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It has been workng snce 70s of the 20th century - from the moment when the bggest word natons decded to swtch from fxed exchange rates to foatng ones. Day oume of Forex trade exceeds 4 tron nted States doars, and ths number s aways growng. an currency for Forex operatons s the nted States doar (SD). Accordng to au Enzg, "he foregn exchange market s the system n whch the conerson of one natona currency n to another takes pace wth transferrng money from one country to another." Accordng to Kndeberger, "It s pace where foregn moneys are bought and sod." In smpe words, the foregn exchange market s a market n whch natona currences are bought and sod aganst one another. here are arge numbers of foregn transactons such as buyng goods abroad, stng foregn country for any purpose. Correspondng naton n whose currency the transacton s to be fufed. he foregn exchange market prodes the foregn currency aganst any natona currency. Howeer, t s to be understood that unke other markets, ths market s not restrcted to any partcuar country or any geographc area. here are arge numbers of deaers' nstruments such as exchange bs, bank drafts, teegraphc transfers (), etc. here are certan other deaers such as brokers, acceptance houses as we as the centra bank and treasury of the naton. The foreign exchange market is unique because of Its huge tradng oume, eadng to hgh qudty; Its geographca dsperson; Its contnuous operaton: 24 hours a day except weekends, .e. tradng from 20:15 G on Sunday unt 22:00 G Frday; he arety of factors that affect exchange rates; he ow margns of reate proft compared wth other markets of fxed ncome; and he use of eerage to enhance proft margns wth respect to account sze. History Hstorcay the aue of goods was expressed through some other goods, for exampe - a barter economy where ndduas exchange goods. he obous dsadantages of such a system encouraged estabshment of more generay accepted and understand means of goods exchange ong tme ago n hstory - to set a common scae of aue. In dfferent paces eerythng from teeth to |ewery has sered ths purpose but ater metas, and especay god and ser, were ntroduced as an accepted means of payment, and aso a reabe form of aue storage. Orgnay, cons were bascay mnted from the meta, but stabe potca systems ntroduced a paper form of IOs (I owe you) whch ganed wde acceptance durng the dde Ages. Such paper IOs became the bass of our modern currences. Before Frst Word War most centra banks supported currences wth god. Een though banknotes aways coud be exchanged for god, n reaty ths dd not happen that often, deeopng an understandng that fu reseres are not reay needed. Sometmes huge suppy of banknotes wthout god support ed to gant nfaton and hence potca nstabty. o protect natona nterests foregn exchange contros were ntroduced to demand more responsbty from market payers. Coser to the end of Word War II, the Bretton Woods agreement was sgned as the ntate of the SA n |uy 1944. he Bretton Woods Conference re|ected |ohn aynard Keynes suggeston for a new word resere currency n faour of a system but on the S doar. Other nternatona nsttutons such as the IF, the Word Bank and GA (Genera Agreement on arffs and rade) were created n the same perod as the emergng ctors of WW2 searched for a way to aod the destabsng monetary crses whch ed to the war. he Bretton Woods agreement resuted n a system of fxed exchange rates that party renstated the god standard, fxng the S doar at SD35oz and fxng the other man currences to the doar - and was ntended to be permanent. he Bretton Woods system came under ncreasng pressure as natona economes moed n dfferent drectons durng the sxtes. A number of reagnments kept the system ae for a ong tme, but eentuay Bretton Woods coapsed n the eary seentes foowng presdent xon's suspenson of the god conertbty n August 1971. he doar was no onger sutabe as the soe nternatona currency at a tme when t was under seere pressure from ncreasng S budget and trade defcts. he foowng decades hae seen foregn exchange tradng deeop nto the argest goba market by far. estrctons on capta fows hae been remoed n most countres, eang the market forces free to ad|ust foregn exchange rates accordng to ther perceed aues. But the dea of fxed exchange rates has by no means ded. he EEC (European Economc Communty) ntroduced a new system of fxed exchange rates n 1979, the European onetary System. hs attempt to fx exchange rates met wth near extncton n 1992-93, when pent-up economc pressures forced deauatons of a number of weak European currences. eertheess, the quest for currency stabty has contnued n Europe wth the renewed attempt to not ony fx