Chapter 1 Introduction to the Study

1. Concepts
Introduction
Currency exchange rate is the value of a foreign currency relative to domestic currency. T he exchange of currencies is done in the foreign exchange market, which is one of the biggest financial markets. The participants of the market are banks, corporations, exporters, importers etc. A foreign exchange contract typically states the currency pair, the amount of the contract,the agreed rate of exchange etc.

CHART 1

Exchange Rate A Currency exchange deal is always done in currency pairs, for example, US Dollar Indian Rupee contract (USD INR); British Pound INR (GBP - INR), Japanese Yen U.S. Dollar (JPYUSD),U.S. Dollar Swiss Franc (USD-CHF) etc. Some of the liquid currencies in the world are USD, JPY, EURO, GBP, and CHF and some of the liquid currency contracts are on USDJPY,USD-EURO, EURO-JPY, USD-GBP, and USD-CHF.

Currency Table Date: 28 June 2011 USD JPY EUR USD 1.000 JPY 0.010 95.318 1.000

INR 0.711 0.007

GBP 48.053 0.504 67.719 1 .000 0.606 0.006 0.852 0.013 TABLE 1

EUR 1.406 134.033 1.000 INR 0.021 1.984 0.015

In a currency pair, the first currency is referred to as the base currency and the second currency is referred to as the counter/terms/quote currency. The exchange rate tells the worth of the base currency in terms of the terms currency, i.e. for a buyer, how much of the terms currenc y must be paid to obtain one unit of the base currency. For example, a USD-INR rate of Rs. 48.0530 implies that Rs. 48.0530 must be paid to obtain one US Dollar. Foreign exchange prices are highly volatile and fluctuate on a real time basis. In foreign exchange contracts, the price fluctuation is expressed as appreciation/depreciation or the strengthening/weakening of a currency relative to the other. A change of USD-INR rate from Rs. 48 to Rs. 48.50 implies that USD has strengthened/ appreciated and the INR has weakened/depreciated, since a buyer of USD will now have to pay more INR to buy 1 USD than before. The primary purpose of the foreign exchange is to assist international trade and investment, by allowing businesses to convert one currency to another currency. The Currency exchange market is unique because of its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size. 1.2.2 MARKET SIZE & LIQUIDITY The Currency exchange market is the most liquid financial market in the world. Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors. The average daily turnover in the global foreign exchange and related markets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated by the Bank for International Settlements, average

daily turnover was US$3.98 trillion in April 2010 (vs $1.7 trillion in 1998).[3] Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5 trillion was traded in outright forwards, FX swaps and other currency derivatives.

CHART 2 Main foreign exchange market turnover, 19882007, measured in billions of USD Top 10 currency traders % of overall volume, May 2011 Rank ,Name& Market share 1. 3. 5. 7. 9. Deutsche Bank :15.64% UBS AG :10.59% JPMorgan: 6.43% Royal Bank of Scotland :6.20% Goldman Sachs: 4.13% 2. 4. 6. 8. 10. Barclays Capital :10.75% Citi: 8.88% HSBC :6.26% Credit Suisse :4.80% Morgan Stanley :3.64%

TABLE 2

MARKET PARTICIPANTS
Banks The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. Many large banks may trade billions of dollars, daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, which are trading desks for the bank's own account. Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for large fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants. Central banks National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit tra Forex Fixing Forex fixing is the daily monetary exchange rate fixed by the national bank of each country. The idea is that central banks use the fixing time and exchange rate to evaluate behavior of their currency. Fixing exchange rates reflects the real value of equilibrium in the forex market. Banks, dealers and online foreign exchange traders use fixing rates as a trend indicator. Hedge funds as speculators About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular

currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor. Investment management firms Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases. Retail foreign exchange traders Individual Retail speculative traders constitute a growing segment of this market with the advent of retail forex platforms, both in size and importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled and regulated in the USA by the CFTC and NFA have in the past been subjected to periodic foreign exchange scams.[11][12] To deal with the issue, the NFA and CFTC began (as of 2009) imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members Non-bank foreign exchange companies Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as foreign exchange brokers but are distinct in that they do not offer speculative trading but rather currency exchange with payments (i.e., there is usually a physical delivery of currency to a bank account). Money transfer/remittance companies and bureau de changes Money transfer companies/remittance companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally followed by UAE Exchange.Bureau de change or currency transfer companies provide low value foreign exchange services for travelers. These are typically located at airports and stations or at tourist locations and allow physical notes to be exchanged from one currency to another. They access the foreign exchange markets via banks or non bank foreign exchange companies.

