Finale Forex

Indian Forex Market Trend Analysis from 2001 to 2011
Abstract If there was only one currency in the world, there would not have been any need for foreign exchange market, foreign exchange rates or foreign exchange. But in a world of many national currencies, the foreign exchange market plays the crucial role of providing the requisite machinery for making payments across borders, transferring funds and purchasing power from one currency to another, and determining the exchange rate. The fundamental changes in foreign exchange, or FX, market began to take form in 1970s along with the increasing internationalization of financial transactions and the change of many economies into floating exchange rate system from fixed rate system. Over years, these changes have transformed the foreign exchange market into the worlds biggest and most dynamic market today. The daily turnover of global FX market currently amounts to many trillions of dollars. The objective behind this entire project is to get the basic understanding about an Indian foreign exchange market, Forex Instruments available in India, its functioning, Forexregulators& players. Project has emphasis more on numerical data gathered through different reliable sources to comparing and analysis the performance so far by Indian foreign market with other countries and their currencies which holds a dominant position in the global foreign exchange market. As in the rest of the world, in India too, foreign exchange market is the largest financial market in existence. The phenomenon that has dramatically changed Indias foreign exchange market was liberalization of economy started during early 90s. Indian foreign exchange market is persistent to grow and has shown an immense potential in recent years. During the final drafting phase of this project, I have been questioned about several other related points of Forex which are not included in this project of mine, the only answer to those questions is that the main aim behind this project is not to teach you about entire Forex market, but to analysis the collected fact figures with some simple basic definition attached to each such data to make it more comprehensive and significant to its readers.
Objectives To study the functioning of Forex market and exchange rate system; To study the various currency derivatives exist in Forex market; To critically evaluate the performance of various major currencies in Foreign exchange market in comparison with Indian rupee; To analyze the trend of world and Indian Forex market through the performance of its various derivatives in last 10 years. Research Methodology The research method adopted for this project is Secondary Research (also known as desk research) which involves the summary, collation and synthesis of existing research rather than primary research. The data is collected from the BIS Triennial Survey Report on Global Foreign Exchange Market Activity in Dec2010, Forex Reports from RBIs website which external sources for this project. The proliferation of web search engines has helped and increased opportunities to gather more such secondary research work on Forex market. Project had employed some of the most active and significant World traded currencies for its study. The currencies chosen are US Dollars, Euro, Japanese Yen, Pound Sterling, Indian rupee (INR) and others. The data used are daily average in month of April for spot, futures, forwards, options and swaps exchange rates. The US dollar (USD) is used as the numeraire currency. Data Collection and Limitations The project is based on the data gathered through the reports which has been published by Bank of International Settlements (BIS) in December 2010, 53 central banks and monetary authorities participated in that survey, collecting information from 1,309 market participants.Datas are also collection from the various other sources such as RBI foreign exchange reports from April 2000 till March 2011 and uses of several Forex related websites. As the entire data is based on these reliable secondary sources for making this project, thus the project has to solely limit itself from any other channel or sources of information in accordance to be the part of this entire project.
Literature Reviews 1. Forex market deals in several currency derivatives, among them the most fundamental financial derivatives instruments are Futures, Options and Swaps. Derivatives could be Over the Counter (OTC), i.e. made to order or Exchange-Traded Facilities (EFTs), which are for fix lots, periods/tenors. Derivative markets provide three essential economic functions Risk Management, Price Discovery, and Transactional Efficiency. Risk Management in it has 3 distinctive sequential steps i.e. Risk Identification, Risk Measurement and Risk
Mitigation.Foreign Trade and Exchange VI Edition 22.1 Author O.P.Agrawal.
2. Every currency in the world has its own regulations and regulatory bodies to regulate, supervise and control the supply of their currency. In India we have the RBI the Central Bank which regulates this system. RBI has given permission to Nationalized Banks and also to several registered Authorized Dealers (ADs) to deal with the foreign exchange transaction as per the guidelines issue by them.Currency Derivatives: A Beginners Module NSE 2009.
3. Forex market has grown tremendous growth in last one and the half decade and experts are optimistic about the same pace of its growth for future. The following facts and figures relate to the foreign exchange market. Much of the information is drawn from the 2010 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank for International Settlements (BIS) in April 2010. 53 central banks and monetary authorities participated in the survey, collecting information from 1,309 market
participants.Starting with the 2010 survey.BIS Triennial Survey Report on Global Foreign Exchange
Market Activity in Dec 2010.
4. Trend analysis has been done on each currency derivative instruments individually along with the turnovers achieved by various countries and by currencies. US Dollar still holds the prominent position in the Forex market with 84.90% followed by Euro with 39.10% and Japanese Yen with 19% of the total currency distribution of global foreign exchange market turnover. Indian Rupee just account for 0.9% in this category. BIS Triennial Survey Report on
Global Foreign Exchange Market Activity in Dec 2010.
Introduction What is foreign exchange? Foreign exchange is the exchange of one currency for another or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "Forex" and occasionally as "FX. Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and
governments for goods and services purchased overseas. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades.The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. For example, it permits a US business to import British goods and pay Pound Sterling, even though the business's income is in US dollars. Exchange rate is the price of one currency expressed in terms of another; it has been explained in detailed later in this project. Exchange rate is the medium though which one currency is exchanged for another. We have two options. One is to quote so many Rupees for each Dollar and the second option is to quote so many Dollars per rupee or per hundred rupees. The first is called the Direct Method and the second is called the Indirect Method. The methods are further explained as under: Direct Method (Home Currency Quotation): Under the above method, the unit of foreign currency remains fixed and local currency varies. Indirect Method (Foreign Currency Quotation): Under this method, a given unit of local currency remains fixed and foreign currency varies In India the unit for quoting foreign currencies is always taken as hundred rupees. Example: US$ = Rs.43.20 (Spot) Pound = Rs.75.20 (Spot) Example: Rs.100 = US$ 2.35 (Spot) Rs.100 = Pound 1.33 (Spot)
What is foreign exchange market? The markets, in which participants are able to buy, sell, exchange, and speculate on various currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, retail Forex brokers, investors and individuals. The Forex market is considered to be the largest financial market in the world. Because these currency markets are large and liquid, they are believed to be the most efficient financial markets. It is important to realize that the foreign exchange market is not a single exchange, but is constructed of a global network of computers that connects participants from all parts of the world. The foreign exchange market determines the relative values of different currencies. The foreign exchange market has three-tier dealings: Dealing between banks and customers; Dealing between local banks including the Reserve Bank; Dealing between domestic banks and banks abroad.
The relative ranking of foreign exchange trading centers has changed slightly from the previous Country wise bank accounted for foreign exchange market turnover in April 2010
Australia 4% Hong Kong 5% Switzerland 5% Singapore 5% Japan 6%
Others 20%
UK 37%
USA 18%
Sources: BIS report 2010
survey of BIS in 2007. Banks located in the United Kingdom accounted for 37% of all foreign exchange market turnovers, against 35% in 2007, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).
Global foreign exchange turnover Daily averages, in millions of US dollars 3981 4000 3000 1934 2000 1000 0 1998 2001 2004 2007 2010 1528 1239 3324
The 2010 triennial survey shows another substantial increase in global foreign exchange market activity (spot transactions, outright forwards, foreign exchange swaps, currency swaps, currency options and other foreign exchange products1) since the last survey in 2007, following the unprecedented 72% rise in activity between 2004 and 2007.2 In the wake of the financial crisis, global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to $4.0 trillion (from $3.3 trillion) at current exchange rates. Because euro/dollar exchange rates were almost unchanged in April 2007 and 2010, growth calculated at constant exchange rates was similar at 18%. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007, with average daily turnover of $4.0 trillion compared with $3.3 trillion. The increase was driven by the 48% growth in turnover of spottransactions, which represent 37% of foreign exchange market turnover. Spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion in April 2007. The increase in turnover of other foreign exchange instrumentswas more modest at 7%, with average daily turnover of $2.5 trillion in April 2010. Turnover in outright forwards and currency swaps grew strongly (by 31% and 36%, respectively). Turnover in the large foreign exchange swaps segment was flat relative to the previous survey, while trading in currency options fell.
What are the Importance & Uniqueness of foreign exchange market? Today the daily volume of Forex trade exceeds 4 trillion US dollars, and this number is always growing. Main currency for Forex operations is the United States dollar (USD).The foreign exchange market is the most liquid financial market in the world. Some of the advantages of Forex market over stock markets and/or other equities include: Traders can make profits both on declining and developing economies; Virtually no minimum capital is required, quick registration process, etc.; Market is not regulated; Its geographical dispersion; There are no broker commissions or they are very low; Its huge trading volume representing the largest asset class in the world leading to high liquidity; Exchange rate are changing constantly, and fluctuations may happen many times per second; The use of leverage to enhance profit and loss margins and with respect to account size; Unlike stock exchanges, Forex market doesn't have any fixed schedule or operating hours - it's open 24 hours per day, 5 days per week from Monday to Friday, since buy/sell orders are performed by world banks any time during the day or night (some banks even work on Saturdays and Sundays).
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions.