currences but actuay repace many of them wth the Euro n 2001. he ack of sustanabty n fxed foregn exchange rates ganed new reeance wth the eents n South East Asa n the atter part of 1997, where currency after currency was deaued aganst the S doar, eang other fxed exchange rates, n partcuar n South Amerca, ookng ery unerabe. But whe commerca companes hae had to face a much more oate currency enronment n recent years, nestors and fnanca nsttutons hae found a new payground. he sze of foregn exchange markets now dwarfs any other nestment market by a arge factor. It s estmated that more than SD 3,000 bon s traded eery day, far more than the word's stock and bond markets combned. Functions of Foreign Exchange Market A Transfer Function: As mentoned aboe, the foregn exchange markets are exchange markets engaged n transferrng the purchasng power between two natons and two currences. It s prme functon of ths market. In smpe terms, t s conerson of one currency nto another such as conertng Indan s. nto .S. and ce ersa at some rate. arous nstruments ke bank drafts, exchange bs, are used for transferrng the purchasng power. In ths regard nternatona cearng to both the drecton s mportant to because t smpfes the conduct of nternatona trade as we as capta moements from one country to another. B Credit Function : nder ths functon the foregn exchange market prodes credt to the traders such as exporters and mporters. Exporters can get credt such as reshpment and post- shpment credt. ecenty started Euro-Doar market s a eadng credt market at nternatona ee. hs functon of makng credt aaabe pays a cruca roe n growth and expanson of the nternatona trade. C Hedging : Hedgng s a specfc functon. nder ths functon the foregn exchange market tres to protect the nterest of the persons deang n the market from any unforeseen changes n the exchange rate. he exchange rates (prce of one currency expressed n another currency) under free market stuaton can go up and down. hs can ether brng gans or osses to the concerned partes. Foregn exchange market guards the nterest of both exports as we as mporters, aganst any changes n the exchange rate. Drimary he prmary functon of foregn currency exchange markets s to conert the currency of one country nto another currency. For exampe, the .S. doar may be changed nto excan esos or Engsh ounds. he amount of currency conerted depends on the exchange rate, whch can be fxed or can fuctuate. he .S. doar s a currency that has a fuctuatng exchange rate that s based on market demand. Some countres, ke Chna, hae a fxed exchange rate determned by ther centra bank. Elnternational Transactions Foregn currency exchange markets sere to factate nternatona fnanca transactons. hese transactons may be the purchasng and seng of goods, drect nestment n budngs and equpment n a foregn country or the purchase of nestment ke foregn bonds. For exampe, a .S.-based company may want to purchase goods manufactured n Chna. he foregn currency exchange market aows them to exchange .S. doars and make the purchase n Chnese B (renmnb, the currency of the eope's epubc of Chna). FCurrency Value he aue of a country's currency can nfuence nternatona trade, consumers' purchasng power and nfaton. Centra banks of a county or regon, ke the .S. Federa esere, seek to mnmze the mpact of currency fuctuatons. he foregn currency exchange market functons as a too for centra banks to contro the aue of ther currency by buyng or seng currency, whch nfuences the tota amount n wordwde crcuaton. lnvestment Fund managers and nestment professonas use the foregn currency exchange market to hep dersfy ther portfoos and potentay ncrease ther returns. hrough cacuated rsks, nestors can bet on a change n the prce or exchange rate of a currency. |ust ke wth the stocks, f currency s purchased at a ow prce and sod at a hgher prce, the nestor makes money. HLoss rotection Internatona companes that work n mutpe countres are sub|ect to gans and osses based on exchange rate fuctuatons. o hep preent osses, companes can make forward transactons where they make a bndng agreement to exchange currency for another currency at a fxed rate. hs functon of the foregn currency exchange market heps a company mnmze the rsk of foregn exchange on future expenses. For exampe, f a .S.