Forex Mkts if 2011

8/3/2019 Forex Mkts if 2011

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ForexForex marketsmarkets


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International FinanceInternational Finance

Global dimensions ofGlobal dimensions of

Financial marketsFinancial markets

InstitutionsInstitutions Instruments and techniquesInstruments and techniques

Public policyPublic policy


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Global Financial MarketsGlobal Financial Markets

International Money MarketsInternational Money Markets

International Capital marketsInternational Capital markets

Eurocurrency MarketsEurocurrency Markets Eurobond MarketsEurobond Markets

Global Derivatives MarketGlobal Derivatives Market


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Global finance is an odd combination ofGlobal finance is an odd combination of

Worlds most perfect money and capitalWorlds most perfect money and capitalmarketsmarkets

The Euromarkets and the free foreign exchangeThe Euromarkets and the free foreign exchangemarketsmarkets

Worlds most imperfect marketsWorlds most imperfect markets

Domesticcapital markets whose development isDomesticcapital markets whose development isstunted by restrictions and exchange controlsstunted by restrictions and exchange controls


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Foreign Exchange MarketForeign Exchange Market

A means by which payments are madeA means by which payments are madeacross national boundaries, jurisdictionsacross national boundaries, jurisdictions

and currencies.and currencies. Sets price for one currency in terms ofSets price for one currency in terms of

otherother


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Eurocurrency MarketEurocurrency Market

Market for bank time deposits and loansMarket for bank time deposits and loansmade outside the country of originmade outside the country of origin


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ForexForex-- BasicconceptsBasicconcepts

Exchange rateExchange rate

Cash market, spot market and forwardCash market, spot market and forwardmarketmarket

QuotationQuotation

Types of quotesTypes of quotes

Spread/cost of transactionSpread/cost of transaction

Determinants of spreadDeterminants of spread


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Foreign exchange marketForeign exchange market

Forex market exists innetwork ofForex market exists innetwork ofinformation system.information system.

Exchange rate: the rate at which oneExchange rate: the rate at which onecurrency is traded for another.currency is traded for another.

Foreign exchange can be in the form ofForeign exchange can be in the form ofcash, funds available oncredit, debitcash, funds available oncredit, debitcards, travelers cheques, bank depositscards, travelers cheques, bank deposits


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MajorMajor ForexForex marketsmarkets

LondonLondon 32%32%

New YorkNew York 18%18%

TokyoTokyo 8%8% SingaporeSingapore -- 7%7%

Hong KongHong Kong

ParisParis

FrankfurtFrankfurt

ZurichZurich


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Characteristics of the Forex MarketCharacteristics of the Forex Market

Worlds largest and most liquid marketWorlds largest and most liquid marketVast geographical dispersionVast geographical dispersion

Huge trading volumesHuge trading volumes three and halfthree and half

trillion dollars turnover per daytrillion dollars turnover per day 24 hour trading24 hour trading

Low marginsLow margins

Network of international dealersNetwork of international dealers Quoted price changes as many as 18Quoted price changes as many as 18

times a minute and 18000 times a daytimes a minute and 18000 times a day


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SegmentsSegments

Over the counter (OTC)Over the counter (OTC)

Composed of bothcommercial & investmentComposed of bothcommercial & investment

banks (Bank of America, Merrill Lynch)banks (Bank of America, Merrill Lynch)It is where most of the foreign exchangeIt is where most of the foreign exchange

activity takes placeactivity takes place


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Exchange Traded MarketExchange Traded Market

Composed of securities exchanges e.g.Composed of securities exchanges e.g.

Chicago Mercantile Exchange, PhiladelphiaChicago Mercantile Exchange, PhiladelphiaStock ExchangeStock Exchange -- where certain types ofwhere certain types offoreign exchange instruments are tradedforeign exchange instruments are traded

e.g. exchange traded futures & optionse.g. exchange traded futures & options


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There are seven major currencies that areThere are seven major currencies that aremostcommonly traded.mostcommonly traded.