Who are the market participants? The market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange rate market. The official participants include the central banks and other monetary agencies of the government. The private participants include banks, other financial institutions, corporate and individuals.The major participants in Forex market are the buyers, sellers, market mediators and the authorities. Besides the countrys commercial capital Mumbai, centers for foreign exchange transactions in India include Kolkata, New Delhi, Chennai, Bangalore, Pondicherry and Cochin. The Authorized Dealers and the attributed brokers are qualified to participate in the foreign Exchange markets of India. When the foreign exchange trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and the overseas banks, the brokers usually do not have any role to play. Besides the Authorized Dealers and brokers, there are some others who are provided with the limited rights to accept the foreign currency or travel and Forex travelers` agents, market cheque, they are the authorized moneychangers, certain hotels shops.Main participants: Central banks; Commercial banks; Investing banks; Brokers, dealers; Pension funds; Insurance companies; International corporations; Individuals 48% government 13% 39% Global foreign exchange market turnover by participants percentage for April 2010 Authorized dealers Financial Institutes Individuals
Data for turnover by counterparty show that the increase in global foreign exchange market turnover in 2010 is largely due to the enlarged trading activity of other financial institutions a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and
Authorized dealers
Financial Institutes 1900
Individuals
2000 1500 1018 1000 500 0 2004 2007 634 276 593 1392 1339
1548
533
2010
central banks. Turnover by this category grew by 42% to $1.9 trillion in April 2010 from $1.3 trillion in April 2007.
Although a surge in activity with other financial institutions had already accounted for most of the growth in total turnover in 2007, this categorys share (48%) surpassed transactions between reporting dealers (39%) for the first time in 2010. Other financial institutions increased their activity mainly in the spot market, with their share of turnover rising from 39% to 51%. In outright forwards, their share rose from 44% to 54%. Transactions between reporting dealers in the interbank market grew by 11% to $1.5 trillion in April 2010 from $1.4 trillion in April 2007. Some of the factors identified as drivers of the downward trend in the share of the interbank market in analyses of previous triennial surveys, such as the increased concentration of the banking sector and the spread of electronic broking platforms, may also have had a dampening effect on interbank turnover. The lower share of turnover between reporting dealers is consistent with ongoing concentration in the FX industry. Among the top 13 global FX centers (covering 90% of global turnover), a decrease in the number of banks accounting for 75% of the turnover was reported between 2007 and 2010 in most centers. In contrast, in Denmark, Hong Kong SAR and Korea, an increase in competition is evident. Foreign exchange market transactions with non-financialcustomers have declined by 10%, falling to $533 billion in April 2010 from $593 billion in April 2007. This category, which includes corporations and governments, now represents around 13% of global foreign exchange market activity, its lowest
share since 2001. An increase in spot transactions by these counterparties was offset by a decrease in the use of foreign exchange swaps and currency options. The use of outright forwards and currency swaps by non-financial customers was relatively unchanged
Exchange Rate Regimes The term exchange rate regime refers to the mechanism, procedures and institutional framework for determining exchange rates at a point of time and changes in them over time, including factors which induced the changes. Present System (under IMF Agreement) - Par Value of Exchange: Under IMF Agreement, a country joining the Fund had to declare the value of its currency in terms of gold or of the USD, of the weight and fineness in effect on July 1, 1944, established in the process a system of fixed parities between the currencies of the member countries and later on April 1, 1978 the 2nd Agreement of the IMF stated, all the values established earlier for currencies have ceased to exist, and the member countries are no longer bound to establish par values.
Under the Bretton Woods Agreement, the rates of exchange were permitted to fluctuate upto 1% on either side of the par values of the currencies of the member countries, the margin was later widen to 2.25% from 1%. In theory, there are a very large number of exchange rate regimes are possible. At two extremes, are the perfectly rigid or fixed exchange rates, and the perfectly flexible or floating exchange rates? Between them are hybrids with varying degrees of limited flexibility. Fixed Exchange Rate: There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). Floating Exchange Rates: Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a
10
look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market.
What Does Purchasing Power Parity PPPMean? PPP is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power. The relative version of PPP is calculated as:S=P1/P2 Where: "S" represents exchange rate of currency 1 to currency 2 "P1" represents the cost of good "x" in currency 1 "P2" represents the cost of good "x" in currency 2 In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)
11
How the currency exchange rate is calculated? There are various factors that determine an exchange rate such as trade value, inflation, and interest rates, to name a few. These are basic principles to help understand the concept. Let's work in a closed vacuum and assume there is no inflation between two countries or any other factors and examine fluctuations based on wealth and trade. We begin with country A, which lets call the USA and country B which we call Britain. Lets imagine that 1 UD Dollar = 1 British Pound. Example of Trade Value: Now let's say that the Americans own $100 and the British own 100 Pounds. If America buys $5 worth of product from Britain, America would have $95 and Britain would have 105 Pounds. Suddenly Britain becomes wealthier by approximately 10% now. (100/95x105=10.52%), so suddenly $1 would be worth around 1 Pound and 10 Pence. This is the principle of trade surpluses and trade deficits and wealth within a currency.
12
Example of Interest rate: Now let's imagine that America and Britain each have $100 again. Let's say that over 1 year, prices in America stayed the same but in Britain, prices went up 5%. We would now have an effect where Britain is 5% poorer then America and $1 would be now worth 1 Pound and 5 Pence. This is where interest rates are determined. Britain could have helped keep $1 worth 1 Pound by having an Interest rate of 5%. Interest rates are determined normally by a Reserve Bank governor that determines economic policy for a currency. Interest rates can also be manipulated to stimulate an economy by strengthening or weakening a currency. Example of Excess Money Printing: Now we can also consider what would happen if Britain deicide to print money twice than what it had before. If America and Britain each has $100 and 100 Pounds each respectively, and Britain decided to print 200 Pounds in an attempt to get wealthier, suddenly $1 would equal 50 pence. However if Britain had found 100 Pounds of gold and was worth 200 Pounds, then $1 would still equal 1 Pound. Very basically, this is how the system works, however is much more complex in reality.
Various Forex Terms Convertibility: In a strict sense a currency can be considered convertible, only if both residents and non-residents have full freedom to use and exchange it for any purpose whatsoever, at some definite rate of exchange. However in practice large number of currencies is considered convertible with various degrees of restrictions and controls. Current Account & Capital Account: Current account includes all transactions, which give rise to or use of our National income, while Capital Account consist of short term and long term capital transactions. As per FEMA "capital account transaction" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India. Those which are not Capital Account transactions are current Account transactions.
13
Current Account Transactions covers the following. All imports and exports of merchandise; Invisible Exports and Imports (sale/purchase of services); Inward private remittances to & from; Pension payments (to & from); Government Grants (both ways).
Capital Account transactions consist of the following Direct Foreign Investments (both inward & outward); Investment in securities (both ways); Other Investments (both ways); Government Loans (both ways); Short-term investments on both directions.
The substance of convertibility is to dispense with the flexible management of foreign exchange and exchange rates and to adopt a more liberal and market driven exchange allocation process. All transactions are still conducted within the framework of exchange controls, as prescribed by the RBI.
Over-The-Counter (OTC): Within the derivatives markets, many of products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerns the default of a member of the exchange. Product traded on the exchange must be well standardized to transparent trading. Non-standard products are traded in the so-called over-the-counter (OTC) derivatives markets. OTC derivatives have less standard structure and are traded bilaterally (between two parties). In such bilateral contract, each party should have credit risk concerns with respect to the other party. OTC derivatives are significant in the asset classes such as interest rate, foreign exchange, equities and commodities.
14
OTC foreign exchange turnover by instruments, counterparty and currency in April 2010. Total reported transactions in all currenices by top four traded currencies. Daily averages, in millions of US dollars 2000000 1500000 1000000 500000 0 Spot Outright Forwards Forex Swaps 1187699 691210 391501 149687 609801
1600101 USD Euro Yen GBP
Growth in the positions of OTC foreign exchange instruments was moderate at 9%, compared with an increase of 83% in notional amounts outstanding of currency instruments in the 200407 periods. Notional amounts outstanding in all instruments peaked in June 2008, declined thereafter and recovered somewhat by June 2010. Notional amounts outstanding provide useful information on the structure of the OTC foreign exchange market but should not be interpreted as a measure of the counterparty risk of these positions. While no single comprehensive measure of risk exists, a useful concept is the cost of replacing all open contracts at the prevailing market prices. This measure, called gross market value, increased at a considerably higher rate (96%) than notional amounts during the reporting period, to $3.2 trillion at the end of June 2010.
OTC foreign exchange turnover by instruments, counterparty and currency in April 2010. Total reported transactions in all currenices by top four traded currencies. Daily averages, in millions of US dollars 120000 100000 80000 60000 40000 20000 0 Currency Swaps Options Sold Options Bought 38313 17673 57445 54981 105529 101003 USD Euro Yen GBP
15
Sharp asset price movements following the bankruptcy of Lehman Brothers in September 2008 resulted in a strong rise of gross market values in the second half of 2008. Gross market values declined rapidly again in subsequent periods as prices moved closer to their pre-crisis values, but increased again in the first half of 2010 as foreign exchange markets went through another bout of turbulence.
OTC foreign exchange turnover of India in April 2010. Daily averages, in millions of US dollars
30000 20000 10000 0
26474
3401 USD Euro
750 Yen
1987 GBP
93 Swiss Franc
The daily average OTC foreign exchange market for India during the month of April 2010 has shown that the turnover in US Dollar holds the dominant position as compared with the other strong world currencies such as, Euro, Yen, GBP and Swiss franc. OTC market for US Dollar was almost 5 times more than taking all other currencies together. The total OTC market for US Dollar has around 26474million dollars followed by Euro at only 3401million dollars, GBP at 1987million dollars, Japanese Yen at 750 million dollars and CHF at 93 million dollars. Arbitrageur: A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capturing risk-free profits. Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require relatively fast trading. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, and buy the undervalued shares on one exchange while short selling the same number of overvalued shares on another exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Hedger: Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level weeks or months in advance, for something they
