixing its currency against the currencies of other countries, a country keeps export prices affordable to foreign buyers and accumulates trade surplus over time. Fixed currency rates also allow a country to assure foreign investors of the stable value of their investments in the country. However, under fixed rates, a country's monetary policies can become ineffective, especially when trying to stimulate domestic economic activities by consumers at home. Injecting more money into the economy would normally reduce a country's currency value against foreign currencies under floating rates. As imports become more expensive, consumers would gradually focus their demand on domestic products, potentially lifting up the economy. With fixed rates, however, the exchange value of domestic currency does not move and more money means more buying power for imports. Such an outcome does not achieve policy makers' intention to increase domestic demand.
3. Pegged Rates :
Pegged foreign exchange rates are a compromise between floating rates and fixed rates. Under pegged rates, a country allows its currency to fluctuate within a fixed band around a periodically adjusted central value. Pegged rates are more appropriate for a transitioning, developing economy. They allow both stability and a certain degree of market adjustments. While no artificial exchange rates, fixed or pegged, can fix economic problems single-handed, they do provide an opportunity for growth. Countries hope that economic improvements can bring in the foreign currency reserves required to keep the stated rates. When an economy fails to produce the expected results, such a system cannot maintain the fixed value for long, according to Brigham Young University in "Fixed Exchange Rates vs. Floating Exchange Rates."
1. Monetary Policy :
When a central bank believes that intervention in the forex market is effective and the results would be consistent with the governments monetary policy, it will participate in forex trading and influence the exchange rates. A central bank generally participates by buying or selling the domestic currency so as to stabilize it at a level that it deems realistic and ideal. Judgment on the possible impact of governments monetary policy and predictio n on future policy by other market players will affect the exchange rates as well.
2. Political Situation :
Due to political instability there can be possibility of delaying implementation of all policies and sanction of budget. So that will create also major impact on trade.
3. Balance of Payments :
Balance of payments of a country will cause the exchange rate of its domestic currency to fluctuate. The balance of payments is a summary of all economic and financial transactions between the country and the rest of the world. It reflects the countrys international economic standing and influences its macroeconomic and microeconomic operations. The balance of payments can affect the supply and demand for foreign currencies as well as their exchange rates. An economic transaction, such as export, or capital transaction, such as inflow of foreign investment, will result in foreign revenue. Since foreign currencies are normally not allowed to circulate in the domestic market, there is a need to exchange these currencies into the domestic currency before circulation. This in turn creates a supply of foreign currencies in the forex market. When the supply of a foreign currency increases but its demand remains constant, it will directly drive the price of that foreign currency down and increase the value of the domestic currency. On the other hand, when the demand for a foreign currency increases but its supply remains constant, it will drive the price of the foreign currency up and decrease the value of the domestic currency.
4. Interest Rates :
When a countrys key interest rate rises higher or fall s lower than that of another country, the currency of the nation with lower interest rate will be sold and the other currency will be bought so as to achieve higher returns. Given this increase in demand for the currency with higher interest rate, the value of that currency will rise against other currencies.
Increased demand for a currency can be due to either an increased transaction demand for money or an increased speculative demand for money. The transaction demand is highly correlated to a country's level of business activity, gross domestic product (GDP), and employment levels. The more people that are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. Speculative demand is much harder for central banks to accommodate, which they influence by adjusting interest rates. A speculator may buy a currency if the return (that is the interest rate) is high enough. In general, the higher a country's interest rates, the greater will be the demand for that currency. It has been argued that such speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency by shorting in order to force that central bank to buy their own currency to keep it stable. (When that happens, the speculator can buy the currency back after it depreciates, close out their position, and thereby take a profit.) For carrier companies shipping goods from one nation to another, exchange rates can often impact them severely. Therefore, most carriers have a CAF charge to account for these fluctuations.
