Forex Market Internationl Finance1

8/3/2019 Forex Market Internationl Finance1

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International FinanceInternational Finance

ForexForex MarketMarket

Amey Shukla - WRR-010089

Indraneel lotankar Malpure saurabhdhirendranikhil



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Exchange Rate

Direct Quote

Indirect Quote

American - European Quote Bid Ask Rate

Two Way Quote

Spread

Forward Rate

Swap Points

Forward Rate, Premium &

Discount

Theories Of Exchange Rates Arbitrage

Foreign Exchange Exposure

Risk Management

Impossible Trinity

International Finance



` The Price Of One Currency Viewed In Relation To Another Currency Is Called Exchange Rate.

` Example- Re/$ 44.76 Means 44.76=1USD

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` X units of domestic currency equal one unit of foreign currency.

` Example- rs44.20 per USD is A direct quote for

USD in India

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` The domestic currency is the commodity which isbeing bought and sold.

` Commodity comes first and price next.

` Example- re1=.02 USD

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` American term is direct.` European term indirect.` Example-the rate $ 1.5 per pound is an

American term.` The quote $1= INR 45 in European term.

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` The bank¶s quote of bid and ask is from thebanker¶s perspective.

` Bid= buy`

Ask=sell` If the bid rate for USD is 40 it means that the

bank is ready to buy 1$ for Rs.40` If the ask rate is for USD is 41, it means that the

bank is (asking if someone will buy) selling 1$for Rs.41.

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` BID QUOTE AND ASK QUOTE

Ex: Re/$- 40.42 ± 41.63

Rs.40.42-bid(buying)-( Bank point of view)

Rs.41.63-ask(selling)

Rs.40.42=1$ means the quote is in India

If you want to buy, if you have $, you will get Rs.40.42

If you want to sell Rs. and buy $ you part withRs.41.63.

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` ASK minus BID = SPREAD

` EX. 40-41

SPREAD= Rs.41-40=Rs.1

Factors:a) Stability of the exchange rate

b) depth of the market-volume of transaction

High volume(deep market)-narrow spread

Low volume (thin market)-wider spread

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` Rate contracted today for exchange of currenciesat a specified future date

` There is a forward bid and forward ask

` Cash delivery-on the same day` Tom delivery-on working day on the following day

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` Difference between spot bid and forward bid or spot ask and forward ask

` Difference between spread and swap points

` Spot price 42.3-43.2` Forward price 43.2-44.1

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` If swap ask> swap bid-foreign currency isappreciating hence add swap points

` If swap ask <swap bid foreign currency isdepreciating. Hence deduct the swap points.

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` General facts:

Pound, Euro and US dollar are having higher values than other currencies like rupee, yen,francetc.

Factors

Inflation rates

Interest rates

Balance of payment position

Volume of international reserves

Level of activity and employment

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` If domestic inflation rate >foreign inflation rate-

` domestic goods are costlier than foreign goods

` It encourages import of foreign goods

` Foreign goods are cheaper ` More demand for foreign currencies

` Foreign currencies are costlier

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Decline in the value of domestic currencies

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If domestic inflation rate < foreign inflation rate

` Domestic goods are cheaper

` Encourages export

` Foreign exchange inflow increases` Domestic currency appreciates

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` If interest rate in home country( India 10%)>foreign country(USA 4%)

` USA funds are likely to be attracted in India asthe investor can earn better return in India rater than In USA

` Flight of funds from USA to India` There will be more demand for rupees in America causing appreciation for Indian rupee

` More dollar is required to buy rupees in Americawhich devalue US Dollar

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` Deficit balance of payments ±not able to meet thedemand of such currency say dollar leads todevalue of home currency

` It discourages import as foreign goods becomescostlier

` It encourages export as domestic goods arecheaper in foreign country

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` It includes gold

` The reserve supports or stabilizes whenever currency depreciates.

` Release or sell foreign exchange reserves so thatdemand for foreign met so further devaluation isreduced.

` The monetary authority can with stand only to theextend to the reserves in hand.

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` Higher level of economic activity and fullemployment have good potential and prospects of appreciation in the value of currencies.

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` Act of buying currency in one market at lower prices and selling it in another at higher price.

` It helps the arbitrageurs in the market to earn

profit without risk` It is a balancing operations that do not allow the

same currency to have varying rates in differentforex markets.

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` Different prices quoted in two geographicalmarkets for the same currency

` Tokyo and London` 1.Observe the following:` Rs/US $` London Rs.: 42.5730--42.61` Tokyo $: 42.6750 -- 42.6675` Can make money out of it?

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Types of Exposure to business risk

` Transaction exposure

` Economic exposure

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Foreign Exchange ExposureForeign Exchange Exposure



` Transactions that require settlement in foreigncurrency-obligations

` Cross border trade` Domestic purchases and sale of goods and

services` Debtors receivable in foreign currencies` Creditors payable in foreign currencies, foreign

loans and collaborations investments

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` Infosys incurs loss of Rs.80 crore in the volatileforex marketdue to 5.6%depreciation of the rupeeduring the first quarter of 2008-09 fiscal year.ierupee was 40.02 depreciated to 43.04 ie 5.6%

` This was after the company had hedged $760million at Rs.40.6 as forward cover

` Operationally a depreciating rupee benefited thecompany by 111 crore

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` It is the most important as it has impact on thevaluation of firm.

` Change in the value of a company thataccompanies an unanticipated change in

exchange rates.` Expected change may not have any impact on

the business as it is accommodated well inadvance

` It is based on the extent to which the value of the firm-as measured by the present value of theexpected future cash flows ± will change whenexchange rates change

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` Currency Futures

` Forward Contract

` Call - Put Options

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Documents

Forex Market Internationl Finance1