16
later intend to buy or sell in the cash market. In this way they attempt to protect themselves against the risk of an unfavourable price change in the interim. Speculator: A person who trades derivatives, commodities, bonds, equities or currencies with a higher-than-average risk in return for a higher-than-average profit potential. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains. Speculators are typically sophisticated; risk-taking investors with expertise in the market(s) in which they are trading and will usually use highly leveraged investments such as futures and options. About 70% to 90%of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favour.
Notional Amount: The notional amount (or notional principal amount or notional value) on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument. This amount generally does not Foreign exchange transactions in percentage by market participants 75% change hands and is thus referred to as notional. Appreciation: The rise in the value of one currency relative to another is called appreciation. When the currency of one country appreciates relative to another country, ones countrys goods prices raise abroad and foreign 17% 8% goods prices decline in your country. This will benefit domestic consumers who buy foreign goods, but makes domestic businesses less Speculative Hedge Arbitrage competitive.
80% 70% 60% 50% 40% 30% 20% 10% 0%
Depreciation: A decline in the value of one currency relative to another is called depreciation. When the currency of one country depreciates relative to another country, ones countrys goods prices
17
decline abroad and foreign goods prices rise in your country. This will benefit domestic businesses, but will affect domestic consumers who buy foreign goods. Economic Indicator: A government issued statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), Inflation, Retail sales, etc. London Interbank Offered Rate LIBOR: An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is the world's most widely used benchmark for shortterm interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K. Absolute Rate: The fixed portion of an interest-rate swap, expressed as a percentage rather than as a premium or a discount to a reference rate. The absolute rate is a combination of the reference rate and the premium or discounted fixed percentage. For example, if the LIBOR is 3% and the fixed interest portion of the swap is at a 7% premium, the absolute rate is 10%. Forward Discount: In a foreign exchange situation where the domestic current spot exchange rate is trading at a higher level than the current domestic futures spot rate for a maturity period. A forward discount is an indication by the market that the current domestic exchange rate is going to depreciate in value against another currency.
Instruments The Forex derivative products that are available in Indian financial markets can be sectored into three broad segments viz. forwards, options, currency swaps. We take a look at all of these segments in detail. The major instruments used in the FX markets are spot, outright forwards, FX swaps, currency options, currency swaps, currency futures and exchange traded options. Spot exchange rate: Spot rates are the rates at which different currencies are traded for immediate exchange. In a spot transaction the seller of exchange has to deliver the foreign
18
exchange he has sold 'on the spot' (usually within 2 days). Similarly the buyer of exchange will receive the foreign exchange he has bought immediately. Spot Exchange of currency the second day after the date on which two foreign-exchange traders agree to do the transaction Spot rate: Rate at which transaction is settled Value date/ Settlement date: Day on which delivery of currency takes place i.e. on the second day of the agreement. Example: On Thursday, an Indian and an American agree to execute the deal in spot market. When will the deal be affected? Now, the exchange of currencies will take place on Saturday. If the particular market is closed on Saturday and Sunday, delivery of currency shall take place on Monday.
Global Spot transactions turnover Daily averages in April, In Billions of US$ 1490 1500 1000 500 0 1998 2001 2004 2007 2010 568 386 631 1005
Foreign exchange spot turnover rose to $1.5 trillion in April 2010 from $1.0 trillion, an increase of 48% at current exchange rates. The increase in spot market turnover to a share of 37% of the global activity accounts for three quarters of the overall increase in global foreign exchange market activity relative to the previous survey. The higher turnover in spot transactions is largely due to more active trading by other financial institutions, followed by inter-dealer trading.Other financial institutions increased their activity mainly in the spot market, with their share of turnover rising from 39% to 51%. Forward exchange rate: This is the rate at which foreign currency dealers are willing to promise to buying or selling a currency in the future. This gives information about the view of market participants on whether the currency appreciates or depreciates in future. Inforward market foreign exchange instruments contracts are made to buy and sell currencies for future delivery, say for duration of one month(30 days), three months(90 days), six
19
months(180 days), nine months(270 days) and one year(360 days). Rate of exchange for the transaction is agreed upon on the very day the deal is finalized. Example: The one month forward contracts that were contracted respectively on the 28th & 29th January 2011. What would be the settlement date? For both, it will be 28th February as 2011 as it was not a leap year. So this is the value date in both the transactions. Relation to Spot Rates: Forward exchange rate is generally expressed in relation to spot rate ruling at the time when forward rate is quoted. Forward quotations can be made as: At a premium on the spot rate or at a discount from it, referred to as forward differential or at par with the spot rate. The linkage between the spot and forward exchange rates come from the actions of three groups of economic agents who use the market, viz. Arbitrageurs, Hedgers, andSpeculators. If forward rate discount.
> spot rate: forward premium,
If
forward
rate
< spot rate: forward
Global Forward transactions turnover Daily averages in April, In Billions of US$ 475 500 400 300 200 100 0 1998 2001 2004 2007 2010 128 130 209 362
The global turnover in outright forwardstransactions was increased by 31% to $475 billion from $362 in 2007.Forward contracts among the banks and financial institutes around the globe have resulted in this growing trend of this derivative instrument.
Forward Contracts: Forward contracts are offered by Banks. In forward contracts Banks quote an exchange rated today for sale or purchase of foreign exchange at a future date.
20
Rupee Forwards Contracts: An important segment of the Forex derivatives market in India is the Rupee forward contracts market. This has been growing rapidly with increasing participation from corporates, exporters, importers, banks and FIIs. Till February 1992, forward contracts were permitted only against trade related exposures and these contracts could not be cancelled except where the underlying transactions failed to materialize.In March 1992, in order to provide operational freedom to corporate entities, unrestricted booking and cancellation of forward contracts for all genuine exposures, whether trade related or not, were permitted. Cross Currency Forwards: Cross currency forwards are also used to hedge the foreign currency exposures, especially by some of the big Indian corporates. Example: A corporate having underlying exposure in Rupee, may book forward contract between Dollar and Sterling. Here even though its exposure is in Rupee, it is also exposed to the movements in Dollar visa-a-visa other currencies. The regulations for rebooking and cancellation of these contracts are also relatively relaxed. The activity in this segment is likely to increase with increasing convertibility of the capital account.
Global foreign exchange market turnover by Cross-currency Daily averages in April, in percentages 45 40 35 30 25 20 15 10 5 0 2001 2004 2007 2010 10 4 6 20 17 13 13 12 6 14 9 6 30 36 28 36 27 28 USD/Euro USD/Yen USD/GBP USD/AUD USD/Others 42 43
Futures Contract: Futures foreign exchange instruments is an agreement between two parties to buy or sell a particular currency at a particular price on a particular date, as specified in the
21
contract to all participants in that currency futures exchange. Its market is an organized market like an exchange and not OTC. Futuresdeal is not settled on maturity instead rates are matched daily with the movements in spot market and gains and losses are credited and debited to the traders account everyday respectively. This is known as marking to market. Currency futures are exactly similar to forward contracts except that the deal is put through a futures exchange, which functions on lines similar to a stock exchange. These contracts are available for fixed amount and standard period, and thus do not command the same flexibility as forward contract. Some of the advantages of future contract are: Currency futures, since they are traded on organized exchanges, also confer benefits from concentrating order flow and providing a transparent venue for price discovery, while overthe-counter forward contracts rely on bilateral negotiations. Two characteristics of futures contract- their minimal margin requirements and the low transactions costs relative to over-the-counter markets due to existence of a clearinghouse, also strengthen the case of their introduction. Credit risks are further mitigated by daily marking to market of all futures positions with gains and losses paid by each participant to the clearinghouse by the end of trading session. Contract standardization and clearing house facilities mean that price discovery can proceed rapidly and transaction costs for participants are relatively low.
Foreign Exchange Swaps: Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future.Swaps are long term hedging instruments to manage exchange rate and interest rate risks. It is possible when there are two
22
parties interested in converting foreign currency in domestic currency and interested in covering the transaction over a long span of time. A major advantage of swap is that it allows both the parties to hedge exchange rate fluctuations over a long period of time. FX Swap is a simultaneous spot and forward transaction a simultaneous sale and purchase of a certain amount of foreign currency for two different dates it is accounted as a single transaction. First Leg: Spot transaction (Trader buys or sells on the spot market). Second Leg: Forward transaction - reverse (Trader buys or sells on the forward market) Also known as spot-forward swap. Example: A borrower wishes to obtain Swiss francs (CHF) to finance business expansion in Switzerland but may not be able to do so. At the same time, this borrower has access to dollar capital market and may be able to borrow it on relatively attractive terms. If counterparty exists who has, a net asset position in CHF and a desire for low-cost dollar funds, the opportunity for currency swap exists. Global Forex Swaps transactions turnover Daily averages in April, In Billions of US$ 1714 954 656 1765
2000 1500 1000 500 0 1998 2001 2004 734
2007
2010
Foreign exchange swaps, the most actively traded foreign exchange instrument by far, are widely used by banks to raise liquidity across money markets for different currencies.The dominance of reporting banks in this market has declined markedly over time, falling from 70% of total turnover in 1998, and around 60% in 2001 and 2004, to just 47% in 2010. At $1.8 trillion (+3%), the level of turnover is largely unchanged from the prior survey. The distribution of trading across other counterparties and maturities was also largely unchanged from 2007. Swap as a Financial Market Product: Swap literally implies exchange in Forex market the term Swap implies simultaneous spot purchase and forward sale of a foreign currency against another
23
