Professional Documents
Culture Documents
Ashutosh Jaiswal
MoF, RBSC
Index
Overview
FX
of Forex Market
market convention
Exchange
rate theories
Overview of FX
Market
FX Market
International currency market has two components:
1.
2.
EUR:USD=1.1035
GBP, EUR, USD are used as quoted currency in this seniority order
Global trading in FX mkt averaged at $5.3 trn per day in Apr 2013. FX
swaps were the most traded instruments, followed by spot trading (BIS)
$ was the dominant currency, with 87% of all FX trades having $ on one
side in Apr 2013, followed by Euro at 33%
1973
FERA Introduced
1991
Economic Liberalization
1993
2000
FEMA Introduced
2008
FX Market
Conventions
FX Quotes
Direct Quote:
a
Foreign Cy
Domestic Cy
100
In Domestic Cy
Indirect Quote:
a
Domestic Cy
b
Foreign Cy
1/100
In Foreign Cy
10
Pip : Price Interest Point, refers to the one unit of the final digit of the quote
(Similar to tick in equity market)
The forex market quotes exchange rate in one direction such as USD:INR,
not INR:USD
USD:INR ask rate is reciprocal of INR:USD bid rate
USD:INR bid rate reciprocal of INR:USD ask rate
e.g.
We get-INR:USD= .01494-.01495
11
Cross Rates
Exchange rate between two currencies, inferred from the exchange rate of
each currency against a common third currency
For example:
EUR:USD & USD:YEN can be used to calculate EUR:YEN
Lets assume: EUR:USD=1.10 , USD:YEN=125
Calculate- EUR:YEN=
12
Exchange Rate
Theories
13
Balance of Payments
Direct investments,
Portfolio
investments,
borrowings
Unilateral trfrs
14
N.B.-
15
Pegged
Floating
A compromise between
fixed & floating rate.
Peg is against another
major currency or a
basket of currency.
Exchange
rate
is
allowed to fluctuate
within a small band.
Mostly followed by
Emerging economies
16
Parity
relations
details
interplay
between
exchang
e rate,
inflation
&
interest
rates
Uncovered interest
rate parity relation
Expectation relation
f= (F-S)/S
18
PPP Theory
Spot exchange rate adjusts perfectly to
inflation differential between two countries.
There are two versions- Absolute & Relative
S1=S0*{(1+If)/(1+Id)}
Absolute PPP:
s = (S1-So)/S0
Or s ~ If-Id
Relative PPP:
19
(1+Rf)/(1+Rd)=
* {(1+E(If))/1+E(Id )}
Or Rf-Rd = E(If)-E(Id)
20
And
E(s) ~ Rf-Rd
Foreign currency movement to be
equal to interest rate differential
between two countries
6th Bourse Programme, RBSC
21
F = E(S1)
Covered Interest rate parity:
22
Related To Factor
By Theory
Forward discount
Interest rate
Inflation rate
PPP
Interest rate
Inflation rate
Fisher relation
Interest rate
Forward Discount
Foreign Exchange
expectation
23
Thanks
Questions?
24