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
6. How to Read a Currency Quote
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
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
9. Types of transactions
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 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
Since you originally sold (paid) 2000 USD, your profit is US
12. Tools for determining future
movements in Money Market
Thorough analysis of economic and political data
with the goal of determining future movements in a
An effort to forecast future market activity by
analyzing market data such as charts, price trends,
13. Some reasons to trade in FOREX
24-hour forex trading
100:1 Leverage in forex trading
Lower transaction costs
Equal profit potential in both rising and falling
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
Transaction risk: Arising from transactions in different
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.