a project report on fundamental analysis of foreign exchange

7/30/2019 A Project Report on Fundamental Analysis of Foreign Exchange

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A PROJECT REPORT ON FUNDAMENTAL ANALYSIS OF FOREIGN

EXCHANGE AT

ANGEL BROKING LIMITED

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR

THE DEGREE OF

MASTERS OF BUSINESS ADMINISTRATION.

PREPARED BY

ID NO.:

(FY MBA FINANCE)

UNDER THE GUIDENCE OF

COLLEGE

PUNE

2011-2012


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A PROJECT REPORT ON FUNDAMENTAL ANALYSIS OF FOREIGN

EXCHANGE AT

ANGEL BROKING LIMITED

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR

THE DEGREE OF

MASTERS OF BUSINESS ADMINISTRATION.

PREPARED BY

ID NO.:

(FY MBA FINANCE)

UNDER THE GUIDENCE OF

COLLEGE

PUNE

2011-2012


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APPROVAL____________

TABLE OF CONTENTS

COVER PAGE...................1

DECLARATION...............5

ACKNOWLEDGEMENT................6

PREFACE. 7

OBJECTIVE OF THE STUDY.. 8

COMPANY PROFILE.9

INTRODUCTION11

MANAGEMENT..18

MILESTONES..............................................26

HUMAN RESOURCE.28

SERVICES........40

TOPIC STUDY ...57

INTRODUCTION....58


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MARKET SIZE AND LIQUIDITY....62

MARKET PARTICIPANTS..66

TRADING CHARACTERISTICS...76

DETERMINANTS OF EXCHANGE RATE .82

ECONOMIC FACTORS...84

POLITICAL CONDITIONS.....86

MARKET PSYCOLOGY..87

FINANCIAL INSTRUMENTS.........89

SPECULATION.....91

RISK AVERSION......93

CARRY TRADE................................94

EXECUTIVE SUMMARY...95

INTRODUCTION.97

SUGGESTIONS....100

RECOMMENDATIONS..102


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SOURCE WEBSITES.....103

DECLARATION

I HERE BY DECLARE THAT THIS RESEARCH PROJECT IS

SUBMITTED AS PER UNIVERSITY REQUIREMENT OF MBA

CURICULUM IS MY ORIGNAL WORK BASED ON THE FINDINGS

DURING THE PROJECT.

I ASSURE THAT THE DATA FACT FIGURES PRESENTED BY ME IN

THIS PROJECT REPORT ARE TRUE. IT IS NOT SUBMITTED IN ANY

OTHER INSTITUTE FOR THE AWARD OF ANY OTHER DEGREE

DIPLOMA FELLOWSHIPOR OTHER SIMILAR PRICES OR TITLES.

I WILL NOT SUBMIT THIS PROJECT TO ANY OTHER PERSON AND

HE/SHE WILL NOT BE ALLOWED TO COPY FROM THIS PROJECT

IN ANY FORM. IF I AM FOUND TO BE GUILTY OF NOT

FULFILLING THE ABOVE PROMISES, MY SUBMISSION CAN BE

DECLARED INVALID AND COLLEGE HAS THE RIGHT TO


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DISQUALIFY ME.

ACKNOWLEDGEMENT

I EXPRESS MY PROFOUND GRATITUDE TO MR. RIZWAN SHAIKH

BRANCH MANAGER OF THE COMPANY, WHO ASSIGNED ME AS A

SUMMER TRAINEE AT ANGEL BROKING LIMITED.

I TAKE THIS OPPORTUNITY TO PRESENT MY GRATITUDE TO MR.

RIZWAN SHAIKH, FOR HIS KIND ADVICE AND GUIDANCE THAT

MADE MY PROJECT SUCCESSFUL.

I AM ALSO GRATEFUL TO college faculty

SPECIAL THANKS TO -INTERNAL GUIDE AND MENTOR, FOR HIS

IMMENSE HELP AT ALL TIMES AND BEING AVAILABLE AT ALL

CALLS OF NEED.


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PREFACE

THE PROFESSIONAL TRAINING IS AN INTEGRAL PART OF A MBA

PROGRAM. IT HELPS THE STUDENT UNDERSTAND PRACTICAL

ASPECTS OF BUSINESS MANAGEMENT IN A BETTER WAY AS A

PART OF MY MBA PROGRAM AT SEVENTH DAY ADVENTIST

COLLEGE.

FINANCIAL MANAGEMENT MEANS PLANNING, ORGANIZING,

DIRECTING AND CONTROLLING THE FINANCIAL ACTIVITIES

SUCH AS PROCUREMENT AND UTILIZATION OF FUNDS OF THE

ENTERPRISE. IT MEANS APPLYING GENERAL MANAGEMENT

PRINCIPLES TO FINANCIAL RESOURCES OF THE ENTERPRISE.

TO BE A MASTER OF BUSINESS ADMINISTRATION STUDENT IS A

MATTER OF PRIDE BECAUSE WE ARE IN FIELD, WHICH HELPS US

TO DEVELOP FROM A NORMAL HUMAN BEING INTO A DISCIPLINE,

AND DEDICATED PROFESSIONAL.


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THE MBA IS A COURSE, WHICH COVERS THEORETICAL AS WELL

AS PRACTICAL ASPECTS OF BUSINESS PRACTICES. SO FOR THIS

PARTIAL FULFILLMENT OF THE COURSE, THE STUDENT IS

SUPPOSED TO UNDERGO TRAINING UNDER ANY

COMMERCIAL/INDUSTRY UNDERTAKING FOR ATLEAST 125

HOURS ABOUT A GIVEN TOPICS.

