1. FOREX
The Foreign Exchange Market
Shwetan Burkule
PUMBA

2. Introduction to FOREX
 The foreign exchange market (currency, forex, or FX)
market is where currency trading takes place.
 The Foreign Exchange market, is the largest financial
market in the world, with a daily average turnover of
US$3.2 trillion —
(Figures represented are of the year 2008)
 "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/
Indian Rupees (USD/INR).

3. About Forex
 Banks and other official institutions facilitate
the buying and selling of foreign currencies.
 Transactions involve one party purchasing
a quantity of one currency in exchange for
paying a quantity of another.
 The purpose of FX market is to facilitate
trade and investment.

4. Some Interesting facts…
 Average daily turnover in global foreign exchange markets
is estimated at $3.21 trillion.
 The Break Up of this $3.21 is as follows:-
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in foreign exchange swaps
$129 billion estimated gaps in reporting
 85% of all daily transactions involve trading a group of
currencies known as the "Majors."

5. Unique FOREX Market
 Its trading volumes.
 The extreme liquidity of the market.
 The vast geographical dispersion.
 the low margins of profit compared with other
markets of fixed income (but profits can be
high due to very large trading volumes)
 its long trading hours: 24 hours a day except
on weekends

6. How to Read a Currency Quote
 currency pair
 base currency
 quote currency
 Bid price
 Ask Price
SIMPLE !!

7. Major Players
 According to the BIS study, the most heavily
traded products were
2. EUR/USD: 27%
3. USD/JPY: 13%
4. GBP/USD (also called sterling or cable): 12%
 The US currency was involved in 86.3% of
transactions, followed by the euro (37.0%), the
yen (16.5%), and sterling (15.0%)
 Since its inception in January 1999, Euro is
gaining a strong foothold and demand to make
Euro as the reference currency has increased.

8. Two components to Forex
 Forex has two components
3. Over-the-counter (OTC)
4. Organized exchanges
 OTC is a network of dealers, brokers, and final customers. Low
regulation
 Dealers are mostly commercial and investment banks that buy a
currency at a bid price and sell it at an ask price
 Dealers take a position and thus face a risk of a price change
between purchase and sale
 Biggest dealers are Deutsche Bank, UBS, Citigroup, HSBC,
Barclays Bank, J.P. Morgan Chase, Goldman Sachs, ABN
AMRO, and Morgan Stanley
 Brokers help in carrying out a deal, connecting a dealer with a
final buyer or seller. They receive a fee and take no exchange
rate risk

9. Types of transactions
 Spot
 Outright exchange of one currency for another at the current spot
price with a two-day settlement.
 Currency covers both actual currency and bank deposits.
 Large transactions are in deposits.
 Outright forward
 Outright exchange of one currency for another at the current
market price but with future delivery.
 Transaction used to be done typically in agriculture. An Italian
exporter of Parmigiano cheese to the US, with an invoice due in
60 days, would sell forward the dollars against liras.
 Now forwards are used for a variety of reasons.

10. Types of transactions
Forex swap (two legs)
 In the first leg there is a swap of one currency for another
 In the second leg, which occurs in the future, there is a re-exchange, that
is the opposite swap
 The swap can occur with the first leg, say, in one month, and the second
in three months
Currency swap (three legs)
 First: a spot exchange of two currencies with underlying assets
 Second: an exchange of flows of fixed or floating interest rate payments
 Third: a re-exchange of the currencies at the initial spot rate
 It thus combines an interest rate swap with a forex swap

11. Example of a FOREX trade
 Suppose you feel that the INR is undervalued against the dollar.
To execute this strategy, you would buy Rupees (simultaneously
selling Dollars) and then wait for the exchange rate to rise.
 So you make the trade: purchasing 100,000 INR (1 lot) and
selling 2000 Dollars.
 As you expected, INR/USD rises to 48.50/55. Since you bought
Rupees and sold Dollars in your previous trade, you must now
sell Rupees for Dollars to realize any profit. You can now sell 1
Rupee for 0.020619 Dollars. When you sell the 100,000 Rupees
at the current INR/USD rate of 0.020619, you will receive
$2,061.9 .
 Since you originally sold (paid) 2000 USD, your profit is US
$61.9.

12. Tools for determining future
movements in Money Market
 Fundamental Analysis
Thorough analysis of economic and political data
with the goal of determining future movements in a
financial market.
 Technical Analysis
An effort to forecast future market activity by
analyzing market data such as charts, price trends,
and volume.

13. Some reasons to trade in FOREX
 24-hour forex trading
 Superior liquidity
 100:1 Leverage in forex trading
 Lower transaction costs
 Equal profit potential in both rising and falling
markets

14. Types of Forex risk
 Translation risk: Multinational co. (MNC) with branches
or subsidiaries in different currency areas of the world
must report its consolidated financial accounts in a
single currency. The conversion creates gains or
losses and may have tax consequences. The US has
the most elaborate system of accounting to handle the
conversion risk.
 Transaction risk: Arising from transactions in different
currencies.
 Economic risk: Typical in a foreign direct investment
(FDI). Investment is valued in terms of discounted
cash flows in foreign currencies and then converted in
local currency, with the local discount rate.

15. References
 http://en.wikipedia.org/wiki/Foreign_exchange
 Categories: Foreign exchange market
 Triennial Central Bank Survey
(December 2008), Bank for International
Settlements.

16. Thank You !!