and vice versa. The Bank for International Settlements defines the term a swap is in financial transaction in which two counterparties agree to exchange streams of payments over time. Swap, as mechanism for widespread use is a development of recent origin during the last two decades. This is due to the progressive elimination of exchange and capital controls and the revolutionary developments in telecommunication and computer technology, active 24-hour trading in foreign exchange has emerged. As a result of these innovations the process of liberalization and consequent integration of markets is underway. The high volatility of exchange rates and interest rates have opened up opportunities for large profit to market participants in the spot as well as in the forward markets, provided they are on the right side of the market. Trading is now increasingly guided by new decision techniques, particularly chart-based by sell recommendations, rather than considerations of the underlying economic factors as previously done. Such a move towards sophistication and globalization of markets in turned opened up arbitrage opportunities, which are increasingly availed through swaps and options (which will be explained in detailed later) in an effective manner. The most commonly used types of Swaps are Currency and Interest Rate Swaps. The currency swap began in 1981, while interest rate swap started in 1982.
24
A Currency swap enables contracting parties to exchange predetermined streams of payments denominated in another currency during an agreed period of time. Two types of Currency Swaps are commonly transacted: 1. Fixed/Fixed Currency Swap (Both terms fixed refer to interest rates) 2. Cross Currency Interest Rate Swaps. Fixed/Fixed Currency Swap: In this type of swap contracts, fixed interest payments on a specified principal amount of one currency is swapped for fixed interest payment on an agreed equivalent principal amount of another currency. Unlike in the case of interest rate swap, where principal currency amount being in the same currency and therefore not exchanged on the final maturity exchanged, in a currency swap the principal amount may be exchanged on the final maturity date of the swap contract at pre-determined exchange rate. Sometimes the principal amount in the respective currency may be exchanged initially and then re-exchanged at the maturity of the contract. Example: An American firm can take out a loan in the U.S. at a 7% interest rate, but requires a loan in yen to finance an expansion project in Japan, where the interest rate is 10%. At the same time, a Japanese firm wishes to finance an expansion project in the U.S., but the interest rate is 12%, compared to the 9% interest rate in Japan. Each party can benefit from the other's interest rate through a fixed-for-fixed currency swap. In this case, the U.S. firm can borrow USD for 7%, and then lend the funds to the Japanese firm at 7%. The Japanese firm can borrow Japanese yen at 9%, and then lend the funds to the U.S. firm for the same amount.
Global Currency Swaps transactions turnover Daily averages in April, In Billions of US$
50 40 30 20 10 0 1998 2001 2004 2007 10 7 21 31
43
2010
25
Trading in currency swaps also grew strongly, by 39%, although from a much lower level, to $43 billion. The use of outright forwards and currency swaps by non-financial customers was relatively unchanged. Not all foreign exchange OTC instruments showed limited growth in amounts outstanding. Currency swaps increased to almost $19 trillion outstanding in June 2010, growing by a third relative to 2007, increasing their share of outstanding instruments to 30%. There are four main elements in a fixed/fixed currency swap. 1. There are fixed interest payments on due dates in the respective currencies. 2. There are specified principal amounts in two currencies on which interest payments at the specified interest rates are calculated. 3. There is an exchange rate involved. In this case it is the spot rate on contract date. It can even be a mutually agreed forward rate. The same exchange rate is used for computing the principal amount for calculating the interest payments and also for the exchange of principal on the initial date and re-exchange on the maturity date of the swap contract. 4. There is a specified maturity period. There are three types of interest rate swaps: a. Coupon Swaps: A coupon swap is a fixed or floating rate interest swap in which two parties exchange fixed interest payments with floating interest payments on an underlying principal amount denominated in the same currency. Example: Party A agrees to exchange fixed Interest rate at 10% on $10 million for floating interest rate based on 6 months LIBOR for $10 million with a swap Bank for a period of 3 years. b. Basic Swaps: A basic swap involves exchange of interest payments calculated on different terms, such as 6 month LIBOR and prime rate (or triple a commercial paper rate). c. Cross Currency Interest Swaps: In this type of swaps exchange of payment on different currencies is involved. Example: Exchange dollar 6 months floating rate with fixed rupee interest rates for a specified period on equivalent not notional principal amounts, or fixed rate dollar with fixed rate rupee.
26
Options Market: Options is a right but not the obligation to buy or sell a foreign currency within a certain time period or on a specific date at a specific exchange rate. The rate at which one currency can be purchased or sold is known as exercise/strike price. The fee or cost of the option is called premium. Options are purchased OTC from a commercial or investment bank or it can be purchased on a stock exchange where options are traded. Options, as an instrument is an improvement over forward and futures contracts. In a forward contract the Bank as well as the customers are under obligation to complete the transaction art the specified date irrespective of the exchange rate movement. In an option the bank has an obligation but the customer has a right and no obligation.
Types of Options: Call Option: An option to purchase the underlying currency, it gives the right but not the obligation to purchase an option. Put Option: An option to sell the underlying currency, it gives the right but not the obligation to sell an option. Example: A person decides to acquire options to buy CHF at a price of US $ 0.70 along with a premium for US $ 0.02. On the maturity date, if: Spot rate of CHF (0.65) < Agreed rate (0.70) the buyer will let the option expire as he can purchase it in the spot market at a cheaper rate. Spot rate of CHF (0.75) > Agreed rate (0.70) the buyer will exercise the option as his cost of buying the Swiss francs under the options contract will be 0.72 (0.70+0.02), whereas, he can sell this currency in spot market at a higher rate (0.75).
Global Options & other transactions turnover Daily averages in April, In Billions of US$
250 200 150 87 100 50 0 1998 2001 2004 60 119
212
207
2007
2010
27
Cross Currency Options: The Reserve Bank of India has permitted authorized dealers to offer cross currency options to the corporate clients and other interbank-counterparties to hedge their foreign currency exposures. Before the introduction of these options the corporates were permitted to hedge their foreign currency exposures only through forwards and swaps route. Forwards and swaps do remove the uncertainty by hedging the exposure but they also result in the elimination of potential extraordinary gains from the currency position. Currency options provide a way of availing of the upside from any currency exposure while being protected from the downside for the payment of an upfront premium.
Global Currency options and other products turnover Daily averages in April, in billions of US dollars
250 200 150 100 50 0 1998 2001 2004 87 60 119
212
207
2007
2010
Currency options market declined by 2% between surveys, with average daily turnover of $207 billion in April 2010. However, turnover in currency options with other financial institutions increased, their share in this sector rising from 43% to 55%. Turnover of outright forwards, foreign exchange swaps, currency swaps, currency options and other OTC foreign exchange products continues to be many times larger than the volumes traded on organized exchanges. Daily turnover for currency instruments on organized exchanges was $168 billion, less than 7% of the $2.5 trillion average daily turnover in those instruments.
28
Rupee Currency Options: Corporates in India can use instruments such as forwards, swaps and options for hedging cross-currency exposures. However, for hedging the USD-INR risk, corporates are restricted to the use of forwards and USD-INR swaps. Introduction of USD-INR options would enable Indian Forex market participants manage their exposures better by hedging the dollar-rupee risk.
Example: If an Indian company is bidding for an international assignment where the bid quote would be in dollars but the costs would be in rupees, then the company runs a risk till the contract is awarded. Using forwards or currency swaps would create the reverse positions if the company is not allotted the contract, but the use of an option contract in this case would freeze the liability only to the option premium paid up front. The advantages of currency options in dollar rupee would be as follows: Hedge for currency exposures to protect the downside while retaining the upside, by paying a premium upfront. This would be a big advantage for importers, exporters (of both goods and services) as well as businesses with exposures to international prices. Currency options would enable Indian industry and businesses to compete better in the international markets by hedging currency risk. Hence, introduction of USD-INR options would complete the spectrum of derivative products available to hedge INR currency risk.
INR currency options in April 2010, Against US dollars in %
INR currency options, million of USD in April 2010, Against US dollars by participants 844 724 436
1000 Options Sold 47% Options brought 53% 800 600 400 200 0
reporting dealers
other non-financial financial institutions institutions
29
Other Exotic Options: Options being over the counter products can be personalized to the requirements of the clients. More sophisticated hedging strategies call for the use of complex derivative products, which go beyond plain vanilla options. These products could be introduced at the inception of the Rupee vanilla options or in phases, depending on the speed of development of the market as well as comfort with competencies and Risk Management Systems of market participants. Some of these products are mentioned below:
Simple structures involving vanilla European calls and puts such as range-forwards, bull and bear spreads, strips, straps, straddles, strangles, butterflies, risk reversals,etc.
Simple exotic options such as barrier options, Asian options, Look-back options and also American options.
More complex range of exotics including binary options, barrier and range digital options, forward-start options, etc.
Some of the above-mentioned products especially the structure involving simple European calls and puts may even be introduced along with the options itself, But in India such kind of options are still not in operation.According to the BIS 2010 survey the trading activity in other related foreign exchange instruments continued to expand, but at a much more moderate pace than in the three years to April 2007. Average daily turnover in these instruments grew by 7% to $2.5 trillion in April 2010, compared with an increase of 78% in the previous three-year period.
30
Indian Forex Market Indian Forex market is small when compared with other developed countries but with the multinationals coming up and new government policies the path of expansion is on its new heights. The Indian government has now open up new ways to trade and regulated this market as well. India has shown great rise in its Forex turnover in last three years. People now feel comfortable to trade in and exit from the market. In India people are now more aware of the kinds of trading like derivative markets, options, swapping, hedging etc. The most important characteristic of Forex is the impact on various currencies by the change in one currency rates. Any economic activity in world affects the Forex market immediately.In India, the economic liberalization in the early nineties provided the economic rationale for the introduction of FX derivatives. Business houses started actively approaching foreign markets not only with their products but also as a source of capital and direct investment opportunities.