THE BUSINESS IS BECOMING MORE AND MORE COMPLEX DUE TO

WHICH IT IS FACING VARIOUS PROBLEMS AND OBSTACLES IN

THEIR DAY-TO-DAY FUNCTIONING. AS A FINANCE STUDENT I HAD

BEEN ASSIGNED A TOPIC:

FUNDAMENTAL ANALYSIS OF FOREIGN EXCHANGE

(FOREX).


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OBJECTIVE OF THE STUDY

Our soul objective of this report confines with these facts:-

To find the trend and advancement in foreign exchange

Determine the market size and potential of all the listed and Non-listed players in theindustry.

A comparative analysis among some major players, especially in India & western region.

Further scope and opportunity analysis.

Comparative analysis of INR and USD.


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COMPANY

PROFILE


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INTRODUCTION

ngel Broking's tryst with excellence in customer relations began in 1987. Today, Angel has

emerged as one of the most respected Stock-Broking and Wealth Management Companies in

India. With its unique retail-focused stock trading business model, Angel is committed to

providing Real Value for Money to all its clients.

The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock Exchange

(NSE) and the two leading Commodity Exchanges in the country: NCDEX & MCX. Angel is

also registered as a Depository Participant with CDSL.


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BUSINESS

Equity Trading Commodities Portfolio Management Services Mutual Funds Life Insurance IPO Depository Services Investment Advisory

ANGEL GROUP

Angel Broking Ltd. Angel Commodities Broking Ltd. Angel Securities Ltd.


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OUR VISION

To provide best value for money to investors through innovative products, trading/investments

strategies, state of the art technology and personalized service.


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OUR MOTTO

To have complete harmony between quality-in-process and continuous improvement to deliver

exceptional service that will delight our Customers and Clients.


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OUR CRM POLICY: CUSTOMER IS THE KING

A Customer is the most Important Visitor on our premises. He is not dependent on us, but we

are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an

outsider in our business. He is part of it. We are not doing him a favor by serving him. He is

doing us a favor by giving us an opportunity to do so.

- MAHATMA GANDHI


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BUSINESS PHILOSOPHY

Ethical practices & transparency in all our dealings Customers interest above our own Always deliver what we promise Effective cost management


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OUR QUALITY ASSUARANCE POLICY

We are committed to providing world-class products and services which exceed

the expectations of our customers, achieved by teamwork and a process of

continuous improvement.


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MANAGEMENT

FOUNDER CHAIRMAN & MANAGING DIRECTOR

MR. DINESH THAKKAR

The Angel Group of Companies was brought to life by Mr. Dinesh Thakkar. He ventured into

stock trading with an intention to raise capital for his own independent enterprise. However, he

recognized the opportunity offered by the stock market to serve individual investors. Thus

Indias first retail-focused stock-broking house was established in 1987. Under his leadership,

Angel became the first broking house to embrace new technology for faster, more effective and

affordable services to retail investors.

Mr. Thakkar is valued for his understanding of the economy and the stock-market. The print and

electronic media often seek his views on the market trend as well as investment strategies.


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M ANAGING DIRECTORINSTITUTIONAL BROKING

MR. LALIT THAKKAR

Mr. Lalit Thakkar is the motivating force behind Angels highly acclaimed Research team. Hes

been a part of the senior management team since the Angel Groups inception. His technical and

fundamental outlook has provided impetus to Angels market research team. Research-based &

personalized advisory services are Angels forte, and Mr. Lalit Thakkar has undoubtedly been

the brain behind it.

When it comes to analyzing the market, Mr. Lalit Thakkar is truly a genius. His hands-on

experience and fundamental knowledge of the market can predict the market trend early. His

views on the market trend are often quoted in the print and electronic media.


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Executive Director & CFO

Mr. Sachinn R Joshi

Mr. Sachinn R Joshi brings with him over 19 years of experience handling strategic positions in

Business Operations & Finance. He also has hands-on experience in Resource Raising, Strategic

Planning, Business Restructuring, Public Listing (Local/ International), etc

A Chartered & a Cost Accountant by qualification, Sachinn is also a post graduate in Law and

has completed a one year Certificate Program (BLP II) from IIM (Kolkatta). He has been

associated with reputed firms such as Navneet Group of Companies, Lupin Laboratories Ltd and

Infrastructure Leasing & Financial Services Ltd. (IL&FS). His last assignment which spanned

over 11 years was with IL&FS Investsmart Group where he worked in various capacities such as

Chief Financial Officer, Executive Director- Finance & Operations and Chief Operating Officer.


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Executive Director & CFO

Executive DirectorEquity Broking

Mr. Vinay Agrawal

Mr. Vinay Agrawal leads the Equity Broking business at Angel, which comprises Business

Development, Operations, Product Development and E-broking initiative. He is actively

involved in exploring new ways to adopt technology for business enhancement.

A Chartered Accountant by qualification, Mr. Agrawal began his career with the Angel Group as

Finance and Operations Consultant, and since then hes quickly climbed up the corporate ladder.


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Executive Director - Sales and Marketing

Mr. Nikhil Daxini

With an MBA in finance, Mr. Nikhil Daxini has been instrumental in introducing the concept of

professional marketing of broking services at Angel. His area of focus is Business Development,

Risk Management and Operations.