CURRENCY
A currency (from Middle English curraunt, meaning in circulation) in the most specific use of the word refers to money in any form when in actual use or circulation, as a medium of exchange, especially circulating paper money. This use is synonymous with banknotes, or (sometimes) with banknotes plus coins, meaning the physical tokens used for money by a government. A much more general use of the word currency is anything that is used in any circumstances, as a medium of exchange. In this use, "currency" is a synonym for the concept of money. A definition of intermediate generality is that a currency is a system of money (monetary units) in common use, especially in a nation. Under this definition, British pounds, U.S. dollars, and European euros are different types of currency, or currencies. Currencies in this definition need not be physical objects, but as stores of value are subject to trading between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in the sense used by foreign exchange markets, are defined by governments, and each type has limited boundaries of acceptance. The former definitions of the term "currency" are discussed in their respective synonymous articles banknote, coin, and money. The latter definition, pertaining to the currency systems of nations, is the topic of this article.
The foreign currency market is also always open. For instance, when the currency markets open in Europe, its counterpart in Asia will be winding down to a close. As the European market closes, the American market opens and soon and so forth. The players who are big in foreign exchange market are banks, large commercial entities hedge fund, investment firms and central banks of the nations. Hedge funds and central banks are the two biggest influences on the foreign exchange market. Although not all central banks do it, but some central banks do trade in the foreign exchange market. They do this for a multitude of reasons. Among the reasons include synchronizing the countrys interest rates in line with the other countries and to stabilize the currency of the country so that the import and export of goods can be completed in an orderly manner. Some central banks also use the foreign exchange market to control fiscal issues like inflation. On the other hand, hedge funds represent the purely commercial side of the foreign exchange market. Hedge funds trade in the market with the sole purpose of taking advantage of anomalies and market huge profits sometimes even at the expense of destabilizing a nations currency.
3. Non-monetary Method
Non-monetary items are those items that do not represent a claim to receive or an obligation to pay a fixed amount of foreign currency items, e.g., inventory, fixed assets, long-term investments. According to this method, current rate is used to translate all moneary items while historical rates Re used to translate non-monetary items the average exchange rate for the period is used to translate Income statement items, except for items such as depreciation and cost of goods sold that are directly associated with non-monetary assets or liabilities. These accounts are translated at their historical rates.
1.00 INR 0.012279 0.016317 0.010508 0.017785 0.016825 0.059932 0.015220 0.099798 0.053495
inv. 1.00 INR 81.438003 61.285683 95.165256 56.227903 59.433657 16.685457 65.701324 10.020191 18.693212
Currency Fluctuations
A currency has value, or worth, in relation to other currencies, and those values change constantly. For example, if demand for a particular currency is high because investors want to invest in that country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets. While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average, of currencies.
6. Government influences the market via central banks. Currency exchange operations being
carried out without any intervention of central bank will make national currency of a certain country become free floating. Nevertheless, this is very rare situation. Countries with such rate can sometimes try to influence it via currency operations. Countries interested in consumption growth and industry development regulate exchange rates. They mostly use direct and indirect regulation. Indirect regulation allows for inflation level, amount of money in turnover, etc. Direct one includes discount policy and currency intervention. 7. The latter is connected to sharp discharge and intake of big volumes of currency from international markets. Central banks do not reach the market directly - they use commercial banks. Volumes amount to millions of dollars; therefore, interventions severely affect currency fluctuation. Sometimes central banks of different countries run joint interventions in the currency market.
Currency Trends
Track the top traded currencies This table displays the change (trend) in currency exchange rates for the top most traded currencies.
Change Compared to: Currency Pair EUR/USD GBP/USD USD/JPY USD/CHF USD/CAD EUR/GBP EUR/JPY GBP/JPY EUR/CHF Current Rate 1.3284 1.5459 97.7363 0.9294 1.0324 0.8594 129.831 151.084 1.2346 Previous Day Last Week Last Month Last Year
How to read this table: Each line shows the percentage change in the value of the currency exchange rate relative to the value of the day before, 7 days before, 30 days before, and 365 days before, respectively. Currency Rate shows the exchange rate for selling the currency pair. For example EUR/USD=0.972 means 1 EUR = 0.972 USD. Arrows indicate the direction of the change.
One tool we recommend utilizing to give yourself a clear picture of what is happening across the currency-market landscape is the Seesaw of Supply and Demand. And the easiest place to start this is with the one currency that affects every currency pair you can trade: the U.S. dollar. The Seesaw Of Supply And Demand The Seesaw of Supply and Demand has two sides. The left side represents increasing demand and decreasing supply. The right side represents increasing supply and decreasing demand. (See Figure 1.)