OTC foreign exchange turnover by instruments, counterparty and currency in April 2010. Total reported transactions in all currenices by India. Daily averages, in millions of US dollars 13527 13620 6789 4623 5000 0 Spot Outright Forwards Forex Swaps Currency Swaps Options 50
15000 10000
The liberalization process has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies. The Sodhani Committee set up in 1994 recommended greater freedom to participating banks, allowing them to fix their own trading limits, interest rates on FCNR deposits and the use of derivative products. Indian foreign exchange market have shown one of the most significant increases in emerging market currencies along with for the Turkish lira, Chinese renminbi and Korean won, followed by the Brazilian
31
real and Singapore dollar. The renminbi now accounts for almost 1% of global turnover, on a par with the Indian rupee and the Russian ruble. INR distribution of global foreign exchange market turnover percentage shares of averages daily turnover in April
1 0.8 0.6 0.4 0.2 0
0.9 0.7 0.3
0.1
0.2
1998
2001
2004
2007
2010
India's share in world Forex market has shown growth of 0.9% last year and will grow further. It is the fastest growth of any country. The growth rates of developed countries are much lower compared with developing countries. UK and USA have shown the lowest change in contribution of foreign exchange. The foreign exchange market in India started in earnest less than three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. Today over 70% of the trading in foreign exchange continues to take place in the inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks) who transact currency among themselves and come out square or without exposure at the end of the trading day. Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self regulatory association of dealers. Since 2001, clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Limited (CCIL) that handles transactions of approximately 3.5 billion US dollars a day, about 80% of the total transactions.
32
Currency and instrument distribution of INR market turnover Percentage shares of average daily turnover in April 2010
Options & other Currency Swaps instruments 0% 10% Forex Swaps 18%
Spot 36%
Forwards 36%
India today operates around 27 billion dollars foreign exchange market as compared with 2 billion dollars in 1998, tough in the 2010 the foreign exchange transaction in India went down from 38 billion dollars in 2007 to the current position of 27 billion dollars in 2010, the expert of the Forex market still are very bullish as they see this down fall as an impact of global crisis on Indian market.
Geographical distribution of global foreign exchange market turnover Daily averages in April, in billions of USD and percentage 38 40 30 20 10 0 1998 2001 2004 2007 2010 7 2 3 27
In March 2006, about half (48%) of the transactions were spot trades, while swap transactions (essentially repurchase agreements with a one-way transaction spot or forward combined with a longer- horizon forward transaction in the reverse direction) accounted for 34% and forwards and forward cancellations made up 11% and 7% respectively. About two-thirds of all transactions had the rupee on one side. In 2004, according to the triennial central bank survey of foreign exchange and derivative markets conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee featured in the 20th position among all currencies in terms of being on one side of all foreign transactions around the globe and its share had tripled since 1998. As a host of foreign exchange trading activity, India
33
ranked 23rd among all countries covered by the BIS survey in 2004 accounting for 0.3% of the world turnover. Trading is relatively moderately concentrated in India with 11 banks accounting for over 75% of the trades covered by the BIS 2004 survey.
The foreign exchange market can be classified into two segments. The merchant segment consists of the transactions put through by customers to meet their transaction needs of acquiring/offloading foreign exchange, and inter-bank segment encompassing transactions between banks. At present, there are over 100 Authorized Dealers (Ads) operating in the foreign exchange market. The banks deal among themselves directly or through foreign exchange brokers. The inter-bank segment of the Forex market is dominated by few large Indian banks with State Bank of India (SBI) accounting for a large portion of turnover, and a few foreign banks with benefit of significant international experience. The customer segment is dominated by Indian Oil Corporation and certain other large public sector units like Oil and Natural Gas Commission, Bharat Heavy Electricals Limited, Steel Authority of India Limited, Maruti Udyog and also Government of India (for defense and civil debt service) on the one hand and large private sector corporates like Reliance Group, Tata Group, Larsen and Tubro, etc., on the other. Of late, the Foreign Institutional Investors (FIIs) have emerged as a major component in the foreign exchange market and they do account for noticeable activity in the market. The Indian foreign exchange market is a huge financial market exceeding an annual turnover of 400 billion valued in US$ in terms only by public dealings (i.e. excluding inter-bank transactions). It is the third wing of the financial markets in India, the others being the money market and the capital market.One of big advantages of the market is its' close relation with latest information technologies. Clients from different parts of the planet may connect to Internet and start trading. Even big banks tend to use electronic trading - it's the most common way of trading now. At this moment, Forex is at the rapid developing phase, and it's expected to grow more and more in the future.
34
Liberalization has transformed Indias external sector and a direct beneficiary of this has been the foreign exchange market in India. From a foreign exchange-starved, control-ridden economy, India has moved on to a position of $319 billion plus in international reserves in Jul 2011, with a confident rupee and drastically reduced foreign exchange control. As foreign trade and cross-border capital flows continue to grow, and the countrymoves towards capital account convertibility, the foreign exchange market is poised toplay an even greater role in the economy, but is unlikely to be completely free of RBIinterventions any time soon.
Who is the authorized Forex Dealer? Any type of financial institution that has received authorization from a relevant regulatory body to act as a dealer involved with the trading of foreign currencies. Dealing with authorized Forex dealers ensure that your transactions are being executed in a legal and just way. Which are the Forex Regulatory & Supervisory Bodies? In the current system, the Reserve Bank of India and its affiliates intervene in the market whenever
they decide it is necessary.The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA, before this act was introduced; the foreign exchange market in India was regulated by the reserve bank of India through the Exchange Control by Foreign Exchange Regulation Act, 1947. Foreign exchange market in India is totally structured, well regulated both of RBI and also by a voluntary association (Foreign Exchange Dealers Association). Only Dealers authorized by RBI can undertake such transactions.All inter-bank dealings in the same center must be affected through accredited brokers, who are the second arm in the market-structure. However, dealings between the
35
authorized dealers and the RBI and also between the AD (Authorized Dealers) and overseas Banks are affected directly without the intervention of the brokers. In addition to the authorized dealers covering commercial banks, who undertake comprehensive transactions covering all spheres of foreign exchange, there are also a peripheral market consisting of licensed money changers and travel agents, who enjoy limited authorization especially for encashment of travelers cheques, notes. Specified hotels and Government owned Shops are also given restricted licenses to accept payment from non-residents in foreign currencies. IDBI and Exim Bank are permitted to handle and hold foreign currencies in a restricted way.Now, the regulators have introduced several innovations to promote the growth of FX market in India. Factors that affects IndFX market The factors affecting the exchange rates in the long run include relative price levels in each country, preferences for domestic vs. foreign goods, productivity and government controls. The buying and selling of currency by the policy makers to control the supply and demand in the FX market influence exchange rates in countries like India. Exchange rates are highly influenced by: Economic factors (economic indicators of countries at the moment, politics of Central banks, changing interest rates, behaviour of importers and exporters, etc.); Political factors (speeches of political leaders, president elections, etc.); Market participants' mood and feelings, their expectations, rumours, etc.; Force-major events (terroristic acts, accidents, catastrophes, etc.).
36
Size of World Forex Market The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs. $1.7 trillion in 1998).Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives.
37
Data for turnover by counterparty show that the increase in global foreign exchange market turnover in 2010 is largely due to the enlarged trading activity of other financial institutions a category that includes non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks. Turnover by this category grew by 42% to $1.9 trillion in April 2010 from $1.3 trillion in April 2007. Although a surge in activity with other financial institutions had already accounted for most of the growth in total turnover in 2007, this categorys share (48%) surpassed transactions between reporting dealers (39%) for the first time in 2010. Other financial institutions increased their activity mainly in the spot market, with their share of turnover rising from 39% to 51%. In outright forwards, their share rose from 44% to 54%. Transactions between reporting dealers in the interbank market grew by 11% to $1.5 trillion in April 2010 from $1.4 trillion in April 2007 (Table B.2). Some of the factors identified as drivers of the downward trend in the share of the interbank market in analyses of previous triennial surveys, such as the increased concentration of the banking sector and the spread of electronic broking platforms, may also have had a dampening effect on interbank turnover Trading in the UK accounted for 36.7% of the total, making UK by far the most important global center for foreign exchange trading. In second and third places, respectively, trading in the USA accounted for 17.9%, and Japan accounted for 6.2%. Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years, reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-
38
traded currency derivatives represent 4% of OTC foreign exchange turnover. FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.
Currency distribution of global foreign exchange market turnover Percentage shares of average daily turnover in April 100 80 60 40 20 0 2001 2004 2007 2010 37.9 23.5 37.4 20.8 16.5 37 17.2 14.9 39.1 19 12.9 89.9 88 85.6 84.9 USD Euro Yen GBP
13
Most developed countries permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. A number of emerging countries do not permit FX derivative products on their exchanges in view of controls on the capital accounts. The use of foreign exchange derivatives is growing in many emerging economies.Countries such as Korea, South Africa, and India have established currency futures exchanges, despite having some controls on the capital account. Turnover by currency
39
Foreign exchange market turnover by currency Daily averages in April 2007
Yen 9%
Others 23%
US Dollar 43%
Euro 18% GBP 7% The currency compositionof turnover has Others 22% Foreign exchange market turnover by currency Daily averages in April 2010
changed only slightly over the past three years, with the relative share of the main currencies diverging somewhat. The market share of the top three currencies (the US dollar, euro and Japanese yen) increased by 3% points, with the market share of the top 10 increasing by only 1.4 percentage points. The biggest increases were seen for the euro and GBP 6% Yen 10%
US Dollar 42%
Euro 20%