Mr. Daxini has immense experience in the marketing of financial products and services. He has

been associated with HDFC Bank Ltd. in the past.


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Executive DirectorOperations

Mr. Syam

Mr. Syam brings with him over 18 years of experience in the field of Transaction Banking,

Wholesale Banking, Treasury Banking, Consumer Banking and CBS. He started his career with

ANZ Grindlays Bank and he was also associated with Standard Chartered Bank in India as

Director Transactional Banking.

Mr. Syam followed up his Engineering degree with an MBA. He has also attended Banking &

Technology seminars organized by SCB Singapore, BSE India & Euro Finance.


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Associate DirectorInformation Technology and B2B Business

Mr. Shah

Mr. Shah has over 18 years of rich industry experience, and has been involved in various aspects

of Business Operations in the past.

IT is a strategic function at Angel. And Mr. Ketan Shah is involved in the designing of Angels

IT policies and Strategies. Mr. Shah leads all IT-related activities from planning and budgeting to

implementation and maintenance.

With his strong business understanding and process knowledge, Mr. Shah is also handling

Business Development of B2B Channel at Angel. He is responsible to formulate strategies for

complete B2B business operations and also takes care of developing new business proposition

for the vertical.


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Associate Director - Commodities and Currencies

Mr. Mathur

A CFA of 1997, Mr. Mathur holds a Post Graduation degree in Financial Management and

Business Finance. He brings with him over 14 years of experience in the financial markets

He had been associated with Religare Commodities, Karvy Consultants and with BLB Ltd in the

past. He has been involved in several management activities, treasury operations, corporate and

strategic planning, and research activities in Futures and Options markets in his past

assignments.

Mr. Mathur is a regular speaker on all the prominent financial news channels.


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MILESTONES

MARCH, 2007

Angel Broking crosses the benchmark of 2, 00,000 unique trading accounts

NOVEMBER, 2007

Angel Broking wins the honored Major Volume Driver Award by BSE for 2006-2007

NOVEMBER, 2007

Angel Broking augments its business with introduction of Insurance Distribution in alliance with

Birla Sun Life

NOVEMBER, 2008

Angel Broking wins the esteemed Major Volume Driver Award by BSE for 2007-2008


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AUGUST, 2008

Angel Broking crosses 5, 00,000 mark in unique trading accounts

MAY, 2009

Angel Broking wins two prestigious awards for 'Broking House with Largest Distribution

Network' and 'Best Retail Broking House' at Dun & Bradstreet Equity Broking Awards

NOVEMBER, 2010

Angel Broking bags the coveted Major Volume Driver Award by BSE for 2009-10

MARCH, 2011

Angel Broking was awarded with 'Best in Contribution Investor Education & Category

Enhancement of the year' and 'Best Commodity Research of the year'

OCTOBER, 2011
http://www.angelbroking.com/Major-Volume-Driver-Award-2010.aspxhttp://www.angelbroking.com/Major-Volume-Driver-Award-2010.aspxhttp://www.angelbroking.com/Major-Volume-Driver-Award-2010.aspx


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Angel Broking bagged the Dun & Bradstreet Equity Broking Awards 2011 for 'Best Retail

Broking House' and 'Fastest Growing Equity Broking House' (Large Firms) at Dun & Bradstreet

Equity Broking Awards 2011.

HUMAN RESOURCE

WORK CULTURE

At Angel, we keep exploring new paths to provide the best value to all our internal and external

customers. We consider people as our biggest asset and believe in creating long term

relationships by nurturing talent from within. A fast-growing, forward-looking organization like

ours, demands HR to be a key responsibility area of our core management team.

Our HR team constantly explores ways to enhance and augment the knowledge base and

productivity of all Angels by providing various learning and development Programs. Our three

tier Leadership Development program helps all star performers to grow and develop their

managerial skills to become effective mentors for their teams and thereby take on the next level

of responsibility effectively.

Ours is a winning team of highly determined, motivated, and adaptable people, all working

diligently to take Angel's exciting success story forward.


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HR PHILOSOPHY

At Angel, People come first. Along with our customers, our employees are equally vital to our

organization. The Business of HR is to foster an entrepreneurial spirit

Whereby Angels can operate with ownership as an entrepreneur (profit center) within the

confines of their job role and earn over and above their fixed salaries.

We believe in inculcating a sense of responsibility and ownership in all Angels which brings out

the entrepreneurial zeal to explore potential within as well as beyond job boundaries.

Our HR Philosophy is to engage employees at professional, emotional and material levels.

We aim to create an environment conducive to both personal and professional development ofthe employees, leading to a productive and happy work force

Angel believes that people impact business and therefore each and every Angel is a key resourceand a valuable asset


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Our business philosophy of being transparent in all our dealings with our customers, is equally

applicable in dealings with employees

We encourage initiative, provide professional freedom and empower Angels based on trust


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EMPLOYEE ENGAGEMENT

Team HR at Angel works effectively to create a work environment and performance culture that

fosters team spirit and enhances employee productivity through motivation and positive

ambition.

Our HR team is continually working to rationalize and restructure measures to ensure better

employee relationship management, employee communications and relations, recruitment and

training need analysis; program design and implementation, performance evaluation and other

work-life initiatives.

Here are some of the event that takes place in the company for employee engagement.


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SPRINT

Sprint is an engagement program devised for better inclusion of new joiners from Day 1. The

major aim is to help employee understand the company products & services and present them to

customers.


