financial market final collegeforprtg1

8/9/2019 Financial Market Final Collegeforprtg1

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KEDIA STOCKS AND COMODITIES PVT .LTD.

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UNIVERSITY OF MUMBAI

SUMMER PROJECT REORT ON

FINANCIAL AND CURRENCY MARKET

PROJECT UNDERTAKEN AT

KEDIA STOCK & COMMODITIES RESEARCH PVT LTD

SUBMITTED BY

Mr.VISHAL VINOD GUPTA

Roll No. : 11

Batch (2009-2011)

NCRDS

STERLING INSTITUTE OF MANAGEMENT STUDIES

Sector-19, Near Seawoods Darave Petrol Pump, Nerul (E),

Navi Mumbai 400706.


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ACKNOWLEDGEMENT

I hereby take opportunity to thank the people who have helped me a lot during the project workof two months. The successful accomplishment of this project, involves sincere guidance from

Mr. Ajay Kedia by his excellent guidance, encouragement and patience made possible the

successful completion of project.

I would also like to thank Kedia commodities staff for their sincere guidance, in the

accomplishment of our project It gives me immense pleasure to present the project report on

"Financial and currency Market" for Kedia commodities Pvt. Ltd.

It was altogether a different and wonderful experience to be there in Kedia commodities Pvt. Ltd.

as a summer trainee.I would also like to thank each and every person who has directly or

indirectly contributed to the successful completion of our project work.


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DECLARATION

I, Gupta Vishal Vinod, of Master of Management studies (semester III) of sterling Institute of

Management studies (sims), hereby declare that I have successfully completed this research

project on "Financial Market and currency Market" as a part of my `summer Internship at Kedia

commodities Pvt. Ltd.'.

The information incorporated in this Research Project is true and original to the best of my

knowledge.

Place:

Date: _________________


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COMPANYPROFILE

KEDIACOMMODITIES

PVTLTD

The Complete Financial Portal for Indian Commodity, Share and Investment Market - Kedia

Commodities is another venture of the prestigious Kedia group. With their well established

presence from last 22 years in the multifarious facets of the modern Financial services industry

from stock broking, Insurance, to portfolio management services, it is indeed a pleasure for them

to make foray into the commodities market which opens yet another door for them to deliver

their service to their customers. With their expertise in financial services, and an enviable

technological edge, they are all set to bring to us, the pleasure of investing in this growing

market of Commodity, which can touch upon the lives of a vast majority of the population from

the farmer, trader, and investor to the corporate alike. They are confident that the commodity

futures can be a good value addition to our portfolio. The company provides investment,advisory and brokerage services in Commodities Markets. And most importantly, they offer a

wide reach through Internet network across all part of country and cities.

Commodities market has an existence since the trade begins in World. However the recent

attempt by the Government to permit Multi-commodity National levels exchanges has indeed

given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and

National Commodity and derivatives Exchange (NCDEX) have come into being. These

exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves,

online trading facilities, robust surveillance measures and a hassle-free settlement system. The

futures contracts available on a wide spectrum of commodities like Gold, Silver, Crude,Menthol-oil, Ref-Soya oil, Guar seed, Chana, Kapas Khalli etc., provide excellent opportunities

for hedging the risks of the farmers, importers, exporters, traders and large scale consumers.

They also make open an avenue for quality investments in precious metals. The commodities

market, as it is not affected by the movements of the stock market or debt market provides

tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds

are contemplating of entering into this market. Commodities market trading volume in

commodity markets has risen more than seven-fold from levels seen just two years ago, and the

rupees value of futures contracts traded in commodity markets currently exceeds many times the

rupee value of common stocks traded on all Indian stock exchanges. The leverage in trading

commodity markets is impressive. Typically the margin requirement will be as little as 4-8% ofthe total cash value of the contract. It is this leverage which is simultaneously the biggest

advantage and greatest danger in futures trading, and is the reason why many otherwise

successful investors have difficulty in mastering these markets for mastering this market also

they are at our service.


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Organizationchart:

The Kedia commodity is a private ltd company and it has proprietorship.

The members are:

y Mr. Ajay Kedia

y Mr. Vijay Kedia

Benefitsgiven by company:

The company provided various benefits to me

y I got the actual idea of the corporate world.

y I got the knowledge about financial market that how it actually

works.

y Got a brief insight of technicalities of the Financial Market andvarious factors which influence the market in short and long run.


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TABLEOFCONTENT

Sr.no. Topics Page no.

1 Introduction 92 Investment Basics 10

3 Short term Financial Option 14

4 Long term financial Options 144 Securities 17

1)Segments 24a)Primary market 25

b)Secondary market 27

5 Stock trading 286 Factors influencing price of stock 29

7 Depository 33

8 Clearing, Settlement and Redressal 379 Introduction to Currency market 40

10 History of Forex 42

11 Historical event of forex 43

12 Players in currency market 52

13 Types of currencies 5414 Leading Economic Indicators 61

15 Regulatory Frame works 68

16 Conclusion 7517 Annexure 76

18 Bibiliography 99


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INTRODUCTION

FinancialMarkets

In economics, a financial market is a mechanism that allows people to buy and sell (trade)

financial securities (such as stocks and bonds), commodities (such as precious metals or

agricultural goods), and other fungible items of value at low transaction costs and at prices that

reflect the efficient-market hypothesis.

Both general markets (where many commodities are traded) and specialized markets (where only

one commodity is traded) exist. Markets work by placing many interested buyers and sellers in

one "place", thus making it easier for them to find each other. An economy which relies

primarily on interactions between buyers and sellers to allocate resources is known as a market

economy in contrast either to a command economy or to a non-market economy such as a gift

economy.

In finance, financial markets facilitate:

y The raising of capital (in the capital markets)

y The transfer of risk (in the derivatives markets)

y International trade (in the currency markets)

and are used to match those who wantcapital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These

receipts are securities which may be freely bought or sold. In return for lending money to the

borrower, the lender will expect some compensation in the form of interest or dividends. In

mathematical finance, the concept of a financial market is defined in terms of a continuous-time

Brownian.


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InvestmentBasicsThe money you earn is partly spent and the rest saved for meeting future expenses. Instead of

keeping the savings idle you may like to use savings in order to get return on it in the future. This

is called Investment.

Figure 1


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Oneneedsto investto:

1. earn return on your idle resources

2. generate a specified sum of money for a specific goal in life

3. make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost ofInflation.

Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs

to buy the goods and services you need to live. Inflation causes money to lose value because it

will not buy the same amount of a good or a service in the future as it does now or did in the

past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today

would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any

long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is

the return after inflation. The aim of investments should be to provide a return above the

inflation rate to ensure that the investment does not decrease in value. For example, if the annual

inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in

value. If the after-tax return on your investment is less than the inflation rate, then your assets

have actually decreased in value; that is, they won't buy as much today as they did last year.