yen, and the biggest decline for sterling. The most significant increases in emerging market currencies were seen for the Turkish lira, Chinese renminbi and Korean won, followed by the Brazilian real and Singapore dollar.The renminbi now accounts for almost 1% of global turnover, on a par with the Indian rupee and the Russian ruble. The US dollar continued the slow retreat from its 90% peak share of all transactions, reached in the 2001 survey just after the introduction of the euro. The share of foreign exchange transactions involving the US dollar has fallen over time, to 85% in April 2010. This decline benefited the euro, which gained 2 percentage points in market share since the last survey and accounted for 39% of all transactions. The Japanese yen also increased its market share by 2 percentage points, to 19%, a recovery relative to the 2007 survey but still below its 2001 peak of 24%.
Geographical distribution of turnover
40
Geographical distribution of global foreign exchange market turnover Daily averages in April, in billions of US Dollar 2000 1800 1600 1400 1200 1000 800 600 400 200 0 2001 2004 2007 2010 542 273 153 104 91 835 499 207 134 120 250 242 101 312 266 109 904 745 1483 UK USA Singapore Japan Germany 1854
The geographical distribution of foreign exchange trading typically changes slowly over time, and the 2010 results are no exception (Table B.8). Banks located in the United Kingdom accounted for 37% of global foreign exchange market turnover, followed by those in the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%). Japan has recovered its third-place ranking, which it lost in the 2007 survey. Singapore has moved ahead of Switzerland in 2010. In dollar terms, the greatest increases in trading activity were in the United Kingdom ($370 billion), the United States ($159 billion), Japan ($62 billion) and Hong Kong SAR ($57 billion). Other countries that saw significant growth relative to the 2007 survey include Denmark, France, Singapore, Finland, Turkey, Australia and Spain. Regional turnover by instrument is fairly evenly divided between spot transactions, which account for about 50% of turnover in North and Latin America and for about a third of turnover in other regions, and outright forwards and FX swaps, which account for almost two thirds of turnover in most regions but around 45% in the Americas. The remainder comprises options, which account for around 5% of turnover.
41
The US dollar continued the slow retreat from its 90% peak share of all transactions, reached in the 2001 survey just after the introduction of the euro. The share of foreign exchange transactions involving the US dollar has fallen over time, to 85% in April 2010. This decline benefited the euro, which gained 2 percentage points in market share since the last survey and accounted for 39% of all transactions. The Japanese yen also increased its market share by 2 percentage points, to 19%, a recovery relative to the 2007 survey but still below its 2001 peak of 24%.
42
Turnover by currency pair Global foreign exchange market turnover by currency pair Daily averages in April, in Billions of USD and percentages 1101 892 USD/Euro 541 328 259 107 568 438 384 185 360 249 USD/Yen USD/GBP USD/AUD
1200 1000 800 600 400 200 0 2004 2007
2010
Turnover by currency pair in April 2010 showed no major changes in ranking from three years earlier, although absolute turnover in the major currency pairs tended to increase, with the exception of dollar/sterling transactions. USD/EUR remained by far the dominant pair (with a 28% share), followed at some distance by USD/JPY with a slight increase to 14% of turnover. The USD/GBP pair continued to retreat from its 2004 peak to a 9% share or about the level reached in pre-euro 1998, but the EUR/GBP pair gained almost 60% in absolute terms.
Sources: BIS 2010
43
Growth & opportunities in Indian Forex market The Indian foreign exchange market has grown significantly in the last several years. The daily average turnover has gone up from about USD 5 billion per day in 1998 to more than USD 50 billion per day in 2008. There is also evidence of growing merchant turnover reflecting the huge increase in external transactions. The bid offer spreads are also narrow. The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives are taken by the central government in order to strengthen the foundation.Until 1992 all foreign investments in India and the repatriation of foreign capital required previous approval of the government. The Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange in India. However, a new foreign investment policy announced in July 1991, declared automatic approval for foreign exchange in India for thirty-four industries. These industries were designated with high priority, up to an equivalent limit of 51 percent. Indian authorities are able to manage the exchange rate easily, only because foreign exchange transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to a tradeweighted basket of currencies. In February 1992, the Indian government started to make the rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign exchange in India was implemented. In July 1995, `31.81 were worth US$1, as compared to`7.86 in 1980, `12.37 in 1985, and `17.50 in 1990. INR distribution of global foreign exchange market turnover Percentage shares of average daily turnover in April
1 0.8 0.6 0.4 0.2 0 2001 2004 2007 0.3 0.2 0.7
0.9
2010
44
The foreign exchange market India is growing very rapidly, since the annual turnover of the market is more than $400 billion. This foreign exchange transaction in India does not include the inter-bank transactions. According to the record of foreign exchange in India, RBI released these transactions. The average monthly turnover in the merchant segment was $40.5 billion in 2003-04 and the interbank transaction was $134.2 for the same period. The average total monthly turnover in the sector of foreign exchange in India was about $174.7 billion for the same period. The transactions are made on spot and also on forward basis, which include currency swaps and interest rate swaps. Since the onset of liberalization, foreign exchange markets in India have witnessed explosive growth in trading capacity. The importance of the exchange rate of foreign exchange in India for the Indian economy has also been far greater than ever before. While the Indian government has clearly adopted a flexible exchange rate regime, in practice the rupee is one of most resourceful trackers of the US dollar. The foreign exchange market in India is actively influenced by macro level changes in the international foreign exchange market. Hence to understand the present scenario of Indian Foreign Exchange Market, it is necessary to focus on the major developments in the international FX. Markets that have taken place in the recent past that hasan impact in Indian environment such as: Liberalization of trade and economic activities creating global pattern of trade and commerce Globalization process has taken deep roots in the world and every country now looks to the world as the market for its product; Trade barriers are being dismantled world over and a closer integration of the world economy is taking shape; Revolutionary change in the structure of FX business today financial transactions and intraday trading constitute more than 90-95% of daily turnover in the market; With revolutionary developments in telecommunication and computer technology, an active 24-hour trading in foreign exchange has emerged; Due to instantaneous dissemination of information simultaneously to all centers around the world, exchange rates in all centers are today closely aligned.
45
Forex derivative instruments status as on 31st March 2011. The Bank uses the following types of derivative instruments for hedging and trading purposes. Interest rate and bond futures are contractual agreements to receive or pay a net amount based on changes in interest rates or bond prices on a future date. Futures contracts are settled daily with the exchange. Associated margin payments are settled by cash or marketable securities. Currency and gold options are contractual agreements under which the seller grants the purchaser the right, but not the obligation, to either buy (call option) or sell (put option), by or on a set date, a specific amount of a currency or gold at a predetermined price. In consideration, the seller receives a premium from the purchaser. Currency and gold swaps, cross-currency interest rate swaps and interest rate swaps are bilateral contractual agreements to exchange cash flows related to currencies, gold or interest rates (for example, fixed rate for floating rate). Cross-currency interest rate swaps involve the exchange of cash flows related to a combination of interest rates and foreign exchange rates. Except for certain currency and gold swaps and cross-currency interest rate swaps, no exchange of principal takes place. Currency and gold forwards are bilateral contractual agreements involving the exchange of foreign currencies or gold at a future date. This includes undelivered spot transactions. Forward rate agreements are bilateral interest rate forward contracts that result in cash settlement at a future date for the difference between a contracted rate of interest and the prevailing market rate. Swaptions are bilateral options under which the seller grants the purchaser the right, but not the obligation, to enter into a currency or interest rate swap at a predetermined price by or on a set date. In consideration, the seller receives a premium from the purchaser.
46
In addition, the Bank sells products to its customers who contain embedded derivatives. Where the host contract is not accounted for as held at fair value, embedded derivatives are separated from the host contract for accounting purposes and treated as though they are regular derivatives. As such, the gold currency options embedded in gold dual currency deposits are included within derivatives as currency and gold options. The table below analyses the fair value of derivative financial instruments:
47
Suggestions for improvement The Indian foreign exchange market hasundergone transformation from a closed and
heavilycontrolled setting of the 1970s and the 1980s to amore open and market oriented regime since the mid-1990s. The foreign exchange market, which witnessedderegulation in conjunction with current accountconvertibility and liberalization of capital controls inmany areas, lent considerable support to the externalsector reform process. The criticality of a well-functioningmarket with its ability to trade and settletransactions in new products and adapt itself quicklyto the changing regulatory and competitiveenvironment has been demonstrated well in the Indiancontext. The bid-ask spread of rupee/US dollar ratehas almost converged with that of other majorcurrencies in the international market. On someoccasions, in fact, the bid-ask spread of rupee/USdollar rate was lower than that of some major currencies. The Reserve Bankintervenes in the foreign exchange market primarilyto prevent excessive volatility and disorderlyconditions. Such intervention is not motivated by anypre-determined target or band around the exchangerate. The objective is to keep market movementsorderly and ensure that there is no liquidity problem or rumour/panic-induced volatility. Indias approach ofmarket determination of the exchange rate, flexibility,combined with intervention, as felt necessary, hasserved it well so far. Moving forward, further initiatives fordeveloping the Indian foreign exchange market needto be aligned with the external sector reforms,particularly the move towards: Improvement in Market Infrastructure: Against the backdrop of corporates in Indiagoing global, it is essential that the Indian foreignexchange market is able to provide them with thesame types of products and services as are availablein the major markets overseas. The agenda for thefuture should, therefore, include introduction of moreinstruments, more participants and improved marketinfrastructure in respect of trading and settlement.The issues that could dominate the agendafor the next phase of development in the foreignexchange market could be catalogued as: Introduction of more derivative products involvingthe rupee and more flexibility to both market makers and users to buy or sell these products; Takingcognizance of the offshore derivative marketsinvolving the rupee and weighing all the options inthis regard (i.e.,permitting these products onshoreand permitting onshore entities to participate in theoffshore markets); Relaxation of the currentrestrictions imposed on the entry of non-residententities in the domestic foreign exchange market,particularly the derivatives segment.
