1. Impact of capItal market
Kallol Kumar Sarkar
B.Com(3rd year)
6th Sem
Roll-432
Room-31
Financial Market Operation & Financial Statement analysis

2. Contents discussed
Introduction
- Capital market
- Foreign currency
Objective of this study
Analysis
- Factors affecting exchange rates
- Exchange rate of some well known currencies
- Determination of value of domestic currency
- Concept of Quotes
- Currency derivatives
- Currency Futures
Conclusion

3. Introduction
A capital market is a market for securities (debt or equity), where business enterprises (companies) and
governments can raise long-term funds. It is defined as a market in which money is provided for periods
longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money
market). The capital market includes the stock market (equity securities) and the bond market (debt).
Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and
Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that
investors are protected against fraud, among other duties.
Capital markets may be classified as primary markets and secondary markets. In primary markets, new
stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary
markets, existing securities are sold and bought among investors or traders, usually on a securities
exchange, over-the-counter, or elsewhere.
FOREIGN CURRENCY
The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-
counter financial market for the trading of currencies. Financial centers around the world function as
anchors of trading between a wide range of different types of buyers and sellers around the clock, with the
exception of weekends. The foreign exchange market determines the relative values of different currencies.
The primary purpose of the foreign exchange is to assist international trade and investment, by allowing
businesses to convert one currency to another currency. For example, it permits a US business to import
British goods and pay Pound Sterling, even though the business's income is in US dollars. It also supports
speculation, and facilitates the carry trade, in which investors borrow low-yielding currencies and lend
(invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in
some countries.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a
quantity of another currency. The modern foreign exchange market began forming during the 1970s when
countries gradually switched to floating exchange rates from the previous exchange rate regime, which
remained fixed as per the Bretton Woods system.
A foreign exchange deal is done in currency pairs. For example (USD-INR),(JPY-USD) etc…The formal
currency is called base currency and the latter is called terms/counter/quote currency. USD-INR rate of Rs
48.053 implies that Rs. 48.053 needs to be paid to get 1US dollar.

4. OBJECTIVE OF THIS STUDY
This forex market is studied for the purpose of knowing the impact of the currency market in the Indian
Economy. Today’s financial environment has more risk than before. Businesses that manage their risk
carefully are the ones which succeed. Firms that monitor their risks carefully and manage their risks
with judicious policies enjoy a more stable business than those who are unable to identify and manage
their risks.
ANALYSIS
Factors affecting exchange rates:-
Fundamental factor : The fundamental factors are basic economic policies followed by the government in
relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and
export, etc…
Technical factor: Interest rates, Inflation rates, Exchange rate policies.
Political factors
Speculation
Exchange rate of some well known currencies.
Date: 28 June 2009
USD JPY EUR INR
USD 1.00 95.380 0.711 48.053
JPY 0.010 1.000 0.007 0.504
EUR 1.406 134.033 1.000 67.719
INR 0.021 1.984 0.015 1.000
Source :www.economictimes.com

5. Determination of value of domestic currency
Fixed exchange rate or pegged exchange rate
• Currency’s value is maintained at fixed ratio to the value of other currency or gold.
• Participation of govt. in open currency market.
• Value of currency raises beyond a permissible limit, govt. sells thereby increasing the supply and
the value decreases and vice-versa.
Floating exchange rate or managed float.
• Value is determined by the market mechanism through demand and supply of the currency.
• No govt. intervention is there. If the demand for currency is low its value decrease and thus
making imports dearer and exports cheaper.
• However at extreme case of appreciation or depreciation of currency , the central bank can
interfere to stabilize.
Concept of QUOTES
In currency market the rates are generally quoted in terms of USD. The price of a currency in terms of
another currency is called quotes. For example we can refer to the chart on the previous page, wherein it
is depicted that Rs.48.083 is equal to 1USD. Other combinations can also be made by us using the suitable
data as provided in the chart above.
Direct Quote- A quote where USD is the base currency is called a direct quote
Indirect Quote- A quote where USD is used as a terms currency is called a indirect quote.
There is however another kind of quote referred to as ‘cross quote’ where the quote is not against USD. It
is calculated via USD.
Currency derivatives can be described as contracts between the sellers and buyers whose values are
derived from the underlying which in this case is the Exchange Rate. Currency derivatives are mostly
designed for hedging purposes, although they are also used as instruments for speculation.
Currency Futures
Futures contracts act as hedging tools and help in protecting the risks associated with uncertainties in
exchange rates. Anyone who is anticipating a future cash outflow (payment of money) in a foreign currency
can lock-in the exchange rate for the future date by entering into a futures contract. It is actually a tool by
means of which we can regulate the trade of future, so the name ‘Futures’.

6. CONCLUSION
The forex market is one of the most important parts of trading these days. The forex market
determines the nature of growth and development in an economy. Even the forex market is responsible for
the networked growth and development.
We can refer to the position last year during recession. Greece, a European country went on with a
loss and that affected the whole world. Now if we try to go deep we will find out that the open economies
had the most bitter taste of this recession, while partially open economies like Brazil, India etc… didn’t
take long to tackle the mass growing problem. But if an economy is not open at all then it will not be
affected by the recession but in the long-run it can’t gain momentum to compete with the rest of the world.
By just referring to one example I wanted to communicate the tremendous impact this forex market has
on our day-to-day life. We are all part of this, ‘we can play safe for sometime but can’t ignore it for ever’ ,
for we say Time is Money.