TRADING CHARACTERSTICS
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price.

Types of Traders in Derivative Markets

Hedgers Hedgers trade with an objective to minimize the risk in trading or holding the underlying securities. Hedgers willingly bear some costs in order to achieve protection against unfavorable price changes. Speculators Speculators use derivatives to bet on the future direction of the markets. They take calculated risks but the objective is to gain when the prices move as per their expectation. Based on the duration for which speculators hold a position they are further be classified as scalpers (very short time, may be defined in minutes), day traders (one trading day) and position traders (for a long period may be a week, a month or a year). Arbitrageurs Arbitrageurs try to make risk-less profit by simultaneously entering into transactions in two or more markets or two or more contracts. They profit from market inefficiencies by making simultaneous trades that offset each other thereby making their positions risk-free. For example, they try to benefit from difference in currency rates in two different markets.

% daily share 84.9% 39.1% 19.0% 12.9% 7.6%

Currency

ISO 4217 code (Symbol)

United States dollar Euro Japanese yen Pound sterling Australian dollar Swiss franc Canadian dollar Hong Kong dollar Swedish krona New Zealand dollar South Korean won Singapore dollar Indian rupee

USD ($) EUR () JPY () GBP () AUD ($) CHF (Fr) CAD ($) HKD ($) SEK (kr) NZD ($)

6.4% 5.3% 2.4%

2.2% 1.6% 1.5%

KRW

1.4%

SGD ($)

0.9%

INR () TABLE 3

1.2.5DETERMINANTS OF FOREIGN EXCHANGE RATES

 Economic factors These include: (a)economic policy, disseminated by government agencies and central banks, (b)economic conditions, generally revealed through economic reports, and other economic indicators. Economic policy: comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency. Inflation levels and trends: Typically a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. Economic growth and health: Reports such as GDP, employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Productivity of an economy: Increasing productivity in an economy should positively influence the value of its currency. Its effects are more prominent if the increase is in the traded sector. Political conditions Internal, regional, and international political conditions and events can have a profound effect on currency markets. All exchange rates are susceptible to political instability and anticipations about the new ruling party. Political upheaval and instability can have a negative impact on a nation's economy. For example, destabilization of coalition governments in Pakistan and Thailand can negatively affect the value of their currencies. Similarly, in a country experiencing financial difficulties, the rise of a political faction that is perceived to be fiscally responsible can

have the opposite effect. Also, events in one country in a region may spur positive/negative interest in a neighboring country and, in the process, affect its currency.

Market psychology Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Flights to quality: Unsettling international events can lead to a "flight to quality", a type of capital flight whereby investors move their assets to a perceived "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The U.S. dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty. Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. "Buy the rumor, sell the fact": This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

FINANCIAL INSTRUMENTS
Spot A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business day), as opposed to the futures contracts, which are usually three months. This trade represents a direct exchange between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. Forward One way to deal with the foreign exchange risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be one day, a few days, months or years. Usually the date is decided by both parties. Then the forward contract is negotiated and agreed upon by both parties. Swap The most common type of forward transaction is the FX swap. In an FX swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. Future Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. Option A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate.

Speculation

Futures contracts can also be used by speculators who anticipate that the spot price in the future will be different from the prevailing futures price. For speculators, who anticipate a strengthening of the base currency will hold a long position in the currency contracts, in order to profit when the exchange rates move up as per the expectation. A speculator who anticipates a weakening of the base currency in terms of the terms currency, will hold a short position in the futures contract so that he can make a profit when the exchange rate moves down. Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do. Other economists such as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.Large hedge funds and other well capitalized "position traders" are the main professional speculators. According to some economists, individual traders could act as "noise traders"and have a more destabilizing role than larger and better informed actors. Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not;according to this view, it is simply gambling that often interferes with economic policy

Risk Aversion in FOREX

Risk aversion in the forex is a kind of trading behavior exhibited by the foreign exchange market when a potentially adverse event happens which may affect market conditions. This behavior is caused when risk averse traders liquidate their positions in risky assets and shift the funds to less risky assets due to uncertainty.[ In the context of the forex market, traders liquidate their positions in various currencies to take up positions in safe-haven currencies, such as the US Dollar. Sometimes, the choice of a safe haven currency is more of a choice based on prevailing sentiments rather than one of economic statistics.