As you are analyzing the U.S. dollar to determine how strong or how weak you believe it will be in the future, you need to stack up all the fundamental factors on the seesaw. If a fundamental factor is going to increase demand or decrease supply, you stack it on the left side of the seesaw. If a fundamental factor is going to increase supply or decrease demand, you stack it on the right side of the seesaw. As you stack more and more fundamental factors on the seesaw, you will notice that it begins to tip up or down depending on how many fundamental factors are on each side. If there are more factors on the left side of the seesaw, the left side will drop down while the right side rises. When this happens, you know that, fundamentally speaking, the U.S. dollar should be increasing in value. An easy way to remember this is by looking at the slope of the seesaw. You can see that it is rising from left to right. This is a positive slope and indicates strength in the U.S. dollar. (See Figures 2 and 3.)
If there are more factors on the right side of the seesaw, the right side will drop down while the left side rises. When this happens, you know that, fundamentally speaking, the U.S. dollar should be decreasing in value. Again, an easy way to remember this is by looking at the slope of the seesaw. You can see that it is tipping down from left to right. This is a negative slope and indicates weakness in the U.S. dollar. (See Figures 4 and 5.)
Using the Seesaw of Supply and Demand can help you distill complex economic information into a more manageable form. For example, when you are analyzing the relative strength or weakness of the U.S. dollar, it is easy to get sidetracked and lost when you are trying to keep track of the various factors that affect the value of the U.S. dollar, such as the unemployment rate, the trade balance, interest rates and so on. However, if you look at each one of these
factors individually to determine how it would affect the value of the U.S. dollar in a vacuum, it is much easier to decide if each individual factor will have a positive or a negative impact. Once you have analyzed a factor, place it on the appropriate side of the seesaw and move on to the next factor. As you move through the various factors that are affecting the value of the U.S. dollar, you will begin to see which side of the seesaw is becoming overloaded, and you can form either a strong-dollar bias or a weak-dollar bias. This is a great way to get started in your fundamental analysis.
2. RBI Intervention :
The valuation of the Indian currency highly depends on RBI that manages the 'balance of payments', slight modification in which can define the over or the under valuation of the Indian currency.
3. Oil factors :
India is a major importer of oil and the valuation of Indian money gets easily affected by the increase in the prices of the crude oil. It can further result in spreading inflation in an economy due to the over valuation of the Indian currency.
4. Political factors :
Several other factors that affect the currency stability are some political factors like change in the government set up, introduction of new export and import policies, tax rate and many more.
Types of exposure :
1. Transaction exposure :
A firm has transaction exposure whenever it has contractual cash flows (receivables and payables) whose values are subject to unanticipated changes in exchange rates due to a contract being denominated in a foreign currency. To realize the domestic value of its foreigndenominated cash flows, the firm must exchange foreign currency for domestic currency. As firms negotiate contracts with set prices and delivery dates in the face of a volatile foreign exchange market with exchange rates constantly fluctuating, the firms face a risk of changes in the exchange rate between the foreign and domestic currency.
2. Economic exposure :
A firm has economic exposure (also known as operating exposure) to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's market share|position with regards to its competitors, the firm's future cash flows, and ultimately the firm's value. Economic exposure can affect the present value of future cash flows. Any transaction that exposes the firm to foreign exchange risk also exposes the firm economically, but economic exposure can be caused by other business activities and investments which may not be mere international transactions, such as future cash flows from fixed assets. A shift in exchange rates that influences the demand for a good in some country would also be an economic exposure for a firm that sells that good.
3. Translation exposure :
A firm's translation exposure is the extent to which its financial reporting is affected by exchange rate movements. As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign asset]s and liabilities or the financial statements of foreign subsidiary|subsidiaries from foreign to domestic currency.While translation exposure may not affect a firm's cash flows, it could have a significant impact on a firm's reported earnings and therefore its stock price.Translation exposure is distinguished from transaction risk as a result of income and losses from various types of risk having different accounting treatments.
4. Contingent exposure :
A firm has contingent exposure when bidding for foreign projects or negotiating other contracts or foreign direct investments. Such an exposure arises from the potential for a firm to suddenly face a transactional or economic foreign exchange risk, contingent on the
outcome of some contract or negotiation. For example, a firm could be waiting for a project bid to be accepted by a foreign business or government that if accepted would result in an immediate receivable. While waiting, the firm faces a contingent exposure from the uncertainty as to whether or not that receivable will happen. If the bid is accepted and a receivable is paid the firm then faces a transaction exposure, so a firm may prefer to manage contingent exposures.