-based company paces an order wth a frm n awan that w be ready n fe months, the company can enter a forward transacton agreement that fxes the prce based on the current exchange rate at the tme of order. he company knows the aue and cost of the purchase and w not be ht wth a future oss based on a change n exchange rates. Advantages of Forex trading High leverage Startng from a mnmum of 100:1, Forex markets offer ts traders wth huge amounts of eerage whch means that fat profts can be produced by nestng sma amounts of deposts. o commission If deang wth a fnanca market on day bass, the reguar nestors or traders are the ones who are reay benefted by the free of commsson tradng. he currency tradng market ets ts traders keep a whoe 100 of ther tradng profts. Superior liquidity Wth most of the currency transactons comprsng of 7 man currency pars, the huge oume and the goba tradng aspect heps these currences exhbt prce stabty, tte sppage, narrow spreads and hgh ees of qudty. rofitability Beng an oer the counter market, the tradng done at Forex can be known as oer the counter tradng, wheren, a trader aways buys one currency and ses of the other one n rea tme. here s no organzatona pre|udce n the market and eery nestor has the equa prospects for proft n t. 24 hours trading Forex currency tradng market offers ts traders wth a 24 hour tradng openng, wheren, a Forex nestor can trade any tme of the day, whateer suts hmher, as the market s open for tradng 24 hours a day, from Sunday 5:00 pm (E) to Frday 4:30 pm. hs ges the Forex traders a choce to opt for tmng for the trade accordng to ther conenence. Disadvantages of Forex trading High Leverage Whe hgh eerage seres as an adantage to attract traders to the market, t can at tmes aso act as a dsadantage for them. Wth such hgh ees of eerage aaabe to traders n the Forex market, comes an equay hgh ee of danger. hs can be true for the hgh stake postons whch carry aong wth them, too much rsk, eadng to margn cas. hs s where effcent money management comes nto pay for payng safe. 24 hours market Athough t s conenent for the trader to trade wheneer t s sutabe to hm, t can be a rather tough |ob too. hs s because, at tmes, t s not possbe for an nddua trader to keep track of the Forex market, 24 hours a day. hs s where a broker comes nto the pcture. eta or nddua nestors shoud try takng hep from a professona broker rather than dong a the deangs hmsef straght wth the huge market. he broker w be an experenced professona who w act as an equa n your transactons, keepng you nformed and updated about mnute to mnute detas and fuctuatons, and een gude you about the condtons, when to and when not to trade n the market. ke eery other fnanca market, Forex market aso has ts share of adantages and dsadantages. But keepng n mnd the two can surey hep a trader become more gant and aware of what to expect whe tradng Forex. Market size As such, t has been referred to as the market cosest to the dea of perfect competton, notwthstandng market manpuaton by banks. Accordng to the Bank for Internatona Settements, as of Apr 2010, aerage day turnoer n goba foregn exchange markets s estmated at 3.9 tron, a growth of approxmatey 20 oer the 3.21 tron day oume as of Apr 2007. he 3.9 tron break-down s as foows: 1.490 tron n spot transactons 475 bon n outrght forwards 1.75 tron n foregn exchange swaps 43 bon currency swaps 207 bon n optons and other products an foregn exchange market turnoer, 192007, measured n bons of SD. he foregn exchange market s the argest and most qud fnanca market n the word. raders ncude arge banks, centra banks, currency specuators, corporatons, goernments, and other fnanca nsttutons. he aerage day oume n the goba foregn exchange and reated markets s contnuousy growng. Day turnoer was reported to be oer S3.9 tron n Apr 2010 by the Bank for Internatona Settements. Of the 3.9 tron day goba turnoer, tradng n ondon accounted for around 1.5 tron, or 3.7 of the tota, makng ondon by far the goba center for foregn exchange. In second and thrd paces respectey, tradng n ew ork Cty accounted for 17.9, and okyo accounted for .2. In addton to "tradtona" turnoer, 2.1 tron was traded n derates Financial instruments Spot A spot transacton s a two-day deery transacton (except n the case of trades between the S Doar, Canadan Doar, urksh ra, EO and ussan ube, whch sette the next busness day), as opposed to the futures contracts, whch are usuay three months. hs trade represents a drect exchange between two currences, has the shortest tme frame, noes cash rather than a contract; and nterest s not ncuded n the agreed-upon transacton. Forward One way to dea wth the foregn exchange rsk s to engage n a forward transacton. In ths transacton, money does not actuay change hands unt some agreed upon future date. A buyer and seer agree on an exchange rate for any date n the future, and the transacton occurs on that date, regardess of what the market rates are then. he duraton of the trade can be one day, a few days, months or years. suay the date s decded by both partes. hen the forward contract s negotated and agreed upon by