Thethreegoldenrulesforallinvestorsare:

1. Invest early

2. Invest regularly

3. Invest for long term and not short term


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Meaning ofInterestandFactorsdeterminingRates ofInterest:

When we borrow money, we are expected to pay for using it this is known as Interest. Interest

is an amount charged to the borrower for the privilege of using the lenders money. Interest is

usually calculated as a percentage of the principal balance (the amount of money borrowed). The

percentage rate may be fixed for the life of the loan, or it may be variable, depending on the

terms of the loan.

Factorsdetermininginterestrates:

When we talk of interest rates, there are different types of interest rates - rates that banks offer to

their depositors, rates that they lend to their borrowers, the rate at which the Government

borrows in the Bond/Government Securities market, rates offered to investors in small savings

schemes like NSC, PPF, rates at which companies issue fixed deposits etc.

The factors which govern these interest rates are mostly economy related and are commonly

referred to as macroeconomic factors. Some of these factors are:

y Demand for money

y Level of Government borrowings

y Supply of money

y Inflation rate

y The Reserve Bank of India and the Government policies which determine some of the

variables mentioned above.

India has the third largest economy in the world measured by

purchasing power parity.


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Onecaninvestin:

y Physicalassetslike real estate, gold/ jewellery, commodities etc and/or

y Financialassets such as fixed deposits with banks, small saving instruments with post

offices, insurance/provident/pension fund etc or securities market related instruments like shares,

bonds, debentures etc.

1993 - The year the first ETF was introduced tracking the S&P

500


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Various Short-term financial optionsavailableforInvestment:

Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with

banks may be considered as short-term financial investment options:

y SavingsBankAccount is often the first banking product people use, which offers low

interest (4%-5% p.a.), making them only marginally better than fixed deposits.

y Money Market orLiquidFundsare a specialized form of mutual funds that invest in

extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most

mutual funds, money market funds are primarily oriented towards protecting your capital and

then, aim to maximize returns. Money market funds usually yield better returns than savings

accounts, but lower than bank fixed deposits.

y Fixed Deposits with Banks are also referred to as term deposits and minimum

investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low

risk appetite, and may be considered for 6-12 months investment period as normally interest on

less than 6 months bank FDs is likely to be lower than money market fund returns.

VariousLong-term financial optionsavailableforInvestment:

y PostOffice Savings:

Post Office Monthly Income Scheme is a low risk saving instrument, which can be availed

through any post office. It provides an interest rate of 8% per annum, which is paid monthly.

Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples

of 1,000/-. Maximum amount is Rs. 3, 00,000/- (if Single) or Rs. 6, 00,000/- (if held jointly)during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is

more than one year old. A deduction of 5% is levied from the principal amount if withdrawn

prematurely.


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y PublicProvidentFund:

A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum

compounded annually. A PPF account can be opened through a nationalized bank at anytime

during the year and is open all through the year for depositing money. Tax benefits can be

availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible

every year from the seventh financial year of the date of opening of the account and the amount

of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year

immediately preceding the year in which the amount is withdrawn or at the end of the preceding

year whichever is lower the amount of loan if any.

y Company FixedDeposits:

These are short-term (six months) to medium-term (three to five years) borrowings by companies

at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They

can also be cumulative fixed deposits where the entire principal along with the interest is paid at

the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs.

The interest received is after deduction of taxes.

y Bonds:

It is a fixed income (debt) instrument issued for a period of more than one year with the purpose

of raising capital. The central or state government, corporations and similar institutions sell

bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on

a specified date, called the Maturity Date.


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y MutualFunds:

These are funds operated by an investment company which raises money from the public and

invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives.

It is a substitute for those who are unable to invest directly in equities or debt because of

resource, time or knowledge constraints. Benefits include professional money management,

buying in small amounts and diversification. Mutual fund units are issued and redeemed by the

Fund Management Companybased on the fund's net asset value (NAV), which is determined at

the end of each trading session. NAV is calculated as the value of all the shares held by the fund,

minus expenses, divided by the number of units issued. Mutual Funds are usually long term

investment vehicle though there some categories of mutual funds, such as money market mutual

funds which are short term instruments.

In 2005, India liberalized its foreign direct investments policy to

allow up to a 100% foreign investment stake in India based

80% - the amount of capitalization represented by the FTSE 100 on

the whole London Stock Exchange.


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Types ofFinancialMarket:

Capital market

A capital market is a market for securities (debt or equity), where business enterprises

(companies) and governments can raise long-term funds. It is defined as a market in which

money is provided for periods longer than a year, as the raising of short-term funds takes place

on other markets (e.g., the money market). The capital market includes the stock market (equity

securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services

Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital

markets in their designated jurisdictions to ensure that investors are protected against fraud,

among other duties.

Capital markets may be classified as primary markets and secondary markets. In primary

markets, new stock or bond issues are sold to investors via a mechanism known as underwriting.

In the secondary markets, existing securities are sold and bought among investors or traders,

usually on a securities exchange, over-the-counter, or elsewhere.

Stockmarket

Astockmarket orequity market is a public market (a loose network of economic transactions,

not a physical facility or discrete entity) for the trading of company stock and derivatives at an

agreed price; these are securities listed on a stock exchange as well as those only traded

privately.

The size of the world stock market was estimated at about $36.6 trillion US at the beginning of

October 2008.The totalworld derivatives market has been estimated at about $791 trillion face

or nominal value, 11 times the size of the entire world economy.The value of the derivativesmarket, because it is stated in terms ofnotional values, cannot be directly compared to a stock or

a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority

of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a


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comparable derivative 'bet' on the event notoccurring). Many such relatively illiquid securities

are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual

organization specialized in the business of bringing buyers and sellers of the organizations to a

listing of stocks and securities together. The largest stock market in the United States, by market

cap is the New York Stock Exchange, NYSE and while in Canada, it is the Toronto Stock

Exchange. Major European examples of stock exchanges include the London Stock Exchange,

Paris Bourse, and the Deutsche Brse. Asian examples include the Tokyo Stock Exchange, the

Hong Kong Stock Exchange and the Bombay Stock Exchange . In Latin America, there are such

exchanges as the BM&F Bovespa and the BMV.

Bond market

The bond market (also known as the debt, credit, or fixed income market) is a financial

market where participants buy and sell debt securities, usually in the form of bonds. As of 2009,

the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of

which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS (or

alternatively $34.3 trillion according to SIFMA).

Nearly all of the $822 billion average daily trading volume in the U.S. bond market takes place

between broker-dealers and large institutions in a decentralized, over-the-counter (OTC) market.

However, a small number of bonds, primarily corporate, are listed on exchanges.

References to the "bond market" usually refer to the government bond market, because of its

size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates. Because of the

inverse relationship between bond valuation and interest rates, the bond market is often used to

indicate changes in interest rates or the shape of the yield curve.


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Commodity markets

Commodity markets are markets where raw or primary products are exchanged. These raw

commodities are traded on regulated commodities exchanges, in which they are bought and sold

in standardized contracts.