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RACE

After having done well in the Sprint program, Race is highly effective in harnessing the

potential of new joiners for further development in the next three months.


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STAR TRACK

Star Track project involves unleashing the competitive spirit of the Sales team and rewarding

the consistent performers with prizes and displaying their name in Hall of Fame.


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HALL OF FAME

It is a display to increase visibility of initiatives taken by employees with an objective to

motivate and recognize contribution and develop sense of pride and belonging.


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SAMPARK

Sampark is our way of bridging the employee-management communication through a common

forum where, ideas, achievements, insight and visions for success are shared on a regular basis.


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CLASH OFANGELS

Angel organizes a cricket tournamentClash of Angels with an aim to encourage the

competitive spirit and sportsmanship in all employees. The best team lifts the rolling trophy.

Cricket being the favorite sport of the nation, the event generates a lot of fanfare among the

employees.


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PRAGATI

Angel strongly believes that innovation does not come from processes but people. We also

believe in evolving continuously to meet the customer needs and create a competitive advantage

through truly personalized service. Pragati is a platform to capture creative ideas from

employees with the objective of bringing tangible results by increasing efficiency, enhancing

productivity and reducing TAT in our work areas.


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RED TAG DAY

Angel encourages employees to reduce, recycle & reuse as a way of life. To re-enforce the

significance of red tagging every year we celebrate Red Tag Day across Angel.


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SERVICES PROVIDED BY ANGEL BROKING

EQUITY

Investing in shares or stock market is inarguably the best route to long-term wealth

accumulation. However, it can also be a very risky proposition due to high risk-return trade-off

prevalent in the stock market. Hence, it is more appropriate to take help of an experienced and

trustworthy expert who will guide you as to when, where and how to invest.

Angel provides guidance in the exciting world of stock market with suitable trading solutions

and value-added tools and services to enhance your trading experience.

ONLINE TRADING

Three different online products tailored for traders & investors

Customized single screen Market Watch for multiple exchanges

Real-time rates


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Flash news & intra-day calls

Intra-day & historical charts with technical tools

Online research

E-broking & back-office software training

QUALITY RESEARCH

Wide range of daily, weekly and special Research reports

Expert Sector Analysts with professional industry experience

ADVISORY


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Real-time market information with News updates

Investment Advisory services

Dedicated Relationship Managers

Portfolio Management Services

SUPPORT

24x7 Web-enabled Back Office

Centralized Help Desk

Live Chat support system


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DERIVATIVES

The derivative segment is a highly lucrative market that gives investors an opportunity to earn

superlative profits (or losses) by paying a nominal amount of margin. Over past few years,

Future & Options segment has emerged as a popular medium for trading in financial markets.

Future contracts are available on Equities, Indices, Currency and Commodities.

Angel with its membership as Trading and Clearing Member of NSE F&O Segment and BSE

Derivatives Segment, provides you a gateway to the exciting world of derivative market.

\

COMMODITIES

Commodities Derivative market has emerged as a new avenue for investors to create wealth.

Today, Commodities have evolved as the next best option after stocks and bonds for diversifying

the portfolio. Based on the fundamentals of demand and supply, Commodities form a separate

asset class offering investors, arbitrageurs and speculators immense potential to earn returns.

Angel aims to harness the immense potential of the Commodities market by providing you a

simple yet effective interface, research and knowledge.


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THE ANGEL ADVANTAGE

Angel provides user-friendly online platforms for commodity trading in the leading commodity

exchanges.

ONLINE TRADING

Three different online products tailored for traders & investors

Single screen customized Market-Watch for MCX & NCDEX with BSE & NSE

Streaming quotes


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TOP QUALITY RESEARCH

In house research on more than 25 commodities

Highly skilled Analysts with professional industry experience

Daily, Weekly and Monthly Research Reports

PRO-ACTIVE RELATIONSHIP MANAGEMENT

Active advisory desk

Efficient & nationwide network

Seminars, workshops and investment camps for investors


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LIFE INSURANCE

Ensure your familys well-being by securing their future with a life insurance policy. No

financial planning is complete without life insurance. Angel offers an array of life insurance

products like Term Plans, Endowment Plans, Money back Plans, Children Life Insurance Plans

and ULIP Plans to meet your individual insurance requirements.

The Angel Advantage

Low and affordable Premium with maximum life cover

Assistance at your doorstep

Tailor made plans to suit your financial needs

Help desk for all your queries

Hassle free and transparent dealings


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MUTUAL FUNDS

Investing in a Mutual fund is an excellent way of diversifying risk as well as portfolio. Angel

presents its Mutual fund services that strive to meet all your mutual fund investment needs. We

have a wide spectrum of investment schemes from all top mutual fund houses.

Angel also provides recommendations based on in-depth research, mutual fund performance and

mutual fund ratings to help meet your investment goals.

THE ANGEL ADVANTAGE

Pan India presence\

Online and offline transaction facility

Schemes from all major fund houses

Latest MF News and Fund Manager views


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Latest New Fund Offers (NFO)

Information and tools to help you select the right scheme

Dedicated Customer Help desk

24x7 Web-enabled Client Back Office

DEPOSITORY SERVICES

Enjoy the dual benefits of trading and depository services under one roof and experience

efficient, risk-free and prompt depository service. Angel is registered as a Depository Participant

with CDSL. We are also a member of the Bombay Stock Exchange (BSE), National Stock

Exchange (NSE) and the two leading Commodity Exchanges in the countryNCDEX & MCX.