These include: EUR, USD, JPY, CHF, GBP,These include: EUR, USD, JPY, CHF, GBP,AUD, and CADAUD, and CAD

Currencies that are not on the top seven listCurrencies that are not on the top seven listare all considered minor currenciesare all considered minor currencies


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Spot marketSpot market

The market where the transactions areThe market where the transactions areconducted for the spot delivery ofconducted for the spot delivery ofcurrencies.currencies.

Spot delivery means delivery after 2Spot delivery means delivery after 2business days.business days.

Spot rate determination: demand andSpot rate determination: demand andsupply ofcurrency.supply ofcurrency.


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QuotationsQuotations

The amount ofcurrencynecessary to buyThe amount ofcurrencynecessary to buyor sell a unit of another currency.or sell a unit of another currency.

Out right ratesOut right rates Bid RateBid Rate: the rate at which the exchange: the rate at which the exchange

dealer is ready to buy a currency.dealer is ready to buy a currency.

Ask rateAsk rate: the rate at which the dealer is: the rate at which the dealer isready to sell the currencyready to sell the currency


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Types of quotationsTypes of quotations

Direct quoteDirect quote: one unit of foreigncurrency: one unit of foreigncurrencyquoted in terms of domesticcurrency.quoted in terms of domesticcurrency.

Ex: Rs.43.50/$ (B) Rs.43.95/$ (A)Ex: Rs.43.50/$ (B) Rs.43.95/$ (A) Indirect quoteIndirect quote: one unit of domestic: one unit of domestic

currency is expressed in terms of foreigncurrency is expressed in terms of foreigncurrency.currency.

Ex: GBP/Rs.85.03 (B) GBP/Rs.84.60 (A)Ex: GBP/Rs.85.03 (B) GBP/Rs.84.60 (A)


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Practices of quotationsPractices of quotations

In terms of discounts and premiumsIn terms of discounts and premiums

Ex: 5% premium in 3 month forwardEx: 5% premium in 3 month forward

marketmarket In terms of basis pointsIn terms of basis points

A basis point is one hundredth of oneA basis point is one hundredth of one

percent (0.0001)percent (0.0001)Ex: forward discount 60 basis pointsEx: forward discount 60 basis points


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(Contd)(Contd)

In terms of aIn terms of a--b or a/b, where a and bb or a/b, where a and bare numbers.are numbers.

Ex : S($/Rs) = Rs.44.55Ex : S($/Rs) = Rs.44.55--75, 44.55/7575, 44.55/75


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SpreadSpread

Direct quoteDirect quote::

Spread = AskSpread = Ask BidBid

Ex: Rs.43.50/$ (B) Rs.43.95/$ (A)Ex: Rs.43.50/$ (B) Rs.43.95/$ (A)Spread: 43.95Spread: 43.95--43.50 = Rs. 0.4543.50 = Rs. 0.45

Indirect quote:Indirect quote:

Spread = BidSpread = Bid AskAsk

Ex: GBP/Rs.85.03 (B) GBP/Rs.84.60Ex: GBP/Rs.85.03 (B) GBP/Rs.84.60

Spread: 85.03Spread: 85.03--84.60 = Rs. 0.4384.60 = Rs. 0.43


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Determinants of spreadDeterminants of spread

The currency being tradedThe currency being traded

The volume ofcurrency being tradedThe volume ofcurrency being traded

The nature of the organization makingThe nature of the organization makingquotesquotes

Overall perception about the economy andOverall perception about the economy and

thethe ForexForex marketmarket


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Cross rateCross rate

Cross rateCross rate is a currency pair that does notis a currency pair that does notinclude USDinclude USD

such as GBP/JPYsuch as GBP/JPYPairs that involve the EUR are calledPairs that involve the EUR are called euroeuro

crossescrosses, such as EUR/GBP, such as EUR/GBP

All other currency pairs (those that don'tAll other currency pairs (those that don'tinvolve USD or EUR) are generally referredinvolve USD or EUR) are generally referredto asto as cross ratescross rates


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Forward marketForward market

Forward exchange rateForward exchange rate : the exchange: the exchangerates for delivery and payment at specifiedrates for delivery and payment at specifiedfuture dates.future dates.