This article focuses on the history and current debates regarding global commodity markets. It

covers physical product (food, metals and electricity) markets but not the ways that services,

including those of governments, nor investment, nor debt, can be seen as a commodity. Articles

on reinsurance markets, stock markets, bond markets and currency markets cover those concerns

separately and in more depth. One focus of this article is the relationship between simple

commodity money and the more complex instruments offered in the commodity markets.

Money Market

The money market is a component of the financial markets for assets involved in short-term

borrowing and lending with original maturities of one year or shorter time frames. Trading in the

money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of

deposit, federal funds, and short-lived mortgage- and asset-backed securities.It provides liquidity

funding for the global financial system.

DerivativesMarket

The derivatives market is the financial market for derivatives, financial instruments like futures

contracts or options, which are derived from other forms of assets.

The market can be divided into two, that for exchange-traded derivatives and that for over-the-

counter derivatives. The legal nature of these products is very different as well as the way they

are traded, though many market participants are active in both.


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Insurance

Insurance, in law and economics, is a form of risk management primarily used to hedge against

the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of

a loss, from one entity to another, in exchange for payment. An insurer is a company selling the

insurance; an insured orpolicyholder is the person or entity buying the insurance policy. The

insurancerate is a factor used to determine the amount to be charged for a certain amount of

insurance coverage, called the premium. Risk management, the practice of appraising and

controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in

the form of payment to the insurer in exchange for the insurer's promise to compensate

(indemnify) the insured in the case of a large, possibly devastating loss. The insured receives a

contract called the insurance policy which details the conditions and circumstances under which

the insured will be compensated.

Foreignexchange market

The foreignexchange market (forex, FX, orcurrency market) is a worldwide decentralized

over-the-counter financial market for the trading of currencies. Financial centers around theworld 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.

The primary purpose of the foreign exchange market 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 European goods and pay Euros, even though the business's

income is in US dollars. It also supports speculation, and facilitates the carry trade, in which

investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and

which (it has been claimed) may lead to loss of competitiveness in some countries.


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Derivative:

Derivative is a product whose value is derived from the value of one or more basic variables,

called underlying. The underlying asset can be equity, index, foreign exchange (forex),

commodity or any other asset. Derivative products initially emerged as hedging devices against

fluctuations in commodity prices and commodity-linked derivatives remained the sole form of

such products for almost three hundred years. The financial derivatives came into spotlight in

post-1970 period due to growing instability in the financial markets. However, since their

emergence, these products have become very popular and by 1990s, they accounted for about

two thirds of total transactions in derivative products.

MutualFund:

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India)

that pools money from individuals/corporate investors and invests the same in a variety of

different financial instruments or securities such as equity shares, Government securities, Bonds,

debentures etc.

Mutual funds can thus be considered as financial intermediaries in the investment business that

collect funds from the public and invest on behalf of the investors. Mutual funds issue units to

the investors. The appreciation of the portfolio or securities in which the mutual fund has

invested the money leads to an appreciation in the value of the units held by investors.

Index:

An Index shows how a specified portfolio of share prices is moving in order to give an indication

of market trends. It is a basket of securities and the average price movement of the basket of

securities indicates the index movement, whether upwards or downwards.


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Depository:

A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds,

government securities, units etc.) in electronic form.

Dematerialization:

Dematerialization is the process by which physical certificates of an investor are converted to an

equivalent number of securities in electronic form and credited to the investors account with his

Depository Participant(DP).

SECURITIES

The definition of Securities as per the Securities Contracts Regulation Act (SCRA), 1956,

includes instruments such as shares, bonds, scrips, stocks or other marketable securities of

similar nature in or of any incorporate company or body corporate, government securities,

derivatives of securities, units of collective investment scheme, interest and rights in securities,

security receipt or any other instruments so declared by the Central Government.

Securities onecaninvestin:

y Shares

y Government Securities

y Derivative products

y Units of Mutual Funds etc are some of the securities investors in the securities market can

invest in.


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Segments ofSecuritiesMarket:

The securities market has two interdependent segments:

1. The primary (new issues) marketand

2. Thesecondary market.


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PRIMARYMARKET:

The primary market provides the channel for sale of new securities. Primary market provides

opportunity to issuers of securities; Government as well as corporate, to raise resources to meet

their requirements of investment and/or discharge some obligation.

They may issue the securities at face value, or at a discount/premium and these securities may

take a variety of forms such as equity, debt etc. They may issue the securities in domestic market

and/or international market.

The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the

original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at

maturity. Also known as par value or simply par. For an equity share, the face value is usually a

very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share,

which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt

security, face value is the amount repaid to the investor when the bond matures (usually,

Government securities and corporate bonds have a face value of Rs. 100). The price at which the

security trades depends on the fluctuations in the interest rates in the economy.

Issue ofShares:

Most companies are usually started privately by their promoter(s). However, the promoters

capital and the borrowings from banks and financial institutions may not be sufficient for settingup or running the business over a long term. So companies invite the public to contribute towards

the equity and issue shares to individual investors. The way to invite share capital from the

public is through a Public Issue. Simply stated, a public issue is an offer to the public to

subscribe to the share capital of a company. Once this is done, the company allots shares to the

applicants as per the prescribed rules and regulations laid down by SEBI.

Whatarethedifferentkinds ofissues?

Primarily, issues can be classified as a Public, Rights or Preferential issues

(Also known as private placements). While public and rights issues involve a

detailed procedure, private placements or preferential issues are relatively


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simpler. The classification of issues is illustrated below:

InitialPublicOffering (IPO)is whenanunlistedcompany makeseithera

fresh issue of securities or an offer for sale of its existing securities or both

for the first time to the public. This paves way for listing and trading of the

issuers securities.

Afollow on public offering (FurtherIssue)is whenanalready listed

company makes either a fresh issue of securities to the public or an offer for

sale to the public, through an offer document.

RightsIssueis whenalistedcompany which proposesto issuefresh

securities to its existing shareholders as on a record date. The rights are

normally offered in a particular ratio to the number of securities held prior to

the issue. This route is best suited for companies who would like to raise

capital without diluting stake of its existing shareholders.

APreferentialissueisanissue ofshares or ofconvertiblesecurities by

listed companies to a select group of persons under Section 81 of the

Companies Act, 1956 which is neither a rights issue nor a public issue. This

is a faster way for a company to raise equity capital. The issuer company

has to comply with the Companies Act and the requirements contained in the Chapter pertaining to

preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.

.

India has the tenth largest economy in the world in US dollar

exchange-rate terms.


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Listing ofSecurities:

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange

through a formal agreement. The prime objective of admission to dealings on the exchange is to

provide liquidity and marketability to securities, as also to provide a mechanism for effective control

and supervision of trading.

Delisting ofsecurities:

The term Delisting of securities means permanent removal of securities of a listed company from a

stock exchange. As a consequence of delisting, the securities of that company would no longer be

traded at that stock exchange.

SECONDARYMARKET:

Secondary market refers to a market where securities are traded after being initially offered to the

public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the

secondary market. Secondary market comprises of equity markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for trading of his

securities. For the management of the company,

Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing

control activities, enabling implementation of incentive-based management contracts, and aggregating

information (via price discovery) that guides management decisions.

StockExchange:

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities

and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to

transact in securities. The trading platform provided by NSE is an electronic one and there is no need

for buyers and sellers to meet at a physical location to trade. They can trade through the computerized

trading screens available with the NSE trading members or the internet based trading facility provided

by the trading members of NSE.


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STOCKTRADING:

ScreenBasedTrading:

The trading on stock exchanges in India used to take place through open outcry without use of

information technology for immediate matching or recording of trades. This was time consuming and

inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency,

liquidity and transparency, NSE introduced a nationwide, on-line, fully automated screen based trading

system (SBTS) where a member can punch into the computer the quantities of a security and the price

at which he would like to transact, and the transaction is executed as soon as a matching sale or buy

order from a counter party is found.

NEAT:

NSE is the first exchange in the world to use satellite communication technology for trading. Its trading

system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server

based application. At the server end all trading information is stored in an in memory database to

achieve minimum response time and maximum system availability for users. It has uptime record of

99.7%. For all trades entered into NEAT system, there is uniform response time of less than one

second.

ContractNote:

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading

member. It imposes a legally enforceable relationship between the client and the trading member with

respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the

investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding

against the trading member in case of a dispute. A valid contract note should be in the prescribed form,

contain the details of trades, stamped with requisite value and duly signed by the authorized signatory.

Contract notes are kept in duplicate, the trading member and the client should keep one copy each.

After verifying the details contained therein, the client keeps one copy and returns the second copy to

the trading member duly acknowledged by him.


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FactorsInfluencingPrice ofa Stock:

Broadly therearetwo factors:

(1) stock specific and

(2) market specific.

The stock-specific factor is related to peoples expectations about the company, its future earnings

capacity, financial health and management, level of technology and marketing skills.

The market specific factor is influenced by the investors sentiment towards the stock market as a

whole. This factor depends on the environment rather than the performance of any particular company.

Events favorable to an economy, political or regulatory environment like high economic growth,

friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the

market. On the other hand, unfavorable events like war, economic crisis, communal riots, minority

government etc. depress the market irrespective of certain companies performing well. However, the

effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the

long run gets stabilized based on the stock specific factors. Therefore, a prudent advice to all investors

is to analyze and invest and not speculate in shares.

Growth Stocks:

In the investment world we come across terms such as Growth stocks, Value stocks etc. Companies,

whose potential for growth in sales and earnings are excellent, are growing faster than other companies

in the market or other stocks in the same industry are called the Growth Stocks. These companies

usually pay little or no dividends and instead prefer to reinvest their profits in their business for further

expansions.

Value Stocks:

The task here is to look for stocks that have been overlooked by other investors and which may have a

hidden value. These companies may have been beaten down in price because of some bad event, or

may be in an industry that's not fancied by most investors. However, even a company that has seen its


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stock price decline still has assets to its name - buildings, real estate, inventories, subsidiaries, and so

on. Many of these assets still have value, yet that value may not be reflected in the stock's price. Value

investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market

realizes the real value of the company's assets. The value investors tend to purchase a company's stock

usually based on relationships between the current market price of the company and certain business

fundamentals. They like P/E ratio being below a certain absolute limit; dividend yields above a certain

absolute limit; Total sales at a certain level relative to the company's market capitalization, or market

value etc.

BidandAskprice:

The Bid is the buyers price. It is this price that you need to know when you have to sell a stock. Bid

is the rate/price at which there is a ready buyer for the stock, which you intend to sell.

The Ask (or offer) is what you need to know when you're buying i.e. this is the rate/ price at which

there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted Ask price. If an

investor looks at a computer screen for a quote on the stock of say XYZ Ltd, it might look something

like this:

Bid (Buy side) Ask(Sellside)

______________________________________________________

Qty. Price (Rs.) Qty. Price (Rs.)

_______________________________________________________

1000 50.25 50.35 2000

500 50.10 50.40 1000

550 50.05 50.50 1500

2500 50.00 50.55 3000

1300 49.85 50.65 1450

________________________________________________________

5850 8950

________________________________________________________


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Here, on the left-hand side after the Bid quantity and price, whereas on the right hand side we find the

Ask quantity and prices. The best Buy (Bid) order is the order with the highest price and therefore sits

on the first line of the Bid side (1000 shares @ Rs. 50.25). The best Sell (Ask) order is the order with

the lowest sell price (2000 shares @ Rs. 50.35). The difference in the price of the best bid and ask is

called as the Bid-Ask spread and often is an indicator of liquidity in a stock. The narrower the

difference the more liquid or highly traded is the stock.

Portfolio:

A Portfolio is a combination of different investment assets mixed and matched for the purpose of

achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset

you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real

estate etc. However, for most investors a portfolio has come to signify an investment in financial

instruments like shares, debentures, fixed deposits, mutual fund units.

DebtInvestment:

Debt instrument represents a contract whereby one party lends money to another on pre-determined

terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to

the lender.

In Indian securities markets, the term bond is used for debt instruments issued by the Central and

State governments and public sector organizations and the term debenture is used for instruments

issued by private corporate sector.

Derivatives:

Forwards:

A forward contract is a customized contract between two entities, where settlement takes place on a

specific date in the future at todays pre-agreed price.


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Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the

future at a certain price. Futures contracts are special types of forward contracts in the sense that the

former are standardized exchange-traded contracts, such as futures of the Nifty index.

Options:

An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a

stated date and at a stated price. While a buyer of an option pays the premium and buys the right to

exercise his option, the writer of an option is the one who receives the option premium and therefore

obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Callsand Puts

options:

Callsgive the buyer the right but not the obligation to buy a given quantity of the underlying asset, at

a given price on or before a given future dates.

Puts give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a

given price on or before a given future date.

Presently, at NSE futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single

stocks

.

Warrants:

Options generally have lives of up to one year. The majority of options traded on exchanges have

maximum maturity of nine months. Longer dated options are called Warrants and are generally traded

over-the counter.

2008 - The year oil reached $100 a barrel


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Depository:

A Depository can be compared with a bank, which holds the funds for depositors. An analogy between

a bank and a depository may be drawn as follows:

BANK DEPOSITORY

Holds funds in an account Hold securities in an account

Facilitates transfers without

having to handle money

Facilitates safekeeping of

Money

Transfers securities between

accounts on the instruction of the

Account holder.

Facilitates transfers of ownership

without having to handle securities.

Transfers funds betweenaccounts on the instruction of

the account holder

Facilitates safekeeping of shares.

There are two depositories in India which provide dematerialization of securities. The National

SecuritiesDepository Limited (NSDL) and CentralDepository Services (India)Limited (CDSL).


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MUTUALFUNDS:

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the

mutual funds must get registered with SEBI.

The benefits ofinvestinginMutualFunds:

There are several benefits from investing in a Mutual Fund:

Smallinvestments:Mutual funds help you to reap the benefit of returns by a portfolio spread across a

wide spectrum of companies with small investments.

Professional Fund Management: Professionals having considerable expertise, experience and

resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets

and economy to pick good investment opportunities.

Spreading Risk: An investor with limited funds might be able to invest in only one or two

stocks/bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a

number of sound stocks or bonds. A fund normally invests in companies across a wide range of

industries, so the risk is diversified.

Transparency: Mutual Funds regularly provide investors with information on the value of their

investments. Mutual Funds also provide complete portfolio disclosure of the investments made by

various schemes and also the proportion invested in each asset type.

Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. An

investor can pick up a scheme depending upon his risk/ return profile.

Regulations:All the mutual funds are registered with SEBI and they function within the provisions of

strict regulation designed to protect the interests of the investor.


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Entry/ExitLoad:

A Load is a charge, which the mutual fund may collect on entry and/or exit from a fund. A load is

levied to cover the up-front cost incurred by the mutual fund for selling the fund. It also covers one

time processing costs.

Some funds do not charge any entry or exit load. These funds are referred to as No Load Fund. Funds

usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and

2.00%. For e.g. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the

entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor

receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount

invested and not on the basis of no. of units purchased).

Let us now assume that the same investor decides to redeem his 761.6146 units. Let us also assume that

the NAV is Rs 15/- and the exit load is 0.50%. Therefore the redemption price per unit works out to Rs.

14.925. The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

StockSplit:

A stock split is a corporate action which splits the existing shares of a particular face value into smaller

denominations so that the number of shares increase, however, the market capitalization or the value of

shares held by the investors post split remains the same as that before the split. For e.g. If a company

has issued 1, 00,00,000 shares with a face value of Rs. 10 and the current market price being Rs. 100, a

2-for-1 stock split would reduce the face value of the shares to 5 and increase the number of the

companys outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)).

Consequently, the share price would also halve to Rs. 50 so that the market capitalization or the value

shares held by an investor remains unchanged. It is the same thing as exchanging a Rs. 100 note for

two Rs. 50 notes; the value remains the same.


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Classification ofIssues:

Pre-Split Post-Split

2-for-1 Split

No. of shares 100 mill. 200 mill.

Share Price Rs. 40 Rs. 20

Market Cap.

Rs. 4000 mill. Rs. 4000 mill.

4-for-1

No. of shares 100 mill. 400 mill.

Share Price Rs. 40 Rs. 10

Market Cap. Rs. 4000 mill. Rs. 4000 mill.


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AmericanDepository Receipt:

An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of

American Depositary Shares ("ADSs"). The term is often used to refer to the ADSs themselves.

An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership

in a non-U.S. company. It represents the foreign shares of the company held on deposit by a

custodian bank in the companys home country and carries the corporate and economic rights of

the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs

can be represented by a physical ADR certificate. The terms ADR and ADS are often used

interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas

securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such

as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on

the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted

on NASDAQ and the over-the-counter (OTC) market.

Although ADSs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do

not eliminate the currency risk associated with an investment in a non-U.S. company.

Clearing & SettlementandRedressal:

ClearingCorporation:

A Clearing Corporation is a part of an exchange or a separate entity and performs three

functions, namely, it clears and settles all transactions, i.e. completes the process of receiving

and delivering shares/funds to the buyers and sellers in the market, it provides financial

guarantee for all transactions executed on the exchange and provides risk management functions.

National Securities Clearing Corporation (NSCCL), a 100% subsidiary of NSE, performs the

role of a Clearing Corporation for transactions executed on the NSE.


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Rolling Settlement:

Under rolling settlement all open positions at the end of the day mandatorily result in payment/

delivery n days later. Currently trades in rolling settlement are settled on T+2 basis where T is

the trade day. For example, a trade executed on Monday is mandatorily settled by Wednesday

(considering two working days from the trade day). The funds and securities pay-in and pay-out

are carried out on T+2 days.

Pay-inandPay-out:

Pay-in day is the day when the securities sold are delivered to the exchange by the sellers and

funds for the securities purchased are made available to the exchange by the buyers.

Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the

securities sold are given to the sellers by the exchange.

At present the pay-in and pay-out happens on the 2nd working day after the trade is executed on

the stock exchange.

Auction:

On account of non-delivery of securities by the trading member on the pay in day, the securities

are put up for auction by the Exchange. This ensures that the buying trading member receives the

securities. The Exchange purchases the requisite quantity in auction market and gives them to the

buying trading member.

Arbitration:

Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for

resolving disputes between the trading members and their clients in respect of trades done on the

exchange. If no amicable settlement could be reached through the normal grievance Redressal

mechanism of the stock exchange, then you can make application for reference to Arbitrationunder the Bye-Laws of the concerned Stock exchange.


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InvestorProtectionFund:

Investor Protection Fund (IPF) is maintained by NSE to make good investor claims, which may

arise out of non-settlement of obligations by the trading member, who has been declared a

defaulter, in respect of trades executed on the Exchange. The IPF is utilized to settle claims of

such investors where the trading member through whom the investor has dealt has been declared

a defaulter. Payments out of the IPF may include claims arising of nonpayment/non receipt of

securities by the investor from the trading member who has been declared a defaulter. The

maximum amount of claim payable from the IPF to the investor (where the trading member

through whom the investor has dealt is declared a defaulter) is Rs. 10 lakh.


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INTRODUCTION-CURRENCYMARKET

Description oftheForex:

The Currency market, established in 1971, was created when floating exchange rates began to

materialize. The Forex market is not centralized, like in currency futures or stock markets.Trading occurs over computers and telephones at thousands of locations worldwide.

The Foreign Exchange market, commonly referred as FOREX, is where banks, investors and

speculators exchange one currency to another. The largest foreign exchange activity retains the

spot exchange (i.e.., immediate) between five major currencies: US Dollar, British Pound,

Japanese Yen, Eurodollar and the Swiss Franc. It is also the largest financial market in the world.

In comparison, the US stock market may trade $10 billion in one day, whereas the Currency

market will trade up to $2 trillion in one single day. The Currency market is an opened 24 hours

a day market where the primary market for currencies is the 24-hour interbank market. This

market follows the sun around the world, moving from the major banking centers of the United

States to Australia and New Zealand to the Far East, to Europe and finally back to the Unites

States.Until now, professional traders from major international commercial and investment banks

have dominated the FX market. Other market participants range from large multinational

corporations, global money managers, registered dealers, international money brokers, and

futures and options traders, to private speculators.

There are three main reasons to participate in the FX market. One is to facilitate an actual

transaction, whereby international corporations convert profits made in foreign currencies into

their domestic currency. Corporate treasurers and money managers also enter the FX market in

order to hedge against unwanted exposure to future price movements in the currency market. The

third and more popular reason is speculation for profit. In fact, today it is estimated that less than

5% of all trading on the FX market is actually facilitating a true commercial transaction.

The FX market is considered an Over The Counter (OTC) or Interbank market, due to the fact

that transactions are conducted between two counterparts over the telephone or via an electronicnetwork. Trading is not centralized on an exchange, as with the stock and futures markets. A true

24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the

business day begins in each financial center, first to Tokyo, London, and New York.


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TheForeignExchangeMarketinIndiaThe Indian forex market owes its origin to the

important step that RBI took in 1978 to allow banks to undertake intra-day trading in foreign

exchange. As a consequence, the stipulation of maintaining "square" or "near square" position

was to be complied with only at the close of business each day. During the period 1975-1992, the

exchange rate of rupee was officially determined by the RBI in terms of a weighted basket of

currencies of Indias major trading partners and there were significant restrictions on the current

account transactions.The appointment of an Expert Group on Foreign Exchange (popularly

known as Sodhani Committee) in November 1994 is a landmark in the design of foreign

exchange market in India. The Group studied the market in great detail and came up with far

reaching recommendations to develop, deepen and widen the forex market. In the process of

development of forex markets, banks have been accorded significant initiative and freedom to

operate in the market. Similarly, corporates were given flexibility to book forward cover based

on past turnover and allowed to use a variety of instruments like interest rates and currency

swaps, caps/collars and forward rate agreements in the international forex market. Rupee-foreign

currency swap market for hedging longer -term exposure has developed substantially in the last

few years.

Courtesy from the RBI (Reserve Bank ofIndia) India

Currency Indian Rupee

QuotationConvention 3 decimal points

Mostliquidcross USD/INR

BestLiquidity 0400-1000 GMT

AverageBid/Offer * 8 pips (45.4200 / 45.4208)

1 pip 0.001 INR

AverageDaily TradingVolume U.S. $750m

Settlement Transaction plus two days (T+2)


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The exchange rate of the rupee is set by the interbank market. Since 2000, this has been managed

by the Reserve Bank of India and is classified as a managed float regime. Documentation is

required for offshore trading. NDFs and FX options are available. It is widely speculated that the

INR will be among the first of the emerging markets to become spot eligible without restrictions

or documentation. There is a very liquid bond market with maturities of up to 25 years available,

based on the government's need to fund the persistent budget deficit. Interest rate swaps are

available onshore and are traded up to 10 years, with mixed liquidity.

History oftheForex

Money, in one form or another, has been used by man for centuries. At first it was mainly Gold

or Silver coins. Goods were traded against other goods or against gold. So, the price of gold

became a reference point. But as the trading of goods grew between nations, moving quantities

of gold around places to settle payments of trade became cumbersome, risky and time

consuming. Therefore, a system was sought by which the payment of trades could be settled in

the sellers local currency. But how much of buyers local currency should be equal to the

sellers local currency

The answer was simple. The strength of a countrys currency depended on the amount of gold

reserves the country maintained. So, if country As gold reserves are double the gold reserves of

country B, country As currency will be twice in value when exchanged with the currency of

country B. This became to be known as The Gold Standard. Around 1880, The Gold Standard

was accepted and used worldwide.

During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money

was created in quantities that far exceeded the gold reserves. The currencies lost their standard

parities and caused a gross distortion in the countrys standing in terms of its foreign liabilities

and assets.

After the end of the second WORLD WAR the western allied powers attempted to solve theproblem at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of

July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial

Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar


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recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and

protectionist trade policies.

During the 1930s, many of the worlds major economies had unstable currency exchange rates.

As well, many nations used restrictive trade policies. In the early 1940s, the United States and

Great Britain developed proposals for the creation of new international financial institutions that

would stabilize exchange rates and boost international trade. There was also a recognized need to

organize a recovery of Europe in the hopes of avoiding the problems that arose after the First

World War. The delegates at Bretton Woods reached an agreement known as the Bretton Woods

Agreement to establish a postwar international monetary system of convertible currencies, fixed

exchange rates and free trade. To facilitate these objectives, the agreement created two

international institutions: the International Monetary Fund (IMF) and the International Bank for

Reconstruction and Development (the World Bank). The intention was to provide economic aid

for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the

World Banks first act.

HistoricalEventsintheForexMarket

Before diving into the inner workings of currency trading, it is important for every trader to

understand a few of the key milestones in the foreign exchange marker, since even to this day

they still represent events that are referenced repeatedly by professional forex traders.

BRETTON WOODS: ANOINTING THE DOLLAR AS THE WORLD CURRENCY

(1944)

In July 1944, representatives of 44 nations met in Bretton Woods, New Hampshire, to create a

new institutional arrangement for governing the international economy in the years after World

War II. After the war, most agreed that international economic instability was one of the

principal causes of the war, and that such instability needed to be prevented in the future. Theagreement, which was developed by renowned economists John Maynard Keynes and Harry

Dexter White, was initially proposed to Great Britain as a part of the Lend-Lease Actan

American act designed to assist Great Britain in postwar redevelopment efforts.


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Bretton Woods Agreement consisted of several key points:

1. The formation of key international authorities designed to promote fair trade and international

economic harmony.

2. The fixing of exchange rates among currencies.

3. The convertibility between gold and the U.S. dollar, thus empowering the U.S. dollar as the

reserve currency of choice for the world.

Of the three aforementioned parameters, only the first point is still in existence today. The

organizations formed as a direct result of Bretton Woods include the International Monetary

Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT), which are still

in existence today and play a crucial role in the development and regulation of international

economies. The IMF, for instance, initially enforced the price of $35 per ounce of gold that was

to be fixed under the Bretton Woods system, as well as the fixing of exchange rates that occurred

while Bretton Woods was in operation (and the financing required to ensure that fixed exchange

rates would not create fundamental distortions in the international economy).

Since the demise of Bretton Woods, the IMF has worked closely with another progeny of Bretton

Woods: the World Bank. Together, the two institutions now regularly lend funds to developing

nations, thus assisting them in the development of a public infrastructure capable of supporting a

sound mercantile economy that can contribute in an international arena. And, in order to ensure

that these nations can actually enjoy equal and legitimate access to trade with their industrialized

counterparts, the World Bank and IMF must work closely with GATT. While GATT was

initially meant to be a temporary organization, it now operates to encourage the dismantling of

trade barriersnamely tariffs and quotas.

The Bretton Woods Agreement was in operation from 1944 to 1971 when it was replaced with

the Smithsonian Agreement, an international contract of sorts pioneered by U.S. PresidentRichard Nixon out of the necessity to accommodate for Bretton Woods' shortcomings,

unfortunately, the Smithsonian Agreement possessed the same critical weakness: while it did not

include gold/U.S. dollar convertibility, it did maintain fixed exchange ratesa facet that did not


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accommodate the ongoing U.S. trade deficit and the international need for a weaker U.S. dollar.

As a result, the Smithsonian Agreement was short-lived.

Ultimately, the exchange rates of the world evolved into a free market, whereby supply and

demand were the sole criteria that determined the value of a currency. While this did and still

does result in a number of currency crises and greater volatility between currencies, it also

allowed the market to become self-regulating, and thus the market could dictate the appropriate

value of a currency without any hindrances.

As for Bretton Woods, perhaps its most memorable contribution to the

international economic arena was its role in changing the perception regarding the U.S. dollar.

While the British pound is still substantially stronger, and while the euro is a revolutionary

currency blazing new frontiers in both social behavior and international trade, the U.S dollar

remains the worlds reserve currency of choice, for the time being. This is undeniably due lately

in part to the Bretton Woods Agreement: by establishing dollar/gold convertibility, the dollars

role as the world's most accessible and reliable currency was firmly cemented. And thus, while

Bretton Woods may be a doctrine of yesteryear, its impact on the U.S. dollar and international

economics still resonates today.

ENDOFBRETTONWOODS:FREEMARKETCAPITALISMIS BORN (1971)

On August 15, 1971, it became official: the Bretton Woods system, a system used to fix the

value of a currency to the value of gold, was abandoned once and for all. While it had been

exorcised before, only to subsequently emerge in a new form, this final eradication of the Bretton

Woods system was truly its last stand: no longer would currencies be fixed in value to gold,

allowed to fluctuate only in a 1 percent range, but instead their fair valuation could be

determined by free market behavior such as trade flows and foreign direct investment.

While U.S. President Nixon was confident that the end of the Bretton Woods system would bring

about better times for the international economy, he was not a believer that the free market coulddictate a currency's true valuation in a fair and catastrophe-free manner. Nixon, as well as most

economists, reasoned that an entirely unstructured foreign exchange market would result in

competing devaluations, which in turn would lead to the breakdown of international trade and


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investment. The end result, Nixon and his board of economic advisers reasoned would be global

depression.

Accordingly, a few months later, the Smithsonian Agreement was introduced. Hailed by

President Nixon as the "greatest monetary agreement in the history of the world," the

Smithsonian Agreement strived to maintain fixed exchange rates, but to do so without the

backing of gold. Its key difference from the Bretton Woods system was that the value of the

dollar could float in a range of 2.25 percent, as opposed to just 1 percent under Bretton Woods.

Ultimately, the Smithsonian Agreement proved to be unfeasible as well. Without exchange rates

fixed to gold, the free market gold price shot up to $215 per ounce. Moreover, the U.S. trade

deficit continued to grow, and from a fundamental standpoint, the U.S. dollar needed to be

devalued beyond the 2.25 percent parameters established by the Smithsonian Agreement. In light

of these problems the foreign exchange markets were forced to close in February 1972.

The Currency markets reopened in March 1973, and this time they were not bound by a

Smithsonian Agreement: the value of the U.S. dollar was to be determined entirely by the

market, as its value was not fixed to any commodity, nor was its exchange rate fluctuation

confined to certain parametric. While this did provide the U.S. dollar, and other currencies by

default, the agility required to adapt to a new and rapidly evoking international trading

environment, it also set the stage for unprecedented inflation. The end of Bretton Woods and the

Smithsonian Agreement, as well as conflicts in the Middle East resulting in substantially higher

oil prices, helped to create stagflationthe synthesis of unemployment and inflationin the

U.S. economy. It would not be until later in the decade, when Federal Reserve Chairman Paul

Volcker initiated new economic policies and President Ronald Reagan introduced a new fiscal

agenda, that the U.S. dollar would return to normal valuations. And by then, the foreign

exchange markets had thoroughly developed, and were now capable of serving a multitude of

purposes: in addition to employing a laissez-faire style of regulation for international trade, they

also were beginning to attract speculators seeking to participate in a market with unrivaledliquidity and continued growth. Ultimately, the death of Bretton Woods in 1971 marked the

beginning of a new economic era, one that liberated international trading while also Proliferating

speculative opportunities.


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ASIANFINANCIALCRISIS (1997-1998)

Falling like a set of dominos on July 2, 1997, the relatively nascent Asian tiger economies

created a perfect example in showing the interdependence of global capital markets and their

subsequent effects throughout international currency forums. Based on several fundamental

breakdowns, the cause of the contagion stemmed largely from shrouded lending practices,

inflated trade deficits, mid immature capital markets. Added together, the factors contributed to a

"perfect storm" that left major regional markets incapacitated and once-prized currencies

devalued to significantly lower levels. With adverse effects easily seen in the equities markets,

currency market fluctuations were negatively impacted in much the same manner during this

time period.

TheBubble

Leading up to 1997, investors had become increasingly attracted to Asian

investment prospects, focusing on real estate development and domestic equities. As a result,

foreign investment capital flowed into the region as economic growth rates climbed on improved

production in countries like Malaysia, the Philippines, Indonesia, and South Korea. Thailand,

home of the baht, experienced a 13 percent growth rate in 1988 (falling to 6.5 percent in 1996).

Additional lending support for a stronger economy came from the enactment of a fixed currency

peg to the more formidable U.S. dollar. With a fixed valuation to the greenback countries like

Thailand could ensure financial stability in their own markets and a constant rate for export

trading purposes with the world's latest economy. Ultimately, the regions national currencies

appreciated as underlying fundamentals were justified, and speculative positions in expectation

of further climbs in price mounted.

83% - The percentage of wealth given away by famous investor Warren

Buffet to the Bill % Melinda Gates charitable foundation.


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BallooningCurrentAccountDeficitsandNonperformingLoans

However, in early 1997, a shift in sentiment had begun to occur as international account deficits

became increasingly difficult for respective governments to handle and lending practices were

revealed to be detrimental to the economic infrastructure. In particular, economists were alerted

to the fact that Thailand's current account deficit had ballooned in 1996 to $14.7 billion (it had

been climbing since 1992). Although comparatively smaller than the U.S. deficit, the gap

represented 8 percent of the country's gross domestic product. Shrouded lending practices also

contributed heavily to these breakdowns as close personal relationships of borrowers with high-

ranking banking officials were well rewarded and surprisingly common throughout the region.

This aspect affected many of South Korea's highly leveraged conglomerates as total

nonperforming loan values sky-rocketed to 7.5 percent of gross domestic product.

Additional evidence of these practices could be observed in financial institutions throughout

Japan. After announcing a $136 billion total in questionable and nonperforming loans in 1994,

Japanese authorities admitted to an alarming $400 billion total a year later. Coupled with a then

crippled stock market, cooling real estate values, and dramatic slowdowns in the economy,

investors saw opportunity in a depreciating yen. subsequently adding selling pressure to neighbor

currencies. When Japan's asset bubble collapsed, asset prices fell by $10 trillion, with the fall in

real estate prices accounting for nearly 65 percent of the total decline, which was worth two

years of national output. This fall in asset prices sparked the banking crisis in Japan. It began inthe early 1990s and then developed into a full-blown systemic crisis in 1997 following the failure

of a number of high-profile financial institutions. In response, Japanese monetary authorities

warned of potentially increasing benchmark interest rates in hopes of defending the domestic

currency valuation.Unfortunately, these considerations never materialized and a shortfall ensued.

Sparked mainly by an announcement of a managed float of the Thai baht, the slide snowballed as

central bank reserves evaporated and currency price levels became unsustainable in light of

downside selling pressure.


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Currency Crisis

Following mass short speculation and attempted intervention, the aforementioned Asian

economies were left ruined and momentarily incapacitated. The Thailand baht, once a prized

possession, was devalued by as much as 48 percent, even slumping closer to a 100 percent fall at

the turn of the New Year. The most adversely affected was the Indonesian rupiah. Relatively

stable prior to the onset of a crawling peg" with the Thai baht, the rupiah fell a whopping 228

percent from its previous high of 12,950 to the fixed U.S. dollar. These particularly volatile price

actions are reflected in Figure 2.4. Among the majors, the Japanese yen fell approximately 23

percent from its high to its low against the U.S. dollar in 1997 and 1998; its shown in Figure

2.5.

Figure 2.4 Asian Crisis Price Action

The financial crisis of 1997-1998 revealed the interconnectivity of economies and their effects

on the global currency markets. Additionally, it showed the inability of central banks to


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successfully intervene in currency valuations when confronted with overwhelming market forces

along with the absence of secure economic fundamentals. Today, with the assistance of IMF

reparation packages and the implementation of stricter requirements, Asias four little dragons

are churning away once again.

Figure 2.5 USD/JPY Asian Crisis Price Action


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INTRODUCTIONOFTHEEURO (1999)

The introduction of the euro was a monumental achievement, marking the largest monetary

changeover ever. The euro was officially launched as an electronic trading currency on January

1, 1999. The 11 initial member states of the European Monetary Union (EMU) were Belgium,

Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, and

Finland. Greece joined two years later. Each country fixed its currency to a specific conversion

rate against the euro, and a common monetary' policy governed by the European Central Bank

(ECU) was adopted. To many economists, the system would ideally include all of the original 15

European Union (EU) nations, but the United Kingdom, Sweden, and Denmark decided to keep

their own currencies for the time being. Euro notes and coins did not begin circulation until the

first two months of 2002. In deciding whether to adopt the euro, EU members all had to weigh

the pros and cons of such an important decision.

Figure 2.5 EUR/USD Price since Launch


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PlayersinCurrency market:

CentralBanks - The national central banks play an important role in the (FOREX) markets.

Ultimately, central banks seek to control the money supply and often have official or unofficial

target rates for their currencies. As many central banks have very substantial foreign exchange

reserves, their intervention power is significant. Among the most important responsibilities of a

central bank is the restoration of an orderly market in times of excessive exchange rate volatility

and the control of the inflationary impact of a weakening currency.

Frequently, the mere expectation of central bank intervention is sufficient to stabilize a currency,

but in case of aggressive intervention the actual impact on the short-term supply/demand balance

can lead to the desired moves in exchange rates.

If a central bank does not achieve its objectives, the market participants can take on a central

bank. The combined resources of the market participants could easily overwhelm any central

bank. Several scenarios of this nature were seen in the 1992-93 with the European Exchange

Rate Mechanism (ERM) collapse and 1997 throughout South East Asia.

Banks - The Interbank market caters to both the majority of commercial turnover as well as

enormous amounts of speculative trading. It is not uncommon for a large bank to trade billions of

dollars daily. Some of this trading activity is undertaken on behalf of corporate customers, but a

banks treasury room also conducts a large amount of trading, where bank dealers are taking their

own positions to make the bank profits.

The Interbank market has become increasingly competitive in the last couple of years and the

god-like status of top foreign exchange traders has suffered as equity traders are again back in

charge. A large part of the banks trading with each other is taking place on electronic booking

systems that have negatively affected traditional foreign exchange brokers.

InterbankBrokers - Until recently, foreign exchange brokers were doing large amounts ofbusiness, facilitating interbank trading and matching anonymous counterparts for comparatively

small fees. With the increased use of the Internet, a lot of this business is moving onto more

efficient electronic systems that are functioning as a closed circuit for banks only.


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The traditional broker box, which lets bank traders and brokers hear market prices, is still seen in

most trading rooms, but turnover is noticeably smaller than just a few years ago due to increased

use of electronic booking systems.

Commercial Companies - The commercial companies international trade exposure is the

backbone of the foreign exchange markets. A multinational company has exposure in accounts

receivables and payables denominated in foreign currencies. They can be protected against

unfavorable moves with foreign exchange. That is why these markets are in existence.

Commercial companies often trade in sizes that are insignificant to short term market moves,

however, as the main currency markets can quite easily absorb hundreds of millions of dollars

without any big impact. It is also clear that one of the decisive factors determining the long-term

direction of a currencys exchange rate is the overall trade flow.

Some multinational companies, whose exposures are not commonly known to the majority of

market, can have an unpredictable impact when very large positions are covered.

RetailBrokers - The arrival of the Internet has brought us a host of retail brokers. There is a

numbered amount of these non-bank brokers offering foreign exchange dealing platforms,

analysis, and strategic advice to retail customers. The fact is many banks do not undertakeforeign exchange trading for retail customers at all, and do not have the necessary resources or

inclination to support retail clients adequately. The services of such retail foreign exchange

brokers are more similar in nature to stock and mutual fund brokers and typically provide a

service-orientated approach to their clients.

HedgeFunds - Hedge funds have gained a reputation for aggressive currency speculation in

recent years. There is no doubt that with the increasing amount of money some of theseinvestment vehicles have under management, the size and liquidity of foreign exchange markets

is very appealing. The leverage available in these markets also allows such a fund to speculate

with tens of billions at a time. The herd instinct that is very apparent in hedge fund circles was


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seen in the early 1990s with George Soros and others squeezing the GBP out of the European

Monetary System.

It is unlikely, however, that such investments would be successful if the underlying investment

strategy was not sound. It is also argued that hedge funds actually perform a beneficial service to

foreign exchange markets. They are able to exploit economical weakness and to expose a

countries unsustainable financial plight, thus forcing realignment to more realistic levels.

Investorsand Speculators - In all efficient markets, the speculator has an important role taking

over the risks that a commercial participant hedges. The boundaries of speculation in the foreign

exchange market are unclear, because many of the above mentioned players also have

speculative interests, even central banks. The foreign exchange market is popular with investors

due to the large amount of leverage that can be obtained and the liquidity with which positions

can be entered and exited. Taking advantage of two currencies interest rate differentials is

another popular strategy that can be efficiently undertaken in a market with high leverage.

Types ofCurrencies

In economics, the term currency can refer to a particular currency, for example Pound Sterling,

or to the coins and banknotes of a particular currency, which comprise the physical aspects of a

nation's money supply. The other part of a nation's money supply consists of money dep

financial market final collegeforprtg1

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