both partes. Swap he most common type of forward transacton s the currency swap. In a swap, two partes exchange currences for a certan ength of tme and agree to reerse the transacton at a ater date. hese are not standardzed contracts and are not traded through an exchange. Future Foregn currency futures are exchange traded forward transactons wth standard contract szes and maturty dates for exampe, 1000 for next oember at an agreed rate 4.5. Futures are standardzed and are usuay traded on an exchange created for ths purpose. he aerage contract ength s roughy 3 months. Futures contracts are usuay ncuse of any nterest amounts. Option A foregn exchange opton (commony shortened to |ust F opton) s a derate where the owner has the rght but not the obgaton to exchange money denomnated n one currency nto another currency at a pre-agreed exchange rate on a specfed date. he F optons market s the deepest, argest and most qud market for optons of any knd n the word. Forex ETF Forex Exchange Traded Funds can be thought of as a stock market existing within the forex market. The Forex ETF firms create 'forex traded funds' through buying and holding of foreign currencies. Later on, these funds are sold as shares and traders can buy any number of stocks for that fund. The most commonly used currency is the USD in forex ETF. shareholder of the forex ETF funds makes money when the prices of the term currency improe against the USD.
Types of Forex ETFs Forex market deals in many currencies. Therefore, many specialized or diersified forex ETFs hae emerged with a focus on different number of currencies. They are:
Forex ETFs which track single currency: These firms buy only one currency and their share represents a fixed amount of that currency. ne can inest in the: Canadian DoIIar Trust (FXC) British Pound Trust (FXB) Euro Currency Trust (FXE) Currency Swiss Franc Trust (FXF) AustraIian DoIIar Trust (FXB) Forex ETFs that track a number of currencies based on their correlation: Funds like PowerShares DB U.S. Dollar Bearish UDN) and PowerShares DB U.S. Dollar Bullish UUP) inest in currencies like: Japanese Yen Euro Swedish Krona British Pound Canadian DoIIar Swiss Franc n these ETFs, the ratio of currencies differs from one fund to another.
Forex ETFs that track currency indexes: There are ery few firms that operate under this category. The DB G10 Currency Harest Fund DBV) is a popular example. Currencies traded in the markets Majors European non Euro EUR C nted States Doar USD $ nted Kngdom ound Sterng B |apanese en ]Y Swtzerand Swss Franc CHF Sfr. Minors Austraa Austraan Doar AUD A$ ew eaand ew eaand Doar ZD Z$ Canada Canadan Doar CAD C$ Exotic Currencies any other countres exst n the word, and most of them hae ther own currences. Outsde of the ma|or and mnor currences s the arge group of the so-caed "exotc currences". Exotc currences are made up of the hundreds of currences not n the ma|or or mnor eagues, but whch are neertheess mportant as we, especay n nternatona commerce and fnance. The exotics include: RUB - the ussan ube CY - the Chnese uan or emnmb BRL - the Brazan ea MX - the excan eso CL - the Chean eso lR - the Indan upee lRR - the Iranan a hese make up |ust a few of the most actey traded exotc currences. In some cases, a country w use .S. Doars as ther currency, such as countres ke Hat for exampe. Working of forex market uotes of trades For exampe, the exchange rate between S doars and the Swss franc s normay stated: SF 1$ European terms Howeer, ths rate can aso be stated as: $2SF American terms Excudng two mportant exceptons, most nterbank quotatons around the word are stated n European terms. Forward rates are typcay quoted n terms of ponts. A forward quotaton s expressed n ponts s not a foregn exchange rate as such. ather, t s the dfference between the forward rate and the spot rate. Interbank quotatons are gen as a bd and ask (aso referred to as offer).A bd s the prce (.e. exchange rate) n one currency at whch a deaer w buy another currency. An ask s the prce (.e. exchange rate) at whch a deaer w se the other currency. Deaers bd (buy) at one prce and ask (se) at a sghty hgher prce, makng ther proft from the spread between the buyng and seng prces. A bd for one currency s aso the offer for the opposte currency. Foreign exchange transactions are settled through ostro and Vostro accounts ostro: our account wth banks abroad. esere Bank of Inda (BI) mantans arous ostro accounts n a number of countres. Vostro: ther account wth us. any mutatera agences (e.g. IF, Word Bank) mantan ther ostro accounts at esere Bank of Inda (BI). SWlFT Society for Worldwide lnterbank Financial Telecommunications rice maker and rice Taker