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ANGEL ADVANTAGE

Automated pay-in facility

Access informationAnytime, Anywhere

Quarterly demat statements with valuation

Statements on demand

View Demat A/C statement online

Competitive transaction charges


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Enjoy exclusive benefits by registering with us:

No risk of loss, wrong transfer, mutilation or theft of share certificates

Hassle free automated pay-in of your sell obligation with no need for physical instruction

Reduced paper work

Speedy settlement process resulting in increased liquidity of your securities

Instant disbursement of non-cash benefits like Bonus and Rights

Efficient pledge mechanism

Wide branch coverage


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Personalized services of trained Help desk

No charges for extra Transaction statement and Holding statement

Combined monthly 'Bill-cum-Transaction-cum-Holding-cum-Ledger' statement of yourinvestments

CURRENCY TRADING

The global increase in trade and foreign investments has led to inter-connection of many national

economies. This and the resulting fluctuations in exchange rates, has created a huge international

market for Forex rendering investors another exciting avenue for trading. The Forex market

offers unmatched potential for profitable trading in any market condition or any stage of the

business cycle.


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INDIAN FOREX MARKET

In terms of daily turnover in 2010, India is the 16th largest market in the world. Indias market

share in World FX Market increased from 0.1 % in 1998 to 0.9% in 2010. As per Latest RBI

Data, Daily FX Indian Market volumes are $50 Billion in 2009.

Indian Currency Futures MarketPresent Status

Currency Futures Trading was launched in India on 29th August, 2008 on NSE. NSE &

MCXSX are the major 2 exchanges presently. United Stock Exchange of India is the

upcoming exchange promoted by Bank of India, Federal Bank, MMTC & Jaypee Capital along

with 9 other banks.

The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA,

Presently Daily Turnover on both exchanges averages Rs. 35000 crores. Banks are active

participants on the exchanges. NRIs & FIIs are not permitted to trade as of now. Currency

markets offer investors a step into the world of Forex.

The global increase in trade and foreign investments has led to inter-connection of many national

economies.


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This and the resulting fluctuations in exchange rates, has created a huge international market for

Forex rendering investors another exciting avenue for trading. The Forex market offers

unmatched potential for profitable trading in any market condition or any stage of the business

cycle.

NRI SERVICES

Living in a foreign country never weakens the thread that binds you to your homeland. Angel

Broking understands the varied needs of the NRIs and value their patronage. We offer a bouquet

of products and services for NRIs.

OUR SERVICE MATRIX:

NRI services desk for personalized assistance to NRI and PIO clients

Dedicated offline equity dealing desk

Online equity trading platforms


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Depository services

24x7 back office

NRI investment advisory desk

PMS

IPO and mutual funds

Insurance and personal loan solutions

Banking support

Pan Card assistance


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INVESTMENT ADVISORY

Even a seasoned investor knows that effective timing of markets is not possible. Therefore,

professional and expert advice is essential to generate superior returns from the stock market.

At Angel, we offer you investment advisory services with ternary objective of superior returns,

risk minimization and portfolio diversification. Supported by a highly specialized and dedicated

Research team, Angel follows a client-centric approach to offer customized solutions.

PERSONALIZED SERVICES

One-to-One communication between client and Relationship Managers

Effective investment advice and Research reports for clients

Daily Calls before market hours


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IPO

Online IPO provides clients the facility to conveniently apply for the various IPOs without any

paper work. This electronic interface also allows online payment for IPO through 20 different

banks.


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TOPIC:

FUNDAMENTAL ANALYSIS

OF CURRENCY EXCHANGE


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Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a form ofexchange for the

global decentralized trading of international currencies. Financial centers around the world

function as anchors of trading between a wide range of different types of buyers and sellers

around the clock, with the exception of weekends. The foreign exchange market determines the

relative values of different currencies.[1]

The foreign exchange market assists international trade and investment by enabling currency

conversion. For example, it permits a business in theUnited States to import goods from

the European Union member states especially Eurozone members and pay Euros, even though its

income is inUnited States dollars. It also supports direct speculation in the value of currencies,

and the carry trade, speculation on the change in interest rates in two currencies.[2]

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying

a quantity of another currency. The modern foreign exchange market began forming during the

1970s after three decades of government restrictions on foreign exchange transactions (the

Bretton Woods system of monetary management established the rules for commercial and

financial relations among the world's major industrial states after World War II), when countries

gradually switched to floating exchange rates from the previous exchange rate regime, which

remained fixed as per the Bretton Woods system.
http://en.wikipedia.org/wiki/Exchange_(organized_market)http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-0http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-0http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-0http://en.wikipedia.org/wiki/Currency_conversionhttp://en.wikipedia.org/wiki/Currency_conversionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/Euroshttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Carry_tradehttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Carry_tradehttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Euroshttp://en.wikipedia.org/wiki/Eurozonehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Currency_conversionhttp://en.wikipedia.org/wiki/Currency_conversionhttp://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-0http://en.wikipedia.org/wiki/Exchange_(organized_market)


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The foreign exchange market is unique because of

its huge trading volume representing the largest asset class in the world leading tohigh liquidity;

its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on

Sunday until 22:00 GMT Friday;

the variety of factors that affect exchange rates;

the low margins of relative profit compared with other markets of fixed income; and