3. Credit Risk:
Other kinds of risks involved in foreign exchange trading are credit risks. These are associated with the probability that an outstanding currency position might not be repaid as agreed upon because of a voluntary or involuntary action by the other party. In such a case, the forex trading occurs on regulated exchanges, where all trades are settled by the learning house. In these types of forex exchanges, the investors of all sizes can deal without any credit concern.
4. Country Risk:
The country risks in forex trading are arise in case of there are a party is unable to receive an expected amount of payment because of the government interference in the matters of insolvency of an individual bank or institution. The country foreign exchange trading risks are linked to the interference of government in forex markets. It falls under the joint responsibility of the treasurer and the credit department. The government control on foreign exchange activities is still present and implemented actively. For the investors, it is important to know or how to be able to anticipate any restrictive changes concerning the free flow of currencies.
Key Points :
Most foreign buyers generall prefer to trade in their local currencies to avoid FX risk exposure. U.S. SME exporters who choose to trade in foreign currencies can minimize FX exposure by using one. of the widely-used FX risk management techniques available in the United States. The volatile nature of the FX market poses a great risk of sudden and drastic FX rate movements, which may cause significantly damaging financial losses from otherwise profitable export sales. The primary objective of FX risk management is to minimize potential currency losses, not to make a profit from FX rate movements, which are unpredictable and frequent.
not possible for any country to remain completely unaffected by developments in international markets, India was able to keep the spillover effect of the Asian crisis to a minimum through constant monitoring and timely action, including recourse to strong monetary measures, when necessary, to prevent emergence of self fulfilling speculative activities (Mohan, 2006a).
pro-cyclical even when fundamentals are strong. It is, therefore, necessary for developing countries to build cushions when times are favorable. High reserves provide some self insurance which is effective in building confidence including among the rating agencies and possibly in dealing with threat of cities. Thirdly, the reserve accumulation could also be seen in the context of the availability of abundant international liquidity following the easing of monetary policy in industrial countries, which enabled excess liquidity to flow into the emerging markets. In the event of hardening of interest rates in industrialized countries, this liquidity may dry up quickly; in that situation, emerging markets should have sufficient cushion to withstand such reserves flow of capital. Finally, and most important, the reserve build up could be the result of countries aiming at containing volatility in foreign exchange markets. It should be recognized that the self-corrective markets. It should be recognized that the self corrective mechanism in foreign exchange markets seen in developed countries is conspicuously absent among many emerging markets. The accumulation of reserves is also a reflection of imbalances in the current account of some countries and since the level of reserves held by any country is consequence of the exchange rate policy being pursued by the policy makers, for instance, capital flows have implications for the conduct of domestic monetary policy and exchange rate management. However, the manner in which such flows impact domestic monetary policy depends largely on the kind of exchange rate regime that the authorities follow. It is clear that, in a fixed exchange rate regime excess capital inflows would, perforce, need to be taken to foreign exchange reserves so as to maintain in desired exchange rate parity. On the other, in a fully floating exchange rate regime, the exchange rate would adjust itself according to the demand and supply conditions in the foreign exchange market, and as such there would be no need to take such inflows into the reserves.
has inflenced on the choice of the exchange rate regime in EMEs and the trend was in favour of intermediate regimes with country-specific features and with no fixed targets for the level of the exchange rate. The EMEs, in general, have been accumulating foreign exchange reserves as an insurance against shocks and the combination of these strategies which guide monetary authorities through the impossible trinity of a fixed exchange rate, open capital account and an independent monetary policy (Mohan, 2003). The appropriate policies on foreign exchange markets has converged around the views like, (i) exchange rates should be flexible and not fixed or pegged; (ii) there is continuing need for many emerging market economies to be able to intervene or manage exchange rates- to some degree - if movements are believed to be destabilizing in the short run; and (iii) reserves should at least be sufficient to take care of fluctuations in capital flows and liquidity at risk (Jalan, 2003). Broadly, the overall distribution of exchange rate regimes across the globe among main categories remained more or less stable during 2001-06, though there was a tendency for some countries to shift across and within exchange regimes which is evident in table.1. Thus, it is clear that managed floats are found in all parts of the globe, while conventional fixed pegs are mostly observed in the Middle East, the North Africa and parts of Asia. On the other hand, hard pegs are found primarily in Europe, Sub-Saharan Africa (the CFA zones) and small island economies (for instance, in the Eastern Caribbean). The substantial movement between soft 5 pegs and floating regimes suggests that floating is not necessarily a durable state, particularly for lower and middle-income countries, whereas there appears to be a greater state of flux between managed floating and pegged arrangements in high-income economies.