he bank quotng the prce s prce maker or market maker. he bank askng for the prce or quote s the prce taker or user. ET OE OSlTlO- O A measure of foregn exchange rsk O s the et Assetet abty poston n a FCs together (Both BS Off BS). et Asset oston s aso caed OG or Oerbought poston. et abty oston s aso caed SHO or Oersod poston. O s a snge statstc that prodes a fary good dea about exchange rsk assumed by the bank. Its ma|or faw s that F exposures n thrd currences reman hdden. Market participants he foregn exchange market conssts of two ters: he nterbank or whoesae market (mutpes of 1 S or equaent n transacton sze) he cent or reta market (specfc, smaer amounts) Fe broad categores of partcpants operate wthn these two ters; bank and nonbank foregn exchange deaers, ndduas and frms, specuators and arbtragers, centra banks and treasures, and foregn exchange brokers. 1 Bank and onbank Foreign Exchange Dealers Banks and a few nonbank foregn exchange deaers operate n both the nterbank and cent markets. he proft from buyng foregn exchange at a bd prce and reseng t at a sghty hgher offer or ask prce. Deaers n the foregn exchange department of arge nternatona banks often functon as market makers.hese deaers stand wng at a tmes to buy and se those currences n whch they specaze and thus mantan an nentory poston n those currences. 2 lndividuals and Firms Indduas (such as toursts) and frms (such as mporters, exporters and Es) conduct commerca and nestment transactons n the foregn exchange market. her use of the foregn exchange market s necessary but neertheess ncdenta to ther underyng commerca or nestment purpose. Some of the partcpants use the market to hedge foregn exchange rsk. Speculators and Arbitragers Specuators and arbtragers seek to proft from tradng n the market tsef. hey operate n ther own nterest, wthout a need or obgaton to sere cents or ensure a contnuous market. Whe deaers seek the bdask spread, specuators seek a the proft from exchange rate changes and arbtragers try to proft from smutaneous exchange rate dfferences n dfferent markets. 4 Central Banks and Treasuries Centra banks and treasures use the market to acqure or spend ther countrys foregn exchange reseres as we as to nfuence the prce at whch ther own currency s traded. hey may act to support the aue of ther own currency because of poces adopted at the natona ee or because of commtments entered nto through membershp n |ont agreements such as the European onetary System. he mote s not to earn a proft as such, but rather to nfuence the foregn exchange aue of ther currency n a manner that w beneft the nterests of ther ctzens. As wng oss takers, centra banks and treasures dffer n mote from a other market partcpants Foreign Exchange Brokers Foregn exchange brokers are agents who factate tradng between deaers wthout themsees becomng prncpas n the transacton. For ths serce, they charge a commsson. It s a brokers busness to know at any moment exacty whch deaers want to buy or se any currency. Deaers use brokers for ther speed, and because they want to reman anonymous snce the dentty of the partcpants may nfuence short term quotes. RBls role in forex market o manage the exchange rate mechansm. eguate nter-bank forex transactons and montor the foregn exchange rsk of the banks. Keep the exchange rate stabe. anage and mantan country's foregn exchange reseres. 1 Exposure limits BI has mposed foregn exchange exposure mts on banks (FE 12 of 1999).he mts are ted wth the ad up capta of the bank. reousy banks had O mt, whch was based on foregn exchange oume handed by the bank. 2 Treasury operations at RBl Treasury operations at RBl A Centra Banks hae treasures to mpement pocy ob|ectes s a s ECHAGE AE IEES AES Deang room catered to the F market ony. oney market was beng ooked after by the Securtes department. It soon became apparent that the two cannot work n soaton wth each other as the nkage between the money market exchange market became pronounced .Fnay the deang room and securtes department were merged to form EDD to form frst eer reasury of BI. RBls monitoring O report. F nfowoutfow statements. O payments, Forward transactons. arket montorng arket Fows and ther mpact on exchange rate. oney arket qudty Forward rates arket actty f requred ates reparaton 2 (Marked to Market), Wtd. Ag(Weghted Aerage), FCA Conerson. 