Impact of Currency Exchange in India

GDP & GNP The Gross Domestic Product (GDP) in India expanded 7.8 percent in the first quarter of 2011 over the same quarter, previous year. From 2004 until 2010, India's average quarterly GDP Growth was 8.40 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. India's economy rose 7.8 percent in the three months ended March 31 from a year earlier, after a revised 8.3 percent gain in the previous quarter, the Central Statistical Office said in a statement in New Delhi on May 31. Thats the slowest pace in five quarters. Manufacturing rose 5.5 percent in the three months through March from a year earlier, compared with a 6 percent gain in the previous quarter. Finance and insurance services grew 9 percent after a 10.8 percent jump in the previous quarter. Farm output rose 7.5 percent while mining advanced 1.7 percent, according to the report.The sectors which registered significant growth rates are agriculture, forestry and fishing at 7.5 percent, electricity, gas and water supply at 7.8 percent, construction at 8.2 percent, trade,hotels, transport and communication at 9.3 percent, and financing, insurance, real estate and business services at 9.0 percent. Particulars GDP (%) GNP (%) NNP (%) IIP (%) WPI (%) CPI (%) BOP Inflation Latest 7.8 Chg - last quarter Estimated / Last Last Update May 2011

10.8 10.4

Oct 6.4 Sep -0.9

4.4 Sep 11.3 July

Dec 2010 Dec 2010

7.48

Nov -1.10

8.58 Oct

Dec

TABLE 4

Types of Exchanges in India

 MCX-SX MCX-SX initiated trading on Oct 7, 2008.MCX Stock Exchange (MCX-SX), and Indias new stock exchange, under the regulatory framework of Securities & Exchange Board of India (SEBI). The exchange received approval from SEBI and Reserve Bank of India (RBI) to launch a nationwide electronic platform for trading in currency derivatives. Currently MCX-SX offers currency futures contracts in US Dollar-Indian Rupee (USDINR), Euro-Indian Rupee (EURINR), Pound Sterling-Indian Rupee (GBPINR) and Japanese YenIndian Rupee (JPYINR). Clearing and Settlement is conducted through the MCX-SX Clearing Corporation Ltd (MCX-SX CCL). Within a year of its launch, MCX-SX has achieved a stupendous growth in average daily turnover and open interest. The average daily turnover increased from Rs 355.66 crores during in the first month of its operations (Oct 7, 2008 till Nov 6, 2008) to Rs 14617.24 crores for the month of January 2010. MCX-SX witnesses participation from over 480 cities and towns across India and has a strong member base of over 600. Among hosts of benefits this state-of-the-art transparent national trading platform offers to a wide range of financial market participants -- hedgers (i.e. exporters, importers, corporate and banks), investors and arbitrageurs -- price discovery and price risk management are of foremost importance.

TURNOVER AND VOLUME OF MCX-SX Total Turnover - Rs. 43,571.98 crores Total number of contracts traded - 8,876,100

Recorded highest turnover - Rs. 1593.04 crores on Jan 22, 2009 Highest number of contracts traded - 324,885 on Jan 22, 2009

Average Daily Volume - 158,501 contracts Average Daily Turnover - Rs. 778.07 crores

Garnered over 50 % market share in two months of operations

 Growth of 187% by clocking an average daily turnover of Rs.1003.38 crore at the end of 2nd month over average daily turnover of Rs. 349.38 crore for the 1st month As on December 31, 2008 since inception Total Volumes Currency Futures volume traded on the Indian Exchanges

CONTRACT SPECIFICATION USD - INR Symbol Instrument Type Unit of trading Underlying

USDINR FUTCUR 1 (1 unit denotes 1000 USD) USD

Quotation/Price Quote

Rs. per USD

Tick size Trading hours Contract trading cycle

0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m. 12 month trading cycle.