premium paid by them for the option. Recently, ANZ Grindlay has offered to arrange a loan of $ 50m to Ranbaxy by making effective use of call and put options to defend both the parties against unfavorable movements in exchange rates. Cross currency forward cover for importers who have taken $ loan for their imports but receive goods invoiced in say a Dm. They can enter forward cover for the delivery of Dm against the currency of loan i.e. -$. This is the cross currency forward cover. Some of the foreign Exchange controls are that export of foreign currency is not permitted, unless it has special RBI permission. Exchange controls also they list the permitted currency and a method of payment as approved by RBI for translation across the countries. It also contains guidelines relating to Foreign currency assets covering permission as for repatriation of capital profits dividends etc. Exchange controls also allow FC to be retained up 50% (in case of EOU EPZ units) and 25% (in case of ordinary exporters with banks in Indian and also abroad under EEFC a/c and FCA a/c. Exchange controls also state under-invoicing and over-invoicing of exports as a crime attracting penal provisions. Further, all sale proceeds in FC should come into the country within 180 days. RBI permission is required for any extension beyond 180 days. In case of failure to get RBI's nod, the tax and other export incentives are not provided to the exporters. Further, exchange controls give details and guidelines for different accounts for NRI and foreign investors such as Ordinary Non- Resident Rupee a/c, Non-Resident External; Rupee a/c FCNR (B) a/c etc. Introduction of complex hedging tools like futures, options is still a long way to go, Recently, the government lifted the ban on futures, option trading in equity (stocks) after 40 years, This could be regarded as a step ahead to come closer to introduction of more complex tools in the currency markets in India. In the near future Standard Chartered plans to introduce rupee-based derivatives in India subject to the clearance and approval by exchange controls, with many companies now making use of different tools effectively, the Indian foreign exchange markets are moving ahead towards more relaxations and towards making the foreign exchange markets more vibrant and versatile, IDBI is one of the most active user of financial derivatives in Indian market. It made considerable savings over the last two year by using the entire range of products available in Indian forex markets.
The rupee, which had touched life time low of 61.21 against a dollar on July 8, was trading around 60.80 today. In order to contain Current Account Deficit (CAD) and arrest value of declining rupee, the RBI last month had raised the cost of borrowing for banks and reduced availability of funds to curb speculation in the forexmarket. RBI did not roll back these measures in its first quarter monetary policy which was unveiled earlier in this week. Prime Minister Manmohan Singh and Finance Minister P Chidambaram had said that the measures announced by the RBI were not indicative of firming up of interest rates in the long-term and would be withdrawn once stability was achieved in the forex market. Subbarao said the arguments of critics, including those related to ownership structures of large corporates, were not trivial and the RBI has been sensitive to them. "That is the reason we have built several safeguards into the licensing regime by prescribing demanding criteria for the corporate structure, fit and proper criteria, corporate governance norms, exposure norms, and others," he said. The RBI hasn't indicated how many bank licences will be issued. Subbarao had earlier said not all those who are fit and proper will be given a licence because the expected number of eligible applicants will be larger than the meaningful number of licences to be given. The RBI had earlier clarified that entities getting new bank licences will have 18 months to open branches and promoters have to transfer their holdings to a non-operative financial holding company within a stipulated period. Applicants for bank licences include India Post, LIC HFL, Reliance Capital, Aditya Birla Nuvo and L&T Finance.
4. Choose a broker :
Making a decision on which broker to use is personal for each trader. Some brokers offer certain options that some traders will thrive on, while other traders will hate the broker for those same options. It is important to review and compare the options of each broker closely and choose the one that makes you feel most comfortable.