4 lntervention o keep exchange rate n ne wth macro ob|ectes BI has to nterene from tme to tme. Interenton s a process where F s sod or purchased to keep the rght amount of qudty aaabe n the F market so that demand suppy equbrum s mantaned. Interenton can be n EAD or FOWAD Other Functions OFFSIE OIOIG DAI AES FO AKE HID CEC ACII FO BO AES ESEE AAGEE A uantitative function to regulate banks Foreign Exchange Exposure Limit FEEL Bascay restrcts the banks to keep a net asset (ong) or net abty (short) poston n foregn currences. resenty FEE for each bank s set at 10 of ts pad up capta. In the presence of FEE, banks net purchases or net saes n foregn exchange on a gen day hae to be wthn ther FEE. ISK AAGEE sk aerson n the forex s a knd of tradng behaor exhbted by the foregn exchange market when a potentay aderse eent happens whch may affect market condtons. hs behaor s caused when rsk aerse traders qudate ther postons n rsky assets and shft the funds to ess rsky assets due to uncertanty. In the context of the forex market, traders qudate ther postons n arous currences to take up postons n safe haen currences, such as the S Doar. Sometmes, the choce of a safe haen currency s more of a choce based on preang sentments rather than one of economc statstcs. An exampe woud be the Fnanca Crss of 200. he aue of equtes across word fe whe the S Doar strengthened. hs happened despte the strong focus of the crss n the SA. Hedging with Forwards Hedgng refers to managng rsk to an extent that makes t bearabe. In nternatona trade and deangs foregn exchange pay an mportant roe. Fuctuatons n the foregn exchange rate can hae sgnfcant mpact on busness decsons and outcomes. any nternatona trade and busness deangs are sheed or become unworthy due to sgnfcant exchange rate rsk embedded n them. Hstorcay, the foremost nstrument used for exchange rate rsk management s the forward contract. Forward contracts are customzed agreements between two partes to fx the exchange rate for a future transacton. hs smpe arrangement woud easy emnate exchange rate rsk, but t has some shortcomngs, partcuary gettng a counter party who woud agree to fx the future rate for the amount and tme perod n queston may not be easy. In aaysa many busnesses are not een aware that some banks do prode forward rate arrangements as a serce to ther customers. By enterng nto a Forward rate agreement wth a bank, the busnessman smpy transfers the rsk to the bank, whch w now hae to bear ths rsk. Of course the bank n turn may hae to do some knd of arrangement to manage ths rsk. Forward contracts are somewhat ess famar, probaby because there exsts no forma tradng factes, budng or een reguatng body. An Example of Hedging Using Forward Agreement Assume that a aaysan constructon company, Bumways |ust won a contract to bud a stretch of road n Inda. he contract s sgned for 10,000,000 upees and woud be pad for after the competon of the work. hs amount s consstent wth Bumways mnmum reenue of 1,000,000 at the exchange rate of 0.10 per upee. Howeer, snce the exchange rate coud fuctuate and end wth a possbe deprecaton of upees, Bumways enters nto a forward agreement wth Frst State Bank of Inda to fx the exchange rate at 0.10 per upee. he forward contract s a ega agreement, and therefore consttutes an obgaton on both sdes. he Frst State Bank may hae to fnd a counter party for ths transacton ether a party who wants to hedge aganst the apprecaton of 10,000,000 upees exprng at the same tme or a party that wshes to specuate on an upward trend n upees. If the bank tsef pays the counter party, then the rsk woud be borne by the bank tsef. he exstence of specuators may be necessary to pay the counter party poston. By enterng nto a forward contract Bumways s guaranteed of an exchange rate of 0.10 per upee n the future rrespecte of what happens to the spot upee exchange rate. If upee were to actuay deprecate, Bumways woud be protected. Howeer, f t were to apprecate, then Bumways woud hae to forego ths faorabe moement and hence bear some mped osses. Een though ths faourabe moement s st a potenta oss, Bumways proceeds wth the hedgng snce t knows an exchange rate of 0.10 per upee s consstent wth a proftabe enture. Hedging with Futures otng the shortcomngs of the forward market, partcuary the need and the dffcuty n fndng a counter party, the futures market came nto exstence. he futures market bascay soes some of the shortcomngs of the forward market. A currency futures contract s an agreement between two partes a buyer and a seer to buy or se a partcuar currency at a future date, at a partcuar exchange rate that s fxed or agreed upon today. hs sounds a ot ke the forward contract. In fact the futures contract s smar to the forward contract but s much more qud. It s qud because t s traded n an organzed exchange the futures market (|ust ke the stock market). Futures contracts are standardzed contracts and thus are bought and sod 4 |ust ke shares n the stock market. he futures contract s aso a ega contract |ust ke the forward, but the obgaton can be remoed