Presentcontract for future delivery.Presentcontract for future delivery.

Forward exchange rate determinationForward exchange rate determination::forward demand and forward supply offorward demand and forward supply ofcurrencies.currencies.


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Premium and DiscountPremium and Discount

PremiumPremium: a foreigncurrency is said to be: a foreigncurrency is said to beat premium where forward price exceedsat premium where forward price exceedsthe present/spot price in terms ofthe present/spot price in terms ofdomesticcurrency.domesticcurrency.

DiscountDiscount: a foreigncurrency is said to be: a foreigncurrency is said to beat discount where forward price is lesserat discount where forward price is lesser

than the present/spot price in terms ofthan the present/spot price in terms ofdomesticcurrency.domesticcurrency.


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Participants in the forward marketParticipants in the forward market

TradersTraders

ArbitrageursArbitrageurs

HedgersHedgers SpeculatorsSpeculators

BanksBanks

GovernmentGovernment


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TradersTraders

Traders use spot and forward markets toTraders use spot and forward markets toeliminate risk of loss of value of exports oreliminate risk of loss of value of exports orimport orders that are denominated inimport orders that are denominated inforeigncurrencies.foreigncurrencies.


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ArbitrageursArbitrageurs

Earn risk free profits by seekingEarn risk free profits by seekingadvantage of differences in prices ofadvantage of differences in prices of

Currencies (Spatial arbitrage)Currencies (Spatial arbitrage)

(a) Two currency arbitrage(a) Two currency arbitrage

(b) Multicurrency arbitrage(b) Multicurrency arbitrage

Interest rates (Interest rate arbitrage)Interest rates (Interest rate arbitrage)

(a) Covered interest arbitrage(a) Covered interest arbitrage

(b) Uncovered interest arbitrage(b) Uncovered interest arbitrage


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HedgersHedgers

Hedgers enter into forward contracts toHedgers enter into forward contracts toprotect themselves against adverseprotect themselves against adverseexchange rate movements.exchange rate movements.

The purpose ofhedging is minimization ofThe purpose ofhedging is minimization ofloss and not profit maximization.loss and not profit maximization.


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SpeculatorsSpeculators

Speculators actively expose themselves toSpeculators actively expose themselves tocurrency risk and attempt to benefit fromcurrency risk and attempt to benefit fromthe exchange rate movements.the exchange rate movements.

Weak currency speculation:Weak currency speculation:

Rule: Sell forward buy spotRule: Sell forward buy spot

Strong currency speculation:Strong currency speculation:Rule: Buycheap sell dearRule: Buycheap sell dear


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Foreign Exchange MarketsForeign Exchange Markets

LondonLondon

New YorkNew York

TokyoTokyo

Hong KongHong Kong

SingaporeSingapore


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Foreign exchange turnover bycurrencyForeign exchange turnover bycurrency2001 (%) 2004 (%) 2007 (%) 2010 (%)

US Dollar 90.4 88.7 86.3 84.9Euro 37.7 37.2 37 39.1

Japanese Yen 22.7 20.3 16.5 19

Pound Sterling 13.3. 16.9 15 12.9

Swiss Franc 6.1 6.1 6.8 6.4

Australian Dollar 4.2 5.5 6.7 7.6

Canadian Dollar 4.5 4.2 4.2 5.3

Swedish Krona 4.5 4.2 4.2 2.2

Hong Kong Dollar 2.2 1.9 2.8 2.4

Others 14.4 15 20.5 20.2


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NoteNote

Because 2 currencies are involved in eachBecause 2 currencies are involved in eachtransaction, the sum of the percentagetransaction, the sum of the percentageshares of individual currencies totalsshares of individual currencies totals200% instead of 100%.200% instead of 100%.