The use ofleverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal ofperfect competition,

notwithstanding currency interventionby central banks. According to the Bank for International

Settlements,[3]as of April 2010, average daily turnoverin global foreign exchange markets is
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estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume

as of April 2007. Some firms specializing on foreign exchange market had put the average daily

turnover in excess of US$4 trillion.[4]

The $3.98 trillion break-down is as follows:

$1.490 trillion in spot transactions

$475 billion in outright forwards

$1.765 trillion in foreign exchange swaps

$43 billion currency swaps

$207 billion in options and other products
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MARKET SIZE AND LIQUIDITY

rnover, 19882007, measured in billions of USD.
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The foreign exchange market is the most liquid financial market in the world. Traders include

large banks, banks, institutional, currency speculators, corporations, governments, otherfinancial

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).[3]Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in

outright forwards, swaps and otherderivatives.

Trading in the United Kingdom accounted for 36.7% of the total, making it by far the most

important centre for foreign exchange trading. Trading in the United States accounted for 17.9%,

and Japan accounted for 6.2%.[5]

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-traded currency derivatives represent 4% of OTC foreign exchange turnover. Foreign

exchange futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are

50actively traded relative to most other futures contracts.
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Most developed countries permit the trading of derivative products (like futures and options on

futures) on their exchanges. All these developed countries already have fully convertible capital

accounts.

Some governments ofemerging economies do not allow foreign exchange derivative products

on their exchanges because they have capital controls.

Top 10 currency traders

% of overall volume, May 2011

Rank Name Market share

1 Deutsche Bank 15.64%

2 Barclays Capital 10.75%

UBS AG 10.59%

Citi 8.88%

JPMorgan 6.43%
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The use of derivatives is growing in many emerging economies.

[6]

Countries such as Korea,

South Africa, and India have established currency futures exchanges, despite having some capital

controls.

Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more

than doubled since 2004.[8]The increase in turnover is due to a number of factors: the growing

importance of foreign exchange as an asset class, the increased trading activity ofhigh-frequency

traders, and the emergence ofretail investors as an important market segment. The growth of

HSBC 6.26%

Royal Bank of Scotland 6.20%

Credit Suisse 4.80%

Goldman Sachs 4.13%

Morgan Stanley 3.64%
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electronic and the diverse selection of execution venues has lowered transaction costs, increased

market liquidity, and attracted greater participation from many customer types.

In particular, electronic trading via online portals has made it easier for retail traders to trade in

the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of

spot turnover, or $150 billion per day (see retail foreign exchange platform).

Foreign exchange is an over-the-counter market where brokers/dealers negotiate directly with

one another, so there is no central exchange orclearing house. The biggest geographic trading

center is the United Kingdom, primarily London, which according toTheCityUKestimates has

increased its share of global turnover in traditional transactions from 34.6% in April 2007 to

36.7% in April 2010.

Due to London's dominance in the market, a particular currency's quoted price is usually the

London market price. For instance, when the International Monetary Fund calculates the value of

its special drawing rights every day, they use the London market prices at noon that day.

MARKET PARTICIPANTS

Financial markets
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Public market Exchange Securities

BOND MARKET

Fixed income Corporate bond Government bond Municipal bond Bond valuation High yield debt

STOCK MARKET

Stock Preferred stock Common stock Registered share


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Voting share Stock exchange

DERIVATIVES MARKET

Securitization Hybrid security Credit derivative Futures exchanges

OVER THE COUNTER

Spot market

Forwards Swaps Options


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FOREIGN EXCHANGE

Exchange rate Currency

OTHER MARKETS

Money market Reinsurance Commodity market Real estate market

FINANCE SERIES

Banks and banking Corporate finance Personal finance Public finance


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Unlike a stock market, the foreign exchange market is divided into levels of access. At the top is

the interbank market, which is made up of the largest commercial banks and securities dealers.

Within the interbank market, spreads, which are the difference between the bid and ask prices,

are razor sharp and not known to players outside the inner circle.

The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2 pips for a

currencies such as the EUR) as you go down the levels of access. This is due to volume. If a

trader can guarantee large numbers of transactions for large amounts, they can demand a smaller

difference between the bid and ask price, which is referred to as a better spread. The levels of

access that make up the foreign exchange market are determined by the size of the "line" (the

amount of money with which they are trading). The top-tierinterbank market accounts for 53%

of all transactions.

From there, smaller banks, followed by large multi-national corporations (which need to hedge

risk and pay employees in different countries), large hedge funds, and even some of the

retail market makers. According to Galati and Melvin, Pension funds, insurance companies,

mutual funds, and other institutional investors have played an increasingly important role in

financial markets in general, and in FX markets in particular, since the early 2000s. (2004) In

addition, he notes, Hedge funds have grown markedly over the 20012004 period in terms of
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both number and overall size.[9] Central banks also participate in the foreign exchange market to

align currencies to their economic needs.

COMMERCIAL COMPANIES

An important part of this market comes from the financial activities of companies seeking

foreign exchange to pay for goods or services. Commercial companies often trade fairly small

amounts compared to those of banks or speculators, and their trades often have little short term

impact on market rates. Nevertheless, trade flows are an important factor in the long-term

direction of a currency's exchange rate. Some multinational companies can have an unpredictable

impact when very large positions are covered due to exposures that are not widely known by

other market participants.