before the expry of the contract by makng an opposte transacton. As for hedgng wth futures, f the rsk s an apprecaton of aue one needs to buy futures and f the rsk s deprecaton then one needs to se futures. Consder our earer exampe, nstead of forwards, Bumways coud hae thus sod upee futures to hedge aganst upee deprecaton. ets assume accordngy that Bumways sod upee futures at the rate 0.10 per upee. Hence the sze of the contract s 1,000,000. ow say that upee deprecates to 0.07 per upee the ery thng Bumways was afrad of. Bumways woud then cose the futures contract by buyng back the contract at ths new rate. ote that n essence Bumways bascay bought the contract for 0.07 and sod t for 0.10. hs woud ge a futures proft of 300,000 (0.10-0.07) x 10,000,000. Howeer n the spot market Bumways gets ony 700,000 when t exchanges the10,000,000 upees contract aue at 0.07. he tota cash fow howeer, s 1,000,000 (700,000 from spot and 300,000 proft from futures). Wth perfect hedgng the cash fow woud be 1 mon no matter what happens to the exchange rate n the spot market. One adantage of usng futures for hedgng s that Bumways can reease tsef from the futures obgaton by buyng back the contract anytme before the expry of the contract. o enter nto a futures contract a trader needs to pay a depost (caed an nta margn) frst. hen hs poston w be tracked on a day bass so much so that wheneer hs account makes a oss for the day, the trader woud recee a margn ca (aso known as araton margn), .e. requrng hm to pay up the osses. 5 Economic Events When Currency Rocked the World hese are changes n the currency markets whch caused substanta mpact n the word economy. It s mportant that peope earn about currency moements and how the occurrence of such eents prode ucrate opportuntes for currency nestors to proft from themarkets. Free Market Capitalism is Born On August 15 1971, ths date marked the end of the Bretton Woods system, a system that used to fx the aue of a currency to the aue of god. he nted States pued out of the Bretton Woods Accord and took the S off the estabshed God exchange Standard. S were runnng a baance of payments defct and a trade defct back n the eary 1970s due to the costs of etnam War and ncreased domestc spendng has acceerated nfaton. he S goernment used up amost a of hs reseres and god reseres by that tme. Hence t began to prnt more doars to suppement ts expendture. In short, most countres ost fath n the doar as t s oeraued aganst god. he nternatona communty dumped ther doars n exchange for god. he fact s there was not enough god n the S aut to pay back the nternatona communty. S goernment had prnted too much doar and they were broke. Foowng that, resdent xon shocked the word. he eent was nformay named xon Shock because resdent xon and 15 adsors remoed S from the God Exchange System wthout consutng the members of the nternatona monetary system. S doars was the frst currency to be foated- that s, exchange rates were no onger the prncpa method used by goernments to admnster monetary pocy but s soey determned by suppy and demand market forces. By 197, a the ma|or currences were foated. he forex markets were started. Devaluation of U.S Dollar - laza ccord In the eary 190s, the S Federa esere System under au ocker had oeraued the doar enough to make S exports n the goba economy ess compette. he .S goernment faced a arge and growng current account defct, whe |apan and Germany were facng arge and growng surpuses. hs mbaance coud create a serous economc dsequbrum whch woud resut n a dstorton of the foregn exchange markets and thus the goba economy. he resut of current account mbaances and the possbty of foregn exchange dstorton brought mnsters of the words eadng economes France, Germany, |apan, the nted Kngdom, and the nted States together n ew ork Cty. he aza Accord was sgned on September 22, 195 at the aza Hote n ew ork Cty, agreeng to deprecate the S doar n reaton to the |apaneseand German Deutsche ark by nterenng n currency markets. he effects of the aza Accord agreement were seen mmedatey wthn 2 years. he doar fe 4 percent and 50 percent aganst the deutsche mark and the |apanese en. Deauaton of the doar stabse the growng S trade defct wth ts tradng partners for a short perod of tme. As a resut, .S. economy became more export-orented whe Germany and |apan became more mport-orented. he sgnng of the aza Accord was sgnfcant n that t refected coordnated actons wth respecte goernments were abe to reguate the aue of the doar n the forex market. aues of foatng currences were determned by suppy and demand, but such forces were nsuffcent, and t was the responsbty of the words centra banks to nterene on behaf of the nternatona communty when necessary. o date, we st see countres that contnue to reguate aue of ts currency wthn a certan band n the forex market. Exampe of one country s |apan. Black Wednesday - The Man Who Broke the Bank Back Wednesday refers to the eents on 1th September 1992 when George Soros paced a 10 bon specuate bet aganst the .K. pound and won. He became the man who broke the Bank of Engand. In 1990, .K. |oned the Exchange ate echansm (E) at a rate of 2.95 deutsche marks to the pound and wth a fuctuaton band of - percent. E gae each partcpatory currency a centra exchange rate aganst a basket of currences, the European Currency nt (EC). hs system preents the exchange rate of partcpatory currences from too much fuctuaton wth the basket of currences. nt md 1992, economy began to change n Germany. Foowng reunfcaton of 199, German goernment spendng surged, forcng the Bundesbank to prnt more money. German economy experenced nfaton and nterest rates were rased to curb nfaton. Other partcpatory countres n the E were aso forced to rase nterest rates so as to mantan the pegged currency exchange rate. he rate hke ed to seere repercussons n the nted Kngdom. At that tme, .K. had a weak economy and hgh unempoyment rate. antanng hgh nterest rates s not sustanabe for .K. n the ong term, and George Soros stepped nto acton. George Soros was sad to proft 2 bon from the Back Wednesday. hs snge eent showed that wth knowedge and experence, nestors coud proft from the forex market. o centra banks can contro the forex markets. sia Currency Crisis eadng up to 1997, nestors were attracted to Asan nestments because of ther hgh nterest rates eadng to a hgh rate of return. As a resut, Asa receed a arge nfow of money. In partcuar, haand, aaysa, Indonesa, Sngapore and South Korea experenced unprecedented growth n the eary 1990s. hese countres fe one after another ke a set of domnos on |uy 2, 1997, showng the nterdependence of the Asan 5 gers economes. any economsts beee that the Asan Fnanca Crss was created not by market psychoogy but by shrouded endng practces and ack of respecte goernment transparency. In eary 1997, haand current account defct has grown consstenty up to a ee that s beeed to be unsustanabe. Shrouded endng practces oersupped the country wth credt and n turn droe up prces of assets. he same type of stuaton happened n aaysa, and Indonesa. ees were reached where prce of assets were oeraued and couped wth a unsustanabe trade defct, nternatona nestors and hedge fund managers began to se ha baht and neghborng countres currences hopng to proft from the punge. Foowng mass short specuaton and attempted nterenton, the Asan economes were n shambes. ha baht was sharpy deaued by as much as 4 percent and Indonesan rupah fe 22 percent from ts preous hgh of 12,950 to the fxed .S. doar. he fnanca crss of 1997-199 reeaed the nterconnectty of economes and ther effects on the goba currency markets. he nabty of centra banks to nterene n currency markets proded yet another ucrate opportunty for currency nestors to proft. The Euro: Best Reserve Currency after Dollar he name Euro was offcay adopted on 1 December 1995. he Euro s the offca currency of 1 of the 27 ember States of the European non. Euro s the second argest resere currency and the second most traded currency n the word after the .S. doar. As of oember 200, wth more than 751 bon n crcuaton, the euro s the currency wth the hghest combned aue of cash n crcuaton n the word, hang surpassed the .S. doar. Based on IF estmates of 200 GD and purchasng power party among the arous currences, the Euro zone s the second argest economy n the word. aue of Euro and the .S. doar are nersey correated. Shoud the doar fa, aue of Euro currency w rse. Euro w be the best choce to shft money to, shoud the aue of .S. doar contnue to fa. hs makes the Euro the best substtute currency for the doar. Conclusion Seeng the aboe data about the foregn exchange market we coud concude that the market n Inda s not st deeoped but s on the growng path. Foregn exchange market pays a ma|or and mportant roe n goba fnanca serces actng as an ndcator to the deeopment of the goba economy. We hereby concude that f Inda needs to deeop ts foregn market t needs to deeop the exchange currency market so as more nestor nests n Inda. This work is brought you by the initiative taken by www.fxbase.com in making forex trading customer aware about the forex market. Fxbase conduct webinar class for its forex customer and also teach through e-books and through team viewer etc. They are one of the fastest growing brokerage firm in Asia in 2012 and their service to their customer is at its peak. 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