FMPrElect6

The
Foreign
Exchang
e
Presentation by GROUP 1 Also Known as FOREX
 What Is Foreign Exchange
(Forex)?
• Is the trading of one currency for
another.
• For example, one can swap the
U.S. dollar for the euro.
• Foreign exchange transactions
can take place on the foreign
exchange market, also known as
the Forex Market.
• The forex market is the largest,
most liquid market in the world,
with trillions of dollars changing
hands every day.
• There is no centralized location,
rather the forex market is an
electronic network of banks,
brokers, institutions, and
individual traders (mostly trading
through brokers or banks).
 How Does Foreign
Exchange Work?
When trading currencies, they are
The market determines the listed in pairs, such as USD/CAD,
EUR/USD, or USD/JPY. These
value, also known as an represent the U.S. dollar (USD)
exchange rate, of the versus the Canadian dollar (CAD),
majority of currencies. the Euro (EUR) versus the USD and
Foreign exchange can be as the USD versus the Japanese Yen
simple as changing one (JPY).
currency for another at a
local bank. It can also There will also be a price
involve trading currency on associated with each pair, such as
the foreign exchange 1.2569. If this price was
market. For example, a associated with the USD/CAD pair
trader is betting a central it means that it costs 1.2569 CAD
bank will ease or tighten to buy one USD. If the price
monetary policy and that increases to 1.3336, then it now
one currency will strengthen costs 1.3336 CAD to buy one USD.
The USD has increased in value (or
versus the other.
 How Does Foreign
Exchange Work?
In the forex market currencies trade in
lots, called micro, mini, and standard lots.
A micro lot is 1000 worth of a given
currency, a mini lot is 10,000, and a
standard lot is 100,000. This is different
than when you go to a bank and want
$450 exchanged for your trip. When
trading in the electronic forex market,
trades take place in set blocks of
currency, but you can trade as many
blocks as you like. For example, you can
trade seven micro lots (7,000) or three
mini lots (30,000) or 75 standard lots
(7,500,000), for example.
 Factors that Affect Foreign
1.Many Exchange
factors can Rates
potentially influence the • Political conditions
market forces behind also exert a
foreign exchange rates. significant impact on
The factors include : the forex rate, as
• Various Economic events such as
Conditions political instability or
• Political Conditions political conflicts
• Psychological may negatively
Conditions. affect the strength of
a currency. The
2. The economic factors psychology of forex
include a market participants
• Government’s economic can also influence
policies exchange rates.
FOREX
• Trade balances, inflation
 FMPrElect6

Understan
ding
Foreign
Exchange
Market
Presentation by GROUP 1 UNDERSTANDING
 What Is the Foreign
Exchange Market?
Foreign exchange
(Also known as forex, markets are made up of
FX, or the currency • Banks
market) is an over-the- • Forex dealers
counter (OTC) global • Commercial
marketplace that companies
determines the • Central banks
exchange rate for • Investment
currencies around the management firms
world. Participants are • Hedge funds
able to buy, sell, • Retail forex dealers
exchange, and • Investors.
speculate on
currencies.
 Understanding the Foreign
Exchange Market
• The foreign exchange market—also called forex, FX, or
currency market—was one of the original financial markets
formed to bring structure to the burgeoning global
economy.
• In terms of trading volume, it is, by far, the largest financial
market in the world. Aside from providing a venue for the
buying, selling, exchanging, and speculation of currencies,
the forex market also enables currency conversion for
international trade settlements and investments.
• According to the Bank for International Settlements (BIS),
which is owned by central banks, trading in foreign
exchange markets averaged $6.6 trillion per day in April
2019.
 Understanding the Foreign
Exchange Market
• Currencies are always traded in pairs, so the "value"
of one of the currencies in that pair is relative to the
value of the other. This determines how much of
country A’s currency country B can buy, and vice
versa.
• Establishing this relationship (price) for the global
markets is the main function of the foreign
exchange market. This also greatly enhances
liquidity in all other financial markets, which is key
to overall stability.
 Understanding the Foreign
Exchange Market
• The value of a country’s currency depends on
whether it is a "free float" or "fixed float".

• Free-floating currencies are those whose

relative value is determined by free market
forces, such as supply-demand relationships.
• A fixed float is where a country’s governing
body sets its currency’s relative value to other
currencies, often by pegging it to some
standard.
 Understanding the Foreign
Exchange Market
• Free-Floating currencies include the
1.U.S. dollar
2.Japanese yen
3.British pound

• Fixed Floating currencies include the

1.Chinese Yuan
2.Indian Rupee.
 Understanding the Foreign
Exchange Market
• One of the most unique features of the forex
market is that it is comprised of a global
network of financial centers that transact 24
hours a day, closing only on the weekends.
• As one major forex hub closes, another hub in a
different part of the world remains open for
business. This increases the liquidity available
in currency markets, which adds to its appeal
as the largest asset class available to
investors.
 Understanding the Foreign
Exchange Market
• The most liquid trading pairs are, in
descending order of liquidity:

1.EUR/USD
2.USD/JPY
3.GBP/USD
 Size of the Foreign Exchange
•Market
The foreign exchange market is
unique for several reasons, mainly
because of its size.Trading volume
in the forex market is generally
very large.
• As an example, trading in foreign
exchange markets averaged $6.6
trillion per day in April 2019,
according to the Bank for
International Settlements, which
is owned by 62 central banks and
is used to work in monetary and
financial responsibility.
 Size of the Foreign Exchange
Market

The largest trading

centers are
• London
• New York
• Singapore
• Tokyo.
 Benefits of Using the Forex
Market
There are some key factors that differentiate the forex market
from others, like the stock market.

• There are fewer rules, • Because the market is open

which means investors 24 hours a day, you can
aren’t held to the strict trade at any time of day,
standards or regulations which means there’s no cut-
found in other markets. off time to be able to
• There are no clearing participate in the market.
houses and no central • Finally, if you’re worried
bodies that oversee the about risk and reward, you
forex market. can get in and out whenever
• Most investors won’t you want, and you can buy
as much currency as you
have to pay the can afford based on your
traditional fees or account balance and your
 Trading in the Foreign Exchange
Market Hours MarketHistorical Context
• Open 24 hours a day, 5 days • Initially for governments,
a week across global large companies, and
financial centers. hedge funds; now
accessible to individuals.
Accessibility
• Anyone can trade forex Profit Motive
easily, with many • Traders hope for upward
investment firms offering movement (if buying) or
accounts for individual weakness (if selling) in a
traders. currency to make a profit
Trading Mechanism Electronic Networks
• Buying or selling a country's • Traders use various dealers
currency; no physical and financial centers with
exchange of money—trades electronic networks to
are electronic. execute trades.
 Differences in the
Forex Markets
• There are some • Second, since trades don’t
fundamental take place on a traditional
differences between exchange, you won’t find
foreign exchange and the same fees or
other markets. First of commissions that you
all, there are fewer would on another market.
rules, which means Next, there’s no cut-off as
investors aren’t held to when you can and
to as strict standards cannot trade. Because the
or regulations as those market is open 24 hours a
in the stock, futures or day, you can trade at any
time of day. Finally,
options markets. That because it’s such a liquid
means there are no market, you can get in and
clearing houses and no out whenever you want
central bodies that
 Differences in the
Forex Markets
Fewer Regulations
• Fewer rules and less oversight compared
to stock, futures, or options markets.
No Clearing Houses
• No central bodies overseeing the forex
market.
No Fees/Commissions
• Trades are free from traditional exchange
fees and commissions.
24-Hour Trading
• Market is open 24 hours a day, allowing
trades at any time.
High Liquidity
• Can easily enter and exit trades, and buy
as much currency as you can afford.
 The Spot Market
• Settlement Time: Most currencies
settle in two business days; U.S.
dollar vs. Canadian dollar settles
next business day.
• Holiday Delays: During multiple
holidays (e.g., Easter, Christmas),
settlement can take up to six days.
• Price and Value: Price set on trade
date; money exchanged on value
date.
• Most Traded Currency: U.S. dollar is
the most actively traded currency.
The Spot Market
• Common Pairs: USD/EUR (Euro), USD/JPY
(Japanese yen), USD/GBP (British
pound), USD/AUD (Australian dollar).
• Cross Pairs: Pairs that don’t include the
dollar (e.g., EUR/GBP, EUR/JPY).
• Market Volatility: The spot market can
be highly volatile.
• Technical Trading: Short-term
movements dominated by technical
analysis (chartists).
• Fundamental Factors: Long-term moves
driven by interest rates and economic
• Forward Trade: Settles at a future
date, beyond the spot market.
• Forward Price: Calculated by adding The
or subtracting forward points
(interest rate differential between Forward
currencies).
• Maturity: Typically less than one
Market
year, but longer durations are
possible.
• Price Setting: Price set on the
transaction date, money exchanged
on the maturity date.
• Tailored Contracts: Forward
contracts are customized to the
needs of the counterparties.
• Flexibility: Can be for any amount
The Futures
Market
A futures transaction is
similar to a forward in that
it settles later than a spot
deal, but is for standard
size and settlement date
and is traded on a
commodities market. The
exchange acts as the
counterparty.
Example of Foreign Exchange
A trader thinks that the European Central Bank (ECB) will
be easing its monetary policy in the coming months as the
Eurozone’s economy slows. As a result, the trader bets
that the euro will fall against the U.S. dollar and sells
short €100,000 at an exchange rate of 1.15. Over the next
several weeks the ECB signals that it may indeed ease its
monetary policy. That causes the exchange rate for the
euro to fall to 1.10 versus the dollar. It creates a profit for
the trader of $5,000. By shorting €100,000, the trader
took in $115,000 for the short-sale. When the euro fell,
and the trader covered their short, it cost the trader only
$110,000 to repurchase the currency. The difference
between the money received on the short-sale and the buy
to cover is the profit. Had the euro strengthened versus
Example of Foreign Exchange
Brakedown
• Trader's Bet: Believes the ECB will ease monetary policy,
causing the euro to fall against the U.S. dollar.
• Short-Selling: Sells €100,000 at an exchange rate of 1.15,
receiving $115,000.
• Market Movement: Euro falls to 1.10 due to ECB signals.
• Profit: Buys back the €100,000 for $110,000, making a
$5,000 profit.

• Profit Calculation:
Sold for $115,000.
Bought back for $110,000.
Profit = $115,000 - $110,000 = $5,000.

• Risk: If the euro had strengthened instead, the trader

would have incurred a loss.
POINTS TO REMEMBER:
Foreign Exchange (forex or FX) is a global market for
exchanging national currencies with one another.
• The foreign exchange market
• Foreign exchange
is an over-the-counter (OTC)
venues comprise the marketplace that determines
largest securities market the exchange rate for global
in the world by nominal currencies.
value, with trillions of • It is, by far, the largest
dollars changing hands financial market in the world
• each day. and futures are
Forwards and is comprised of a global
another way to network of financial centers
participate in the forex that transact 24 hours a day,
closing only on the
• market.
Foreign exchange
trading utilizes currency • weekends.
Currencies are always traded
pairs, priced in terms of in pairs, so the "value" of one
one versus the other. of the currencies in that pair
is relative to the value of the
other.
 FMPrElect6

Thank
You
To everyone who is present
here