48
Accounting Standards: The Indian accounting standards relating toderivatives are still in the process of being developed.Greater clarity is required in the area of derivativeaccounting in the books of corporates as well as bankswith regard to revenue recognition and valuation ofassets and liabilities. It may be, therefore, desirableto have convergence in the accounting standards forboth foreign currency and INR derivatives andbetween on-balance sheet and off-balance sheetitems. The appropriateness standardensures that banks use the same principles for takingcredit decisions in respect of complex derivativetransactions as they do for non-derivative transactions.Banks are expected to evaluate the purpose of thederivative transactions and make an assessment as towhether it is appropriate to the customers needs andlevel of sophistication. Only some banks have anappropriateness policy in place. It is, therefore,important that all banks introduce a customer suitabilityand appropriateness policy. Relaxation of the Criteria of Underlying for Transactions: The Annual Policy Statement of the ReserveBank for 2007-08 released in April 2007 announcedseveral measures to expand the range of hedgingtools available to market participants and facilitatedynamic hedging by residents as alluded to earlier.As the foreign exchange market matures, the criteriaof underlying could be considered for furtherrelaxation to include economic exposures, i.e.,exposures which may not relate directly to foreignexchange transactions, but are affected bymovements in exchange rates. Interest Rate Parity: To encourage interest rate parity in theforward markets, the Committee on Fuller Capital Account Convertibility recommended moreflexibility for banks to borrow and lend overseas onboth short-term and long-term basis and to increasethe limits. The Committee further observed that inorder to ensure that banks are not exposed toadditional risks because of their access to foreignmarkets; their access should continue to be alloweddepending upon the strength of their balance sheets. Reserve Management: Indias experience highlights the importanceof managing foreign exchange reserves to take careof unforeseen contingencies, volatile capital flows andother developments, which can affect expectationsadversely. As there is no international lender of lastresort to provide additional liquidity at short noticeon acceptable terms, the need for adequate reservesis unlikely to be eliminated or reduced even ifexchange rates are allowed to float freely. Several factors such as vulnerability of the real sector to shocks, strength of the fiscal andfinancial sectors, current account balance, thechanging composition of capital flows, a medium-termview of growth prospects encompassing businesscycles and the exchange rate regime influence thecomfort level of reserves. Thus, the comfort level of reserves should not beviewed with respect to the current situation alone, butgoing forward should also reckon with the potentialrisks.
49
Customer Service: In order to provide adequate foreign exchangefacilities to common persons, it is necessary that awide range of activities are available and that thereexist a number of Authorized Dealers. Accordingly, afew entities were licensed as AD (Category II),permitting them to release/remit foreign exchange for17 non-trade related current account transactions.Existing full-fledged money changers (FFMCs), urbanco-operative banks (UCBs), regional rural banks (RRBs), among others, are eligible for such license.Individuals and small enterprises may not haveadequate access to competitive and efficient servicerelating to foreign exchange transactions. Theexporters, particularly the small exporters, do needbetter advice on hedging their currency exposures inview of the two-way movement of the exchange rate.Banks, therefore, may have to consider devisinghedging products, especially for the small andmediumenterprises (SME) sector. Implications of Global Imbalances: A significant risk arises from the large andgrowing global financial imbalances. The speed atwhich the US current account ultimately returnstowards balance, the triggers that drive thatadjustment, and the way in which the burden ofadjustment is allocated across the rest of the worldhave enormous implications for the global exchangerates. Any disorderly adjustments in major currenciesand rise in interest rates would impact the Indianeconomy, though the impact is not expected to besignificant compared too many other emerging market economies. Any disorderly adjustmentin global imbalances may have some impact oncorporates, banks and households in India, thoughtheir exposures, in aggregate, to the external sectorare not significant. Managing Exchange Rate Volatility: As India progresses towards fuller capitalaccount convertibility, it would have to contend withthe impossible trinity of independent monetary policy,open capital account, and exchange rate regime. In the reserve currency countries, which specialize in technology intensiveproducts, the degree of exchange rate pass-throughis low, enabling exporters and importers to ignoretemporary shocks and set stable product prices tomaintain monopolistic positions, despite largecurrency fluctuations. Moreover, mature and welldevelopedfinancial markets in these countries havethe wherewithal to absorb the risk associated withexchange rate fluctuations with minimal shocks to thereal sector. On the other hand, for the most ofdeveloping countries, which specialize in labour intensive and low and intermediate technologyproducts, profit margins in the highly competitivemarkets for these products are very thin andvulnerable to pricing power by retail chains.Consequently, exchange rate volatility has significantemployment, output and distributional consequences.In this context, managing exchange rate volatilitywould continue to be an issue requiring attention, evenwhen the exchange rate becomes more flexible. Conclusion
50
The Indian foreign exchange market has operated in a liberalized environment for more than a decade. A cautious and well-calibrated approach was followed while liberalizing the foreign exchange market with an emphasis on the need to safeguard against potential financial instability that could arise due to excessive speculation. The focus was on gradually dismantling controls and providing an enabling environment to all entities engaged in external transactions. The approach to liberalization adopted by the Reserve Bank has been characterized by greater transparency, data monitoring and information is semi nation and to move away from micromanagement of foreign exchange transactions to macro management of foreign exchange flows. Banks have been given significant autonomy to undertake foreign exchange operations. In order to deepen the foreign exchange market, several products have been introduced and new players have been allowed to enter the market. Full convertibility on the current account and extensive liberalization ofthe capital account has resulted in large increase in transactions in foreign currency. These have also enabled the corporate to hedge various types of risks associated with foreign currency transactions. The impact of these reform initiatives is clearly discernible in terms of depth and efficiency of the market. Exchange rate regimes do influence the regulatory framework when it comes to the issue of providing operational freedom to market participants in respect of their foreign exchange market operations. Notwithstanding a move towards greater exchange rate flexibility by most exponential moving average (EMAs), almost all central banksin EMEs actively participate in their foreign exchange markets to maintain orderly conditions. While the useof risk management instruments is encouraged bymany emerging markets for hedging genuine exposures linked to real and financial flows, their overall approach towards risk management has remained cautious with an emphasis on the need to safeguard against potential financial instability arising due to excessive speculation in the foreign exchange market. In the coming years, the challenge for the Reserve Bank would be to further build up on the strength of the foreign exchange market and carry forward the reform initiatives, while simultaneously ensuring that orderly conditions prevail in the foreign exchange market. Development of the foreign exchange market also needs to be coordinated with the capital account liberalization. Reforms in the financial markets is a dynamic process and need to be harmonized with the evolving macroeconomic developments and the level of maturity of participating financial institutions and other segments of the financial market.
51
Glossary Ask Price Sometimes called the Offer Price, this is the market price for traders to buy currencies. Ask Prices are shown on the right side of a quote. Example: EUR/USD 1.1965 / 68 means that one euro can be bought for 1.1968 UD dollars. Base Currency Is the first currency in a currency pair. A quote shows how much the base currency is worth in the quote (second) currency. For example, in the quote - USD/JPY 112.13 US dollars are the base currency, with 1 US dollar being worth 112.13 Japanese yen. Bid Price Is the price a trader can sell currencies? The Bid Price is shown on the left side of a quote - e.g. EUR/USD1.1965 / 68 means that one euro can be sold for 1.1965 UD dollars. Bid/Ask Spread Is the difference between the bid price and the ask price in any currency quotation. The spread represents the broker's fee, and varies from broker to broker. Broker The intermediary between buyer and seller. Most FOREX brokers are associated with large financial institutions and earn money by setting a spread between bids and ask prices. Cross Currency A currency pair that does not include US dollars e.g. EUR/GBP. Currency Pair Two currencies involved in a FOREX transaction e.g. EUR/USD. Economic Indicator A statistical report issued by governments or academic institutions indicating economic conditions within a country. Fundamental Analysis Analysis of political and economic conditions that can affect currency prices. Leverageor Margin The ratio of the value of a transaction to the required deposit. A common margin for FOREX trading is 100:1. You can trade currency worth 100 times the amount of your deposit. Limit Order An order to buy or sell when the price reaches a specified level. Lot The size of a FOREX transaction. Standard lots are worth about 100,000 US dollars.
52
Major Currency The euro, German mark, Swiss franc, British pound, and the Japanese yen are the major currencies. Minor Currency The Canadian dollar, the Australian dollar, and the New Zealand dollar are the minor currencies. One Cancels the Other (OCO) Two orders placed simultaneously with instructions to cancel the second order on execution of the first. Open Position An active trade that has not been closed. Pips or Points The smallest unit a currency can be traded in. Quote Currency The second currency in a currency pair. In the currency pair USD/EUR the euro is the quote currency. Rollover Extending the settlement time of spot deals to the current delivery date. The cost of rollover is calculated using swap points based on interest rate differentials. Technical Analysis Analysis of historical market data to predict future movements in the market. Tick The minimum change in price. Transaction Cost The cost of a FOREX transaction typically the spread between bids and asks prices. Volatility A statistical measure indicating the tendency of sharp price movements within a period of time. Yard Another term for a billion. Derivative A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.
53
List of References & Bibliography 1) Bank of International Settlements, Triennial Central Bank Survey: Report on global foreign exchange market activity in December 2010; 2) Foreign Exchange Derivatives Market in India - Status and Prospect, &Derivatives Markets in India 2003" by Mr.Susan Thomas, faculty of IGIDR; 3) Bank of International Settlements, 81st Annual Report 1st April 2010 31st March 2011. 4) Foreign Trade and Foreign Exchange VI Edition by Author O. P. Agrawal; 5) Currency Derivatives, NSE Module for beginners 2009. Courtesy NSE India website. Web-links www.rbi.org.in; www.wikipedia.org; http://www.bis.org/publ/rpfxf10t.htm; www.google.com.
54