Last trading day

Two working days prior to the last business day of the expiry month at 12:15pm. Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Theoretical price on the 1st day of the contract. On all other days, DSP of the contract. Tenure upto 6 months Tenure greater than 6 months

Final settlement day Base price Price operating range

+/-3 % of base price Clients Higher of 6% of total open interest or USD 10 million

+/- 5% of base price Trading Members Higher of 15% of the total open interest or USD 50 million Banks Higher of 15% of the total open interest or USD 100 million

Position limits

Minimum initial margin Extreme loss margin

1.75% on first day & 1% thereafter.

1% of MTM value of gross open position.

Calendar spreads Settlement Mode of settlement Daily settlement price (DSP) Final settlement price (FSP)

Rs. 400/- for a spread of 1 month, Rs. 500/- for a spread of 2 months, Rs. 800/- for a spread of 3 months & Rs. 1000/- for a spread of 4 months or more Daily settlement : T + 1 Final settlement : T + 2 Cash settled in Indian Rupees DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time. RBI reference rate

 EURINR Symbol Instrument Type Unit of trading Underlying EURINR FUTCUR

1 (1 unit denotes 1000 EURO) EURO

Quotation/Price Rs. per EUR Quote

Tick size Trading hours

0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m.

Contract trading cycle Settlement price Last trading day

12 month trading cycle. RBI Reference Rate on the date of expiry Two working days prior to the last business day of the expiry month at 12:15pm. Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Final settlement day Base price

Price operating range

Tenure upto 6 months +/-3 % of base price

Tenure greater than 6 months +/- 5% of base price

Position limits Calendar spreads Settlement Mode of settlement Rs.700/- for a spread of 1 month, 1000/- for a spread of 2 months, Rs.1500/for a spread of 3 months or more Daily settlement : T + 1 Final settlement : T + 2 Cash settled in Indian Rupees

 GBPINR Symbol Instrument Type Unit of trading Underlying Quotation/Price Quote Tick size Trading hours Contract trading cycle Settlement price Last trading day Final settlement day Base price Price operating range GBPINR FUTCUR 1 (1 unit denotes 1000 POUND STERLING) POUND STERLING Rs. per GBP 0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m. 12 month trading cycle. Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro. Two working days prior to the last business day of the expiry month at 12:15pm. Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Theoretical price on the 1st day of the contract. On all other days, DSP of the contract Tenure upto 6 months +/-3 % of base price Clients Higher of 6% of total open interest or GBP 5 million Tenure greater than 6 months +/- 5% of base price Banks Higher of 15% of the total open interest or GBP 50 million

Position limits

Trading Members Higher of 15% of the total open interest or GBP 25 million

Minimum initial margin Extreme loss margin Calendar spreads Settlement

3.2% on first day & 2% thereafter 0.5% of MTM value of gross open positions. Rs.1500/- for a spread of 1 month, 1800/- for a spread of 2 months, Rs.2000/- for a spread of 3 months or more Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement Cash settled in Indian Rupees

Daily settlement price (DSP) Final settlement price (FSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time. Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

 JPYINR Symbol Instrument Type Unit of trading Underlying Quotation/Price Quote Tick size Trading hours Contract trading cycle Settlement price Last trading day Final settlement day Base price Price operating range JPYINR FUTCUR 1 (1 unit denotes 100000 YEN) JPY Rs per 100 YEN 0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m. 12 month trading cycle. Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro. Two working days prior to the last business day of the expiry month at 12:15pm. Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Theoretical price on the 1st day of the contract. On all other days, DSP of the contract Tenure upto 6 months +/-3 % of base price Clients Higher of 6% of total open interest or JPY 200 million Tenure greater than 6 months +/- 5% of base price Banks Higher of 15% of the total open interest or JPY 2000 million

Position limits

Trading Members Higher of 15% of the total open interest or JPY 1000 million

Minimum initial margin Extreme loss margin Calendar spreads Settlement

4.50% on first day & 2.30% thereafter 0.7% of MTM value of gross open positions. Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or more Daily settlement : T + 1 Final settlement : T + 2 DSP shall be calculated on the basis of the last half an hour weighted

Mode of settlement Cash settled in Indian Rupees Daily settlement

price (DSP) Final settlement price (FSP)

average price of such contract or such other price as may be decided by the relevant authority from time to time. Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

NSE The National Stock Exchange of India was promoted by leading Financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives segment commenced in June 2000.