Central banks

National central banks play an important role in the foreign exchange markets. They try to

control the money supply, inflation, and/orinterest rates and often have official or unofficial

target rates for their currencies. They can use their often substantial foreign exchange reserves to

stabilize the market.
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Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because

central banks do not go bankrupt if they make large losses, like other traders would, and there is

no convincing evidence that they do make a profit trading.

FOREIGN EXCHANGE FIXING

Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of each

country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior

of their currency. Fixing exchange rates reflects the real value of equilibrium in the market.

Banks, dealers and traders use fixing rates as a trend indicator.

The mere expectation or rumor of a central bankforeign exchange intervention might be enough

to stabilize a currency, but aggressive intervention might be used several times each year in

countries with a dirty float currency regime. Central banks do not always achieve their

objectives.
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The combined resources of the market can easily overwhelm any central bank. Several scenarios

of this nature were seen in the 199293 European Exchange Rate Mechanism collapse, and in

more recent times in Southeast Asia.

HEDGE FUNDS AS SPECULATORS

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 have gained a reputation for aggressive currency speculation since 1996.

They control billions of dollars ofequity 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' favor.

INVESTMENT MANAGEMENT FIRMS

Investment management firms (who typically manage large accounts on behalf of customers

such as pension funds and endowments) use the foreign exchange market to facilitate

transactions in foreign securities. For example, an investment manager bearing an international
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equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign

securities purchases.

Some investment management firms also have more speculative specialist currency

overlay operations, which manage clients' currency exposures with the aim of generating profits

as well as limiting risk. While the number of this type of specialist firms is quite small, many

have a large value ofassets under management), and hence can generate large trades.

RETAIL FOREIGN EXCHANGE TRADERS

Individual Retail speculative traders constitute a growing segment of this market with the advent

ofretail foreign exchange platforms, both in size and importance. Currently, they participate

indirectly through brokers or banks.

Retail brokers, while largely controlled and regulated in the USA by the Commodity Futures

Trading Commission and National Futures Association have in the past been subjected to

periodic Foreign exchange fraud. To deal with the issue, in 2010 the NFA required its members

that deal in the Forex markets to register as such (I.e., Forex CTA instead of a CTA).
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Those NFA members that would traditionally be subject to minimum net capital requirements,

FCMs and IBs, are subject to greater minimum net capital requirements if they deal in Forex. A

number of the foreign exchange brokers operate from the UK underFinancial Services

Authority regulations where foreign exchange trading using margin is part of the widerover-the-

counterderivatives trading industry that includes Contract for differences and financial spread

betting.

There are two main types of retail FX brokers offering the opportunity for speculative currency

trading: brokers and dealers ormarket makers. Brokers serve as an agent of the customer in the

broader FX market, by seeking the best price in the market for a retail order and dealing on

behalf of the retail customer. They charge a commission or mark-up in addition to the price

obtained in the market. Dealers or market makers, by contrast, typically act as principal in the

transaction versus the retail customer, and quote a price they are willing to deal at.

NON-BANK FOREIGN EXCHANGE COMPANIES

Non-bankforeign exchange companies offer currency exchange and international payments to

private individuals and companies. These are also known as foreign exchange brokers but are

distinct in that they do not offer speculative trading but rather currency exchange with payments

(i.e., there is usually a physical delivery of currency to a bank account).
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It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign

Exchange Companies.[14]These companies' selling point is usually that they will offer better

exchange rates or cheaper payments than the customer's bank. These companies differ from

Money Transfer/Remittance Companies in that they generally offer higher-value services.

Money transfer companies/remittance companies perform high-volume low-value transfers

generally by economic migrants back to their home country. In 2007, the Aite Group estimated

that there were $369 billion of remittances (an increase of 8% on the previous year).

The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The

largest and best known provider is Western Union with 345,000 agents globally followed

by UAE Exchange.

Bureaux de change or currency transfer companies provide low value foreign exchange services

for travelers. These are typically located at airports and stations or at tourist locations and allow

physical notes to be exchanged from one currency to another. They access the foreign exchange

markets via banks or non bank foreign exchange companies.

TRADING CHARACTERISTICS
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Most traded currencies by value

Currency distribution of global foreign exchange market turnover[3]

Rank CurrencyISO 4217 code

(Symbol)

% daily share

(April 2010)

1 United States dollar USD ($) 84.9%

2 Euro EUR () 39.1%

3 Japanese yen JPY () 19.0%

4 Pound sterling GBP () 12.9%

5 Australian dollar AUD ($) 7.6%

6 Swiss franc CHF (Fr) 6.4%

7 Canadian dollar CAD ($) 5.3%

8 Hong Kong dollar HKD ($) 2.4%

9 Swedish krona SEK (kr) 2.2%
http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2http://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Canadian_dollarhttp://en.wikipedia.org/wiki/Canadian_dollarhttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedenhttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Swedish_kronahttp://en.wikipedia.org/wiki/Hong_Kong_dollarhttp://en.wikipedia.org/wiki/Canadian_dollarhttp://en.wikipedia.org/wiki/Swiss_franchttp://en.wikipedia.org/wiki/Australian_dollarhttp://en.wikipedia.org/wiki/Pound_sterlinghttp://en.wikipedia.org/wiki/Japanese_yenhttp://en.wikipedia.org/wiki/Eurohttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/ISO_4217http://en.wikipedia.org/wiki/Foreign_exchange_market#cite_note-BIS-2


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10 New Zealand dollar NZD ($) 1.6%

11 South Korean won KRW () 1.5%

12 Singapore dollar SGD ($) 1.4%

13 Norwegian krone NOK (kr) 1.3%

14 Mexican peso MXN ($) 1.3%

15 Indian rupee INR ( ) 0.9%

Other 12.2%

Total[15] 200%

There is no unified or centrally cleared market for the majority of trades, and there is very little

cross-border regulation. Due to the over-the-counter(OTC) nature of currency markets, there are
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rather a number of interconnected marketplaces, where different currencies instruments are

traded.