Finale Forex

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Finale Forex

Diunggah oleh

Hak Cipta:

Format Tersedia

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Mitigation.Foreign Trade and Exchange VI Edition 22.1 Author O.P.Agrawal.

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Australia 4% Hong Kong 5% Switzerland 5% Singapore 5% Japan 6%

Sources: BIS report 2010

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Financial Institutes 1900

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

1600101 USD Euro Yen GBP

Indian Forex Market Trend Analysis from 2001 to 2011

30000 20000 10000 0

3401 USD Euro

Indian Forex Market Trend Analysis from 2001 to 2011

80% 70% 60% 50% 40% 30% 20% 10% 0%

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

> spot rate: forward premium,

< spot rate: forward

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

2000 1500 1000 500 0 1998 2001 2004 734

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

50 40 30 20 10 0 1998 2001 2004 2007 10 7 21 31

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

250 200 150 87 100 50 0 1998 2001 2004 60 119

Indian Forex Market Trend Analysis from 2001 to 2011

250 200 150 100 50 0 1998 2001 2004 87 60 119

Indian Forex Market Trend Analysis from 2001 to 2011

INR currency options in April 2010, Against US dollars in %

other non-financial financial institutions institutions

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

1 0.8 0.6 0.4 0.2 0

0.9 0.7 0.3

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Foreign exchange market turnover by currency Daily averages in April 2007

Geographical distribution of turnover

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011

Indian Forex Market Trend Analysis from 2001 to 2011