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FOREIGN EXCHANGE MARKETSAND
EXCHANGE RATES POLICIES IN INDIA
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The foreign exchange market is a worldwidedecentralized over-the-counter financial market for thetrading of currencies
To assist international trade and investment, byallowing businesses to convert one currency toanother currency
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In a typical foreign exchange transaction, a partypurchases a quantity of one currency by paying aquantity of another currency
Why exchange?Import & Export of goodsImport & Export of servicesTourismInvestment
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Tra sf r f P rc asi g P r
H gi g Faciliti s
C rr cy C v rsi
R ci g F r ig Exc a g Risks
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H uge trading volume
Geographical dispersion
ontinuous Operation
Low margins of relative profit
Use of leverage
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42%
20%
10%
6%
4%3%
3% 1%1%
1%
9%
% daily shareUS DOLLAR
EURO
JAPANESE YEN
POUND STERLING
AUSTRALIAN DOLLAR
SWISS FRANC
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23%
15%
14%10%
8%
8%
6%6%
6% 4%
M rk t S r Deutsche Bank
UBS AG
Barclays Capital
CitiRoyal Bank of ScotlandJPMorgan
HSBC
Credit Suisse
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` D epreciation/Appreciation
` Soft urrency/ H ard urrency
` Long/Short ositions
` Bid/Offer price
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DIR E T
QUOTES
INDIR E T
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` C urrency Band
` Fixed Exchange Rate
` Floating exchange rate
` Linked Exchange Rate
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FIRST LEVEL(Investors, Tourists,
exporters,Importers)
SECOND LEVEL(Commercial Banks)
THIRD LEVEL(Foreign Exchange Brokers)
FOURTH LEVEL(Central Banks)
PARTICIPANTS
M ajorM ajor articipantsarticipants
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D eferential in inflation
D ifferentials in interest rates
C urrent account deficits
ublic debt
Terms of trade
olitical stability and economic performance.
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Fundamental factors
olitical and psychological factors
Technical factorsCapital movementRelative inflation ratesInterest rates
Speculation
Others
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Spot TransactionAn agreement to buy or sell a currency at the currentexchange rate.
ForwardsThe buying or selling of foreign currency forsettlement no less than three days later.
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F t r sf t r s c tract is a f r ar c tract it a r -
t r i c rr cy a t, at rity at ai t r st a t
S aIn a s a tra n sacti n , ne c rren cy is e xc an ged
f r a no t e r f o r a s e cified len gt o f ti e
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OptionsA currency option is similar to a futures contract, asit entails a fixed currency transaction at some future
point in time
C all & ut OptionAmerican or European Option
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34%
11%40%
10%
5%
S l
spot transactions
o tri t forwar s
forei n exc an e swaps
c rrency swaps
options an ot er pro cts
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C ommissions
M argins requirements
24 hour market
N o Limit up / limit down
Sell before you buy
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Only certain types of transactions qualify forforeign exchange at the official rate
Lack of means for forward cover
R isk and uncertainty
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E rl St g : 1947-1977Per value system of ExchangeRBI maintained rupee ithin ±1 %
Form tiv St g : 1978-1992The impetus to trading in the foreign exchangeDetermination of trading limits by management of BanksWeighted basket of currenciesStrict control on Foreign exchange transaction had resulted to Ha ala
Po t-R form P rio : 1992 onw r Pegged exchange rate system changed to the Liberalized Exchange RateManagement System (LERMS)60% of transactions ere at markrt rate quated by AD¶s and remaining 40%at RBI official rate
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OtherMarket Forex
Limited floor trading hours
Threat of liquidity drying up aftermarket hours
C ommission basedLarge capital requirements, highmargin rates, restrictions onshorting, very little autonomy
attern day traders subject torestrictions requiring accountbalances in excess of $50,000.
The Forex market is open 24 hours adayM ost liquid market in the world
Commission-FreeOne consistent margin rate 24 hours aday allows Forex traders to leveragetheir capital more efficiently with ashigh as 100-to-1 leverage.
N o restrictions. Very low accountbalances.
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The Foreign Exchange Management Act , 1999 (FEMA) came into force itheffect from June 1, 2000
FEMA as introduced because the FERA didn¶t fit in ith post-liberalisationpolicies.
It made all offenses regarding foreign exchange civil offenses, as opposed tocriminal offenses as dictated by FERA
The main objective is to consolidate and amend the la relating to foreignexchange ith the objective of facilitating external trade and payments.
FEMA is applicable to all parts of India.
The act is also applicable to all branches, offices and agencies outside Indiao ned or controlled by a person ho is a resident of India.
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122 Swati Ramteke124 Priyanka Poojari126 Ninad Sakharwade128 Yatin Samel130 Amol Satale