Source : Bank ofInternational SettlementsSource : Bank ofInternational Settlements

Central Bank Survey of Foreign ExchangeCentral Bank Survey of Foreign Exchange

Market ActivityMarket Activity


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Average Daily Turnover in Major MarketsAverage Daily Turnover in Major MarketsUS $ BillionsUS $ Billions

2001 2001 2004 2004 2007 2007 2010 2010

1.UK 504 UK 753 UK 1359 UK 1853

2.US 254 US 461 US 664 US 904.4

3.Japan 147 Japan 199 Switzerland 242 Japan 312.3

4.Singapo

re

101 Singapo

re

125 Japan 238 Singapore 266

5.Germany

88 Germany

118 Singapore 231 Switzerland 263

6.Switzerland

71 HongKong

102 Hong Kong 175 Hong Kong 237

7.HongKong

67 Australia

81 Australia 170Australia 192

8.Australia 52 Switzerland

79 France 120 France 151

9.France 48 France 64 Germany 99 Denmark 120

10.Canada 42 Canada 54 Denmark 86 Canada 62

Total 1200 1880 3210 Germany 109


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LondonLondon


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LondonLondon

Mother of all foreign exchange marketsMother of all foreign exchange markets

Worlds largest foreign exchange marketWorlds largest foreign exchange market

with 32% sharewith 32% share But pound is not the most widely tradedBut pound is not the most widely traded

currencycurrency

Advantage of proximity to Europe market,Advantage of proximity to Europe market,geographical location and time zonegeographical location and time zone


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HistoryHistory

BeginningBeginning ofof 2020thth

century,century, LondonLondon ForexForexMarketMarket (LFM)(LFM) playedplayed aa secondsecond fiddlefiddle.. ((MoreMore importantimportant werewere NewNew York,York, Paris,Paris,Berlin)Berlin)..

TheThe WorldWorld WarsWars worsenedworsened thethe situationsituation..

DecliningDeclining interestinterest inin PoundPound SterlingSterling andandincreasingincreasing importanceimportance ofof dollardollar


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Key factors in development ofKey factors in development of

LFMLFM LFMLFM becamebecame thethe mainmain EuropeanEuropean centercenter forfor

tradingtrading thethe USUS dollardollar..

USUS dollardollar emergedemerged asas aa keykey internationalinternationalcurrencycurrency..

MoreMore foreignforeign exchangeexchange tradingtrading isis donedone inindollarsdollars inin LondonLondon thanthan inin USUS

TheThe postpost WorldWorld WarWar turmoilturmoil inin centralcentral andandeasteast EuropeEurope helpedhelped LFMLFM whenwhen tradetrade atatBerlinBerlin andand ViennaVienna werewere hinderedhindered.. (The(The 22

mainmain rivals)rivals)


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Advantages of LFMAdvantages of LFM

ConcentrationConcentration ofof financialfinancial institutions,institutions,fundfund managementmanagement sector,sector, investmentinvestmentbanksbanks && brokersbrokers..

EasyEasy access toto globalglobal marketmarket..

HighHigh qualityquality ofof professionalprofessional servicesservices..

EfficientEfficient telecomtelecom infrastructureinfrastructure.. CentralCentral geographicalgeographical locationlocation..(Between(Between USUS

&& Asia)Asia)

UseUse ofof EnglishEnglish languagelanguage..


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Best time to trade in LFMBest time to trade in LFM

US trading session starts at 8:00 GMTUS trading session starts at 8:00 GMTand winds up at around 16:00 GMT.and winds up at around 16:00 GMT.

UK trading session starts at 13:00 GMTUK trading session starts at 13:00 GMTand winds up at around 22:00 GMT.and winds up at around 22:00 GMT.

Thus they overlap from 13:00 hrs GMT toThus they overlap from 13:00 hrs GMT to16:00 GMT.16:00 GMT. It is at this time when most ofIt is at this time when most ofthe trading takes place and the marketsthe trading takes place and the markets

are the most liquid.are the most liquid.


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New YorkNew York


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Most widely traded currencyMost widely traded currency

InvestmentInvestment

ReserveReserve

TransactionTransaction

InvoiceInvoice

InterventionIntervention


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Dollar the most widely tradedDollar the most widely tradedcurrencycurrency

An investmentcurrency in manycapital marketsAn investmentcurrency in manycapital markets

A reserve currencyheld by manycentral banksA reserve currencyheld by manycentral banks

A transactioncurrency in many internationalA transactioncurrency in many internationalcommodity marketscommodity markets

An invoice currency in manycontractsAn invoice currency in manycontracts

An interventioncurrency employed by monetaryAn interventioncurrency employed by monetary

authorities in market operations to influenceauthorities in market operations to influencetheir own exchange ratestheir own exchange rates

Vehicle currency used for quotationsVehicle currency used for quotations


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OVEROVER--THETHE--COUNTER MARKET WITH ANCOUNTER MARKET WITH ANEXCHANGEEXCHANGE--TRADEDSEGMENTTRADEDSEGMENT

Unregulated marketUnregulated market

No permission from SECNo permission from SEC

90% of the trading90% of the trading

Organized exchangeOrganized exchange

Commodity Futures Trading CorporationCommodity Futures Trading Corporation(CFTC)(CFTC)

Securities Exchange CommissionSecurities Exchange Commission


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TokyoTokyo


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Tokyo Financial ExchangeTokyo Financial Exchange

Third largest market after US and UK tillThird largest market after US and UK till20042004

Established in 1989 due to a series ofEstablished in 1989 due to a series ofinterest rate liberalization in Japan.interest rate liberalization in Japan.

TFXhas beenchallenging and realizingTFXhas beenchallenging and realizinggloballyglobally--standardized systems andstandardized systems andschemes as a pioneering exchange inschemes as a pioneering exchange inJapan.Japan.

It was established under financial futuresIt was established under financial futures

trading law of Japan.trading law of Japan.


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FeaturesFeatures Highly regulatedHighly regulated

Dominated by few playersDominated by few players

Trading the largest amounts for singleTrading the largest amounts for singletransactiontransaction

Restricted to few currency pairs and fewRestricted to few currency pairs and fewfinancial instrumentsfinancial instruments

Participants are mostly JapaneseParticipants are mostly Japanese

Majority of turnover comes from OTCMajority of turnover comes from OTCproductsproducts

Notorious for opacity in accountingNotorious for opacity in accounting

racticesractices


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Hong KongHong Kong SingaporeSingapore


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Singapore and Hong KongSingapore and Hong Kong

Often perceived as hub of most majorOften perceived as hub of most majormultinational companies and importantmultinational companies and importantprovision of financial services toprovision of financial services tointernational investors in South East Asiainternational investors in South East Asia


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HistoryHistory

After Second World War Singapore andAfter Second World War Singapore andHong Kong had built up its reputation as aHong Kong had built up its reputation as amajor commercial, manufacturing andmajor commercial, manufacturing andshipping centre in the Far Eastshipping centre in the Far East

It was in late 1970s that they emerged asIt was in late 1970s that they emerged asa financial centrea financial centre

Became a hub for Asian Dollar marketBecame a hub for Asian Dollar market


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Contd..Contd..

Turning point in 1978 after Chinas openTurning point in 1978 after Chinas opendoor policydoor policy

This enhanced them as financial centreThis enhanced them as financial centreand gateway to Chinaand gateway to China


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Key factors for developmentKey factors for development

Both are situated at appropriate timeBoth are situated at appropriate timezones which allow 24 hour trading whenzones which allow 24 hour trading whenthe two markets New York and Londonthe two markets New York and Londonare closed.are closed.

Availability of Banking and financialAvailability of Banking and financialfacilities and infrastructure are identifiedfacilities and infrastructure are identified

as the two important factors inchoosingas the two important factors inchoosingthese two places as financial hub forthese two places as financial hub forSouth East Asia RegionSouth East Asia Region


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Contd..Contd..

Hong Kong is China Corporate CentreHong Kong is China Corporate Centre

Singapore is regional financial centre inSingapore is regional financial centre in

the South East Asian Regionthe South East Asian Region They do nothave a Central Bank but onlyThey do nothave a Central Bank but only

monetary authorities withoutcurrencymonetary authorities withoutcurrencyissuing powersissuing powers

Hong Kong Monetary Authority andHong Kong Monetary Authority andMonetary Authority of SingaporeMonetary Authority of Singapore

Documents

Forex Mkts if 2011