The Foreign Exchange

Market
 Definition
The foreign exchange market
provides the physical and
institutional structure through which
the money of one country is
exchanged for that of another
country, the rate of exchange
between currencies is determined,
and foreign exchange transactions
are physically completed.
 The forex market is the market in which participants
are able to buy, sell, exchange and speculate on
currencies.

The forex markets is made up of banks, commercial

companies, central banks, investment management
firms, hedge funds, and retail forex brokers and
investors.

The forex market is open 24 hours a day, five days a

week. Because this market operates in multiple time
zones, it can be accessed at almost any time.

The currency market is considered to be the largest

financial market in the world, processing trillions of
dollars worth of transactions each day.
 Functions of the Foreign Exchange
Market

Transfer of Purchasing Power

Provision of Credit
Minimizing Foreign Exchange Risk
 Facts..
According to the Bank for International
Settlements, the preliminary global
results from the 2016 Triennial Central
Bank Survey of Foreign Exchange and
OTC Derivatives Markets Activity show
that trading in foreign exchange
markets averaged $5.1 trillion per day
in April 2016.
 History
Ancient times: If a Greek coin held more gold than an
Egyptian coin due to its size or content, then a
merchant could barter fewer Greek gold coins for more
Egyptian ones, or for more material goods..

Capital controls

State control of the foreign exchange trading ended in

1973 when complete floating and relatively free market
conditions of modern times began (the first time a
currency pair was traded by US retail customers was
during 1982)
 Foreign exchange is traded in an
over-the-counter market where
brokers/dealers negotiate directly
with one another, so there is no
central exchange or clearing house.
Structure of the FX market
 Participants
Commercial companies
Central banks
Investment management firms
Retail foreign exchange traders
Non-bank foreign exchange
companies
Money transfer/remittance
companies and bureaux de change
Determinants of currency exchange

International parity conditions: Relative purchasing

power parity, interest rate parity, Domestic Fisher
effect, International Fisher effect.

Balance of payments model: This model, however,

focuses largely on tradable goods and services,
ignoring the increasing role of global capital flows.

Asset market model: views currencies as an

important asset class for constructing investment
portfolios.
 Economic factors
Government fiscal policy
(budget/spending practices) and
monetary policy (interest rate).
Government budget deficits or
surpluses
Balance of trade levels and trends
Inflation levels and trends
Economic growth and health
Productivity of an economy
 Political conditions
Susceptible to political instability and
anticipations about the new ruling
party.

Political upheaval and instability can

have a negative impact on a nation's
economy.
 Market psychology
Flights to quality: Unsettling
international events can lead to a
"flight-to-quality", a type of capital
flight whereby investors move their
assets to a perceived "safe haven".
Long-term trends: Currency markets
often move in visible long-term
trends.
Rumors and technical trading
patterns.
Transactions in the Interbank Market

Spot Transactions
Outright Forward Transactions
Swap Transactions
Structure of the FX market
 Some symbols
Australian Dollar AUD
British Pound GBP
Euro EUR
Japanese Yen JPY
Swiss Franc CHFUS
Dollar USD
 Foreign Exchange Rates and
Quotations
Interbank Quotations
The European terms quote shows the
number of units of foreign currency needed
to purchase one USD: CAD 1.5770 / USD

The American terms quote shows the

number of units of USD needed to
purchase one unit of foreign currency: USD
0.6341 / CAD
 Todays rates

RBI Reference Rate

INR / 1 USD : 67.9106

INR / 1 Euro : 72.5625

INR / 100 Jap. YEN : 62.1000

INR / 1 Pound Sterling : 84.3178

 Direct and Indirect
Quotations
A direct quote is a home currency
price of a unit of foreign currency.
In the US, a direct quote for the CAD is
USD 0.6341 / CAD

An indirect quote is a foreign

currency price of a unit of home
currency.
 Bid and Ask Quotations
Interbank quotations are given as "bid" and "ask".

A bid is the exchange rate in one currency at which

a dealer will buy another currency

An ask is the exchange rate at which a dealer will

sell the other currency.

Dealers buy at the bid price and sell at the ask

price, profiting from the spread between the bid
and ask prices: bid < ask.
 Cross Rates
Quotations:
Thai Baht: THB 41.6982/USD
Barbados Dollars: BBD 2.0116/USD

The cross rate is THB/BBD is: