mail no 2 ifm

8/8/2019 MAIL NO 2 IFM

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Dr . Deepak TandonLBSIM

DWARKA NEW DELHI

International Forex Markets and

Forex Risk Management


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Introduction to Forex Market

The Foreign Exchange Market (FX Market)

a market for converting the currency of one country

into the currency of another country.

Functionsconverting currencies

reducing risk


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y Forex Market spans the globe , with prices and currencies

y Trade starts each morning in Sydney and Tokyo,moves west to Hongkong and singapore,

passes on to Bahrain, shifts to main European markets of Frankfurt, Zurich and

London;jumps the Atlantic to New York; goes wesyt to Chicago ; ends in SanFransisco

and Los angeles

y Round the clock basis trading 24 hr a day process

y In some countries it is in bidding on trading floor


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Introduction to Forex MarketImportant places of the FX market

Tokyo

Hong Kong

Singapore

Dubai Mumbai

Sydney

Rio de Janeiro

Vienna

Madrid

Brussels

Mexico City

Sao Paulo

Important places of the FX market

London

New York

Paris

Chicago

Frankfurt

Hamburg

Dsseldorf

Amsterdam

San Francisco

Melbourne

Zurich


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Introduction to Forex Market

Organization of the FX marketMarket levels in the FX market

1. Wholesale Level (95% of transaction volume)

Major banks (Inter-bank market)

2. Retail LevelBanks deal with business customers (large firms)

Basic Types of FX MarketsSpot Market

Immediate transaction (Cash or, Tom)

Currencies to be delivered within 2 business days.

Forward MarketCurrencies delivery at a specified future date


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Introduction to Forex MarketOrganization of the FX Market

Participants in the Inter-Bank MarketMajor commercial banks (market makers)

Sell and buy foreign currencyBrokersMatch supply and demandCommission Rs 2500 (For USD 1 million or, equivalent)Other Commercial BanksTo participate in foreign exchange market

To cover revenues received in foreign currencyCentral banksTo participate for intervention purposes.


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Functions of Market

y Transfer of Purchasing power is necessary

y Inventory in transit is to be financed

y Forex Markets provide hedging facilities for transferring

Forex Risk to someone else more willing to carry risk


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Risks in Foreign ExchangePLAYERS IN FOREIGN EXCHANGE MARKET

1. CUSTOMERS

2. COMMERCIAL BANKS

3. CENTRAL BANK

4. BROKERS

IIBANKS+NON BANK FOREX DEALERS

(speculators+arbitragers,treasuries, brokers)


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Risks in Foreign ExchangeFEATURESOF FOREIGN EXCHANGE MARKET

OMNI-PRESENT

SLEEPLESS

EXTRA INFORMATION DRIVEN EXPONENTIAL VOLATILITY

CAPITAL FLOW SENSITIVE

TWOTIER MARKET

INTER-BANK

OTC MARKET


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Risks in Foreign Exchange

IMPORTER BANK EXPORTER

Currency Risk

TransactionTranslation

Economic

Currency

RiskPosition

carrying

Translation

Currency

RiskTransaction

Translation

Economic

Interest Risk Interest Risk Interest Risk

Country Risk Country Risk Country Risk

Credit Risk Credit Risk Credit Risk


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Risks in Foreign ExchangeImporter Bank Exporter

Transit

Risk/

MarinePeril

Mismatch

of

maturities

Transit

Risk/

MarinePeril

Inferior

quality of

goods

Operational

Risk

Goods

rejected by

buyerFalse/ fake

documents

Adverse

selection

Insolvency

of LC

issuing

bank.

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