The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in Capital Market, Derivatives Market and Currency Derivatives segments including equities, equities based derivatives, Currency futures and options, equity based ETFs, Gold ETF and Retail Government Securities. Today NSE network stretches to more than 1,500 locations in the country and supports more than 2, 30,000 terminals. With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen the securities industry and provides several new products like Mini Nifty, Long Dated Options and Mutual Fund Service System. Responding to market needs, NSE has introduced services like DMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of the market and various categories of market participants. NSE has made its global presence felt with cross-listing arrangements, including license agreements covering benchmark indexes for U.S. and Indian equities with CME Group and has also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to cooperate in the development of a market for India-linked products and services to be listed on SGX. The two exchanges also will look into a bilateral securities trading link to enable investors in one country to seamlessly trade on the other countrys exchange.

 CONTRACT SPECIFICATION Symbol Market Type Instrument Type USDINR N FUTCUR EURINR N FUTCUR GBPINR N FUTCUR JPYINR N FUTCUR

Unit of trading

1 - 1 unit 1 - 1 unit 1 - 1 unit denotes 1000 denotes 1000 denotes 1000 POUND USD. EURO. STERLING. The exchange rate in Indian Rupees for US Dollars The exchange rate in Indian Rupees for Euro. The exchange rate in Indian Rupees for Pound Sterling.

1 - 1 unit denotes 100000 JAPANESE YEN.

Underlying / Order Quotation

The exchange rate in Indian Rupees for 100 Japanese Yen.

Tick size

0.25 paise or INR 0.0025 Monday to Friday 9:00 a.m. to 5:00 p.m. 12 month trading cycle. Two working days prior to the last business day of the expiry month at 12 noon. Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. 10,001 or greater Theoretical Theoretical Theoretical price Theoretical price price on the price on the on the 1st day of on the 1st day of 1st day of the 1st day of the the contract. the contract.

Trading hours

Contract trading cycle

Last trading day

Final settlement day

Quantity Freeze

Base price

contract. On all other days, DSP of the contract. Tenure upto 6 months

contract. On all other days, DSP of the contract.

On all other days, DSP of the contract.

On all other days, DSP of the contract.

Price operating range

+/-3 % of base price.

Tenure greater +/- 5% of base price. than 6 months higher of 6% of total open interest or USD 10 million higher of 15% of the total open interest or USD 50 million higher of 15% of the total open interest or USD 100 million higher of 6% of total open interest or EURO 5 million higher of 15% of the total open interest or EURO 25 million higher of 15% of the total open interest or EURO 50 million

Clients

higher of 6% of total open interest or GBP 5 million

higher of 6% of total open interest or JPY 200 million

Position limits

Trading Members

higher of 15% of the total open interest or GBP 25 million

higher of 15% of the total open interest or JPY 1000 million

Banks

higher of 15% of the total open interest or GBP 50 million

higher of 15% of the total open interest or JPY 2000 million

Initial margin

SPAN Based Margin 1% of MTM 0.3% of MTM 0.5% of MTM value of gross value of gross value of gross open position open position open position Rs.400 for spread of 1 Rs.700 for spread of 1 Rs.1500 for spread of 1 0.7% of MTM value of gross open position Rs.600 for spread of 1

Extreme loss margin

Calendar spreads

month Rs.500 for spread of 2 months Rs.800 for spread of 3 months Rs.1000 for spread of 4 months and more

month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months and more

month Rs.1800 for spread of 2 months Rs.2000 for spread of 3 months and more

month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months and more

Settlement

Daily settlement : T + 1 Final settlement : T + 2 Cash settled in Indian Rupees Calculated on the basis of the last half an hour weighted average price. Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro

Mode of settlement Daily settlement price (DSP)

Final settlement price (FSP)

RBI reference rate

RBI reference rate

 VOLUME No. 1. 2. 3. 4. 5. 8. Volume Rising Time 1 Day(Daily) 2 Days 3 Days 4 Days 1 Week 2 Weeks Number of Stocks 796 878 961 978 1029 1080

No. 1. 2. 3. 4. 5. 8.