This implies that there is not a single exchange rate but rather a number of different rates

(prices), depending on what bank or market maker is trading, and where it is. In practice the rates

are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to

London's dominance in the market, a particular currency's quoted price is usually the London

market price. Major trading exchanges include EBS and Reuters, while major banks also offer

trading systems.

A joint venture of the Chicago and Reuters, called Fx marketspace opened in 2007 and aspired

but failed to the role of a central market clearing mechanism.[citation needed]

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 paritytheory), interest rates (interest rate parity, Domestic
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Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-

borderM&A deals and other macroeconomic conditions. Major news is released publicly, often

on scheduled dates; so many people have access to the same news at the same time. However,

the large banks have an important advantage; they can see their customers' order flow.

Currencies are traded against one another.

Each currency pairthus constitutes an individual trading product and is traditionally noted

XXXYYY or XXX/YYY, where XXX and YYY are the ISO 4217 international three-letter

code of the currencies involved. The first currency (XXX) is the base currency that is quoted

relative to the second currency (YYY), called the counter currency (or quote currency). For

instance, the quotation EURUSD (EUR/USD) 1.5465 is the price of the euro expressed in US

dollars, meaning 1 euro = 1.5465 dollars. The market convention is to quote most exchange rates

against the USD with the US dollar as the base currency (e.g. USDJPY, USDCAD, USDCHF).

The exceptions are the British pound (GBP), Australian dollar (AUD), the New Zealand dollar

(NZD) and the euro (EUR) where the USD is the counter currency (e.g. GBPUSD, AUDUSD,

NZDUSD, EURUSD).

The factors affecting XXX will affect both XXXYYY and XXXZZZ. This causes positive

currency correlationbetween XXXYYY and XXXZZZ.
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On the spot market, according to the 2010 Triennial Survey, the most heavily traded

bilateral currency pairs were:

EURUSD: 28%

USDJPY: 14%

GBPUSD (also called cable): 9%

And the US currency was involved in 84.9% of transactions, followed by the euro (39.1%), the

yen (19.0%), and sterling (12.9%) (See table). Volume percentages for all individual currencies

should add up to 200%, as each transaction involves two currencies.

Trading in the euro has grown considerably since the currency's creation in January 1999, and

how long the foreign exchange market will remain dollar-centered is open to debate.

Until recently, trading the euro versus a non-European currency ZZZ would have usually

involved two trades: EURUSD and USDZZZ. The exception to this is EURJPY, which is an

established traded currency pair in the interbank spot market. As the dollar's value has eroded

during 2008, interest in using the euro as reference currency for prices in commodities (such as

oil), as well as a larger component of foreign reserves by banks, has increased dramatically.
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Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD,

have also increased.

DETERMINANTS OF EXCHANGE RATES

The following theories explain the fluctuations in exchange rates in a floating exchange

rate regime (In a fixed exchange rate regime, rates are decided by its government):

1. International parity conditions: Relative Purchasing Power Parity, interest rateparity, Domestic Fisher effect, International Fisher effect. Though to some extent the

above theories provide logical explanation for the fluctuations in exchange rates, yet

these theories falter as they are based on challengeable assumptions [e.g., free flow of

goods, services and capital] which seldom hold true in the real world.
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2. Balance of payments model (see exchange rate): This model, however, focuses largely ontradable goods and services, ignoring the increasing role of global capital flows. It failed

to provide any explanation for continuous appreciation of dollar during 1980s and most

part of 1990s in face of soaring US current account deficit.

3. Asset market model (see exchange rate): views currencies as an important asset class forconstructing investment portfolios. Assets prices are influenced mostly by people's

willingness to hold the existing quantities of assets, which in turn depends on their

expectations on the future worth of these assets.

4. The asset market model of exchange rate determination states that the exchange ratebetween two currencies represents the price that just balances the relative supplies of,

and demand for, assets denominated in those currencies.

None of the models developed so far succeed to explain exchange rates and volatility in the

longer time frames. For shorter time frames (less than a few days) algorithms can be devised to
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predict prices. It is understood from the above models that many macroeconomic factors affect

the exchange rates and in the end currency prices are a result of dual forces of demand and

supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-

changing mix of current events, supply and demand factors are constantly shifting, and the price

of one currency in relation to another shifts accordingly.

No other market encompasses (and distills) as much of what is going on in the world at any

given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are not influenced by any single

element, but rather by several. These elements generally fall into three categories: economic

factors, political conditions and market psychology.

ECONOMIC FACTORS

These include: (a) economic policy, disseminated by government agencies and central banks, (b)

economic conditions, generally revealed through economic reports, and othereconomic

indicators.
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Economic policy comprises government fiscal policy (budget/spending practices)and monetary policy (the means by which a government's central bank influences the supply

and "cost" of money, which is reflected by the level ofinterest rates).

Government budget deficits or surpluses: The mar

a project report on fundamental analysis of foreign exchange

Documents