By :-

SOUMYA, 219

SURBHI, 194

A foreign exchange market is a market where a convertible currency is exchanged for another convertible currency.

Foreign exchange markets are not reserved for traders or finance people only but for almost everyone from MNCs operating in several countries to tourists across two currency zones.

CHARACTERISTICS OF FOREIGN EXCHANGE

MARKETA Global Market

A 24-Hour Market

Huge Trading Volume

Unorganised Market

Pricing

Electronic Trading

Changing Role of Currencies

Settlement of Transactions

Many Market Participants and Instruments

REASONS FOR FOREIGN EXCHANGE

Tourism

International Trade

International Investment

WHAT REALLY IS TRADED?

● Bank deposits or bank transfers of deposits denominated in foreign currency.● The foreign exchange market exists as a network of large commercial banks trading foreign-currency-denominated deposits.● Legally speaking, physical exchange of money takes place only in the case of tourism.

HOW FOREX IS TRADED Forex exchange traders would typically look at the currencies available and buy the strongest currency while selling the weakest. So, for example, if after reading the news, you thought the euro was strong and the US dollar was weak, you could buy the euro while selling the dollar.

Because you are comparing one currency to another, Forex is always quoted in Pairs. Therefore, an example of a EUR/USD quote would be 1.4650. This means that one euro is worth 1.4650 US dollars at that moment in time. If this rate fell to 1.4422, then this would mean the euro is getting weaker and the US dollar is getting stronger.

Within a Forex pair, the first currency is referred to as the Base Currency and the second currency is referred to as the Quote Currency. When you buy or sell a currency pair, you are performing an action on the base currency.

CURRENCY INFORMATION Main Currency Symbols

Symbol Currency Country

USD ($) Dollar USA

EUR (€) Euro Eurozone Members

JPY (¥) Yen Japan

GBP (£) Pound Great Britain

CHF Franc Switzerland

AUD Australian Dollar Australia

NZD New Zealand Dollar New Zealand

The US dollar is by far the most traded currency in the world – with almost 85% of all reported transactions. The euro comes next, followed by the yen, and then the pound. For this reason the rates of all currencies against the dollar are referred to as major rates (USD/JPY) and the rest are cross rates (e.g. EUR/JPY).

Pip :-Stock indices have "points", however Forex has pips.The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places. Every fourth decimal point that the currency pair moves is 1 pip of movement.

For example, if GBP/USD was to move in price from 1.6339 to 1.6340, this would be a movement of 1 pip, and if it moved from 1.6339 to 1.6329, then this is a movement of 10 pips.The monetary value of one pip can vary according to the size of your trade and the base currency you are trading in.

Forex Leverage:-

One of the advantages of Forex trading is that you can trade more than your initial deposit. This is called Leverage. Leverage of 50:1 allows you to trade with $10,000 in the market by having a deposit of $200. This means that you can take advantage of the smallest movements by controlling more money than your initial deposit, allows you to maximize your potential profits.

Leverage Amount Traded Required Margin

100:1 $100,000 $1000

200:1 $100,000 $500

500:1 $100,000 $200

The standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency, 10,000 units if it's a mini, or 1,000 units if it's a micro.

Mini Lot Size No. of Units

0.01 1,000

0.1 10,000

1.0 100,000

Max Lot Size No. of Units

8.0 800,000

LOT :-

Long position is buying the lot of currency pair

Example: If You decide to buy the euro against the dollar and the quote is

1.4422/1.4423, and you buy 1 Standard Lot of the same at 1.4423The value of your position is 100,000 x 1.4423 = $144,230.00To open the position you have to deposit (margin) of just 1% of the position in your account.

Your deposit is therefore 1% of $144,230.00 = $1442.30

Leverage Percentage Deposit

100:1 1%

200:1 0.5%

500:1 0.2%

Short position is selling the lot of currency pair

Example: Suppose, a few hours later in the previous example, EUR/USD has

risen to 1.4639/1.4640 and you decide to book your profit by selling the same 1 lot at 1.4639

Long Position: 1 Std. Lot = 100,000 x 1.4423 = $144,230.00

Short Position: 1 Std. Lot = 100,000 x 1.4639 = $146,390.00

Note: you can Open a position either by Long/Short transaction, but when you

book your profits with the same transaction/deal, you have to

Close that transaction.

DETERMINATION OFFOREX RATES

Demand And Supply Theory

▪ Determined by free market.▪ Role of domestic monetary authorities.▪ Factors determining demand are- economic growth, relative price stability, and variety of competitive goods and services available for export.

Differentials in inflation and interest rate.

Current account deficits.

Public debt.

Terms of trade.

Political stability and economic performance.

Spot Market

Currency Future Market

Currency Option Market

Forward Foreign Exchange Market

FOREIGN EXCHANGE

“Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.”Thus risk is of the real world; it is a combination of circumstances in the external environment. In combination of circumstances, there might be a possibility of losses. In case of foreign exchange the risk may be positive or negative.

Transaction Exposure

Economic Exposure

Translation exposure

TYPES OF FOREX

MANAGEMENT

Trading in forward, future or options market.

Invoicing in the domestic currency.

Speeding (slowing) payments of currency expected to appreciate (depreciate).

Speeding (slowing) collection of currencies expected to depreciate (appreciate).