Volume Falling Time 1 Day(Daily) 2 Days 3 Days 4 Days 1 Week 2 Weeks

Number of Stocks 742 667 575 564 514 464

TURNOVER Jul 2011 Date 01-Jul-2011 04-Jul-2011 05-Jul-2011 06-Jul-2011 07-Jul-2011 08-Jul-2011 11-Jul-2011 12-Jul-2011 13-Jul-2011 14-Jul-2011 15-Jul-2011 18-Jul-2011 19-Jul-2011 20-Jul-2011 21-Jul-2011 22-Jul-2011 No. of securities traded 1502 1514 1512 1512 1516 1511 1498 1510 1516 1505 1513 1516 1515 1522 1514 1513 No of trades 5510177 5125060 5026589 5105786 5779509 5916051 4403006 5528067 5005631 5612804 4810149 4354318 5415602 6228094 5317367 5804422 Traded quantity (lakhs) 6356.17 5682.75 5770.26 5486.13 6127.02 6667.36 4534.06 5459.35 5153.7 6302.67 4720.01 4217.17 5214.73 6307.79 5293.23 6058.17 Traded Value (Rs.crore) 11133.06 9965.78 10752.34 9881.31 12023.56 12269.41 8660.03 10954.51 9775.66 11735.25 8815.95 8276.66 9900.08 11315.26 10013.07 11632.77

25-Jul-2011 26-Jul-2011

1518 1523

5892139 6186931

6114.43 5951.11

11484.43 12296.62

LIVE TRADING EXAMPLE: Sold @ 64.5125 Bought @ 64.0800 Difference : 64.5125 64.0800 = 0.4325 Profit for 1 lot : 0.4325 * 1000 = 432 Rs Profit for 100 lots : 0.4325 * 1000 * 100 = 43250 Rs.

Need For the Study

Minimal or no commissions - There are no clearing fees, no exchange fees, no government fees and no brokerage fees.

Easy access if we compare the money you need on the market in comparison with the amount needed for entering the stock, options or futures market, its a huge difference. The amount of capital is very low and it allows numerous types of people to easily enter the foreign exchange market.

No middlemen spot currency trading is decentralized and eliminates middlemen, allowing you to trade directly.

Lots of free courses and demo possibilities On the internet we can find huge opportunities for learning how the Forex market works and what we need to become a good trader. Also, most online Forex brokers offer demo accounts to practice trading and build our skills, using real-time charts and news feeds. They are more valuable than we could even imagine and, before starting your real money on the market, try to see if we are built and ready for it by practicing with these types of software.

Time and location flexibility the market is open 24 hours each day, so we dont have to match our schedule with the one of the market. It doesnt require a full-time engagement and we can choose the hours that suit our best. Also, we can operate from any corner of the world, as long as wehave an Internet connection.

Low transaction costs the transaction cost, determined by the bid/ask spread, is usually less than 0.1%, and it can go even lower in the case of large dealers.

A high liquidity market the market is huge, so is extremely liquid. Around 4 trillion dollars are exchanged every day, according to the latest figures released by the Bank of International Settlements (BIS). That becomes an advantage, as we dont have to struggle so much until we will find someone who wants to buy our currency or sell we one. We

cant get stuck and, by using features like stop lose, we will close your position automatically, while not even being in front of the computer.

Leverage with a little investment you can move large amounts of money. Leverage gives the trader the ability to make nice profits and keep risk capital to a minimum. No forced deadlines no one and no rule is forcing we to close a position. we can stay open as long as we consider necessary.

Transparency - due to multi-day market movement, its size and the high number of participants, it is virtually impossible to market manipulation.

Problem
Differences between retail and wholesale pricing around two-thirds of the trades are made between dealers and large organizations such as hedge funds and banks. They trade at wholesale prices, while the investor trades at a retail price. Like this it can become a challenge to compete against bigger organization that start with a lower entry point and sell more profitably. Zero Sum Game- dont expect necessarily to win lots of money. Remember that for someone to get rich, another has to loos money on the Forex market. On the web there are many unscrupulous people who are dedicated to defraud honest people. It is important when investing your money to have the support of a trusted broker; they usually must be properly registered, including some requests that the brokerage firms have made at least 100 successful operations. Lack of complete knowledge & Skills Without completely knowing the markets rules and without having patience, your investment might very well soon vanish. Leverage: As mentioned, you can take a leverage, which will allow you to enter the market with a larger capital, if the operations are successful, and use good strategies you can obtain better returns but if the opposite happens, you may lose a lot of your money. leverage is a double edged sword. complex nature: the technical analysis techniques are complex as so is the implementation of certain strategies requires much training and education. The currency exchange rates are influenced by a variety of factors, which may fluctuate over time. Cannot keep track for 24 hours: It is quite impossible for an individual trader to keep track of the forex market throughout the day. High volatility: High volatile forex markets can cause huge losses if you dont know how to deal with it. Therefore, it is advisable that you opt for a forex trading course that will help you to know how to make profit in foreign exchange trading. Possibility of scams while trading in forex- In a quite common scam, investors are promised significant amount of profit in exchange of an initial investment. However, the investors money is not placed in the forex market; instead, the con artists simply run away with the money. However, you can avoid being a victim if you gather a little knowledge about forex trading before starting to trade on your own.

 Confined to only certain areas-currency market are confined to only certain areas i.e only urban areas.Still in rural areas people are unaware of these markets.These areas do not have even footprints of the currency markets. Theoretical data are taken from internet; possibilities of wrong data can take in the report. Respondent could provide wrong data. Shortage of time. May small sample size doesnt cover the all population characteristics.

Objective Primary Objective

Study Impact of Currency market in Indian economy.

Secondary Objective
To unite and revise all the laws that relate to currency exchange markets. To observe the orderly maintenance and development of the currency exchange market in India. Recognize the basics of the currency exchange market

Describe the characteristics of the forward market and the four types of forward contracts namely: outright forwards, currency swaps, forwards-forwards, and option date forwards. Illustrate the differences between and among currency futures, currency options, and currency swaps Examine the risks in the currency market

Determine the participants in the currency market and their respective roles. Appraise the effect of the currency market on money stock and money market liquidity. To study the on board aspects of corporate. To Study the various services provided by Broker house to their clients. To know investors experience in Forex market.

METHODOLOGY

RESEARCH DESIGN A research design is a framework or blueprint for conducting the marketing research project.It specifies the details of the procedures necessary for obtaining the information needed to structure and solve marketing research problems.

Exploratory Design: In exploratory design first collect the information about research. Understand foreign exchange market About foreign exchange market in India About Indian economy Impact of currency market in Indian economy Collection of primary data from past research. Then collection secondary data from Books, Magazines, Internet etc. Then start qualitative research in this the interview.

1.6.2 THE SIX W 1. Who: who are respondent? The accounts holder in SMC Global Securities and other people who are trading in Forex Market 2. What: what information should be obtained from the respondent? A wide variety of information could be obtained, including: a. What are income criteria? b. In which financial instrument they invest in? c. Factors they determine before investing. 3. When: when should the information is obtained from the respondent? 10.00a.m. to 4.00p.m. 4. Where: where should the respondent is contacted to obtain the required information? The information was collected from the SMC Global Securities, pusa road,New Delhi. 5. Why: why are we obtaining information from the respondent? It is the necessary step to determine the factors of currency market impact in Indian economy because of the research project assigned. 6. Way: In what way are we going to obtain information from the respondent? a. Personal interview with questioners b. Expert opinion

1.6.3 SOURCES OF DATA COLLECTION

SECONDARY SOURCES OF DATA Secondary data is data collected by someone other than the user. Common sources of secondary data for social science include censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. Primary data, by contrast, are collected by the investigator conducting the research. INTERNET The Internet is a global system of interconnected computer networks that use the standard Internet Protocol Suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that consists of millions of private, public, academic, business, and government networks, of local to global scope, that are linked by a broad array of electronic, wireless and optical networking technologies.internet is being used for collecting and taking out various information on currency markets.

CASE STUDY METHOD A case study is a research design framework common in social science. It is based on an in-depth investigation of a single individual, group, or event. Case studies may be descriptive or explanatory. The latter type is used to explore causation in order to find underlying principles.[1][2] They may be prospective, in which criteria are established and cases fitting the criteria are included as they become available, or retrospective, in which criteria are established for selecting cases from historical records for inclusion in the study.a case study of the organization was obtained and based on that information was extracted.

MAGAZINES, JOURNALS AND ARTICLES Magazines, journals and articles are used as a source of information for carrying out research work on currency market. Information has been extracted from these sources.

EXISTING SYSTEM

The global increase in trade and foreign investments has led to inter-connection of many national economies. This and the resulting fluctuations in exchange rates, has created a huge international market for Forex rendering investors another exciting avenue for trading. The Forex market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle. Indian Forex Market In terms of daily turnover in 2010, India is the 16th largest market in the world. Indias market share in World FX Market increased from 0.1 % in 1998 to 0.9% in 2010. As per Latest RBI Data, Daily FX Indian Market volumes are $50 Billion in 2009. Indian Currency Futures Market Present Status Currency Futures Trading was launched in India on 29th August, 2008 on NSE. NSE & MCXSX are the major 2 exchanges presently. United Stock Exchange of India is the upcoming exchange promoted by Bank of India, Federal Bank, MMTC & Jaypee Capital along with 9 other banks. The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA, Presently Daily Turnover on both exchanges averages Rs. 35000 crores. Banks are active participants on the exchanges. NRIs & FIIs are not permitted to trade as of now. Currency markets offer investors a step into the world of Forex. The global increase in trade and foreign investments has led to inter-connection of many national economies. This and the resulting fluctuations in exchange rates, has created a huge international market for Forex rendering investors another exciting avenue for trading. The Forex market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle.

Currency

Current Rate

Short Term Trend

Support

Resistance

Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

76.36 1.3931 79.72 1.5829 44.82 62.41 56.24 70.94

UP Down Down Down UP Down UP Down

76.20-75.80 1.3900-1.3820 79.50-79 1.5780-1.5700 44.75-44.50 62.10-61.70 55-55.80 70.85-70.45

76.75-77.25 1.3985-1.4070 80.10-80.55 1.5885-1.5925 44.95-45.20 62.65-62.98 56.56.35-56.65 71.15-71.35

Note: The above levels are only for intraday trading

Currency Outlook for 13.07.2011 MAJOR MARKET UPDATES The Pound was trading close to a five-and-a-half-month low against the U.S. dollar on Tuesday, as concerns over sovereign debt contagion saw investors shun riskier assets while a report showing a decline in U.K.inflation weighed on interest rate expectations. The Canadian dollar weakened versus its US counterpart as the problems in Europe and prospects of slower economic growth in China made the US currency more preferable to the Canadian one. The Euro was hovering just above a five-month low against the U.S. dollar on Tuesday, amid growing concernsthat the euro zones debt crisis was spreading to Italy as yields on the countrys government bonds rose sharply. The New Zealand dollar tumbled to a two-week low against its U.S. counterpart on Tuesday, as fears that the euro zones sovereign debt crisis could spread to Spain and possibly Italy sparked a flight to safety. The U.S. dollar was broadly higher against its major counterparts on Tuesday, as risk appetite crumbled after an emergency meeting of euro zone policymakers failed to stem fears over the threat of sovereign debt contagion in the single currency bloc.

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
75.64 1.4072 79.29 1.5961 44.63 62.74 56.27 71.18

Short Term Trend

Down UP Down Down Down UP UP UP

Support
75.30-74.70 1.4000-1.3960 79-78.40 1.5900-1.5780 44.55-44.40 62.50-62.10 56.10-55.70 71.10-70.85

Resistance
75.95-76.35 1.4120-1.4245 79.55-79.95 1.5985-1.6070 44.85-45.20 63-63.35 56.35-56.90 71.40-71.85

Note: The above levels are only for intraday trading

Currency Outlook for 14.07.2011

MAJOR MARKET UPDATES The Great Britain pound dropped against the euro today as the government report showed that the unemployment claims increased in June, instead of decreasing as was predicted by analysts. The currency gained versus The Japanese yen erased gains versus the US dollar and fell against the euro today after the Chinese economy grew more than expected in the second quarter of this year. The Euro rose today against the US dollar after yesterdays decline as the US trade balance posted bigger deficit than was anticipated and the minutes of the Federal Open Market Committee showed that the US policymakers are divide on their opinion about necessity of the quantitative easing The U.S. dollar remained broadly lower against its major counterparts on Wednesday, as upbeat Chinese economic data boosted investor demand for higher yielding assets.

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
75.04 1.4191 79 1.6121 44.59 63.20 56.37 71.88

Short Term Trend

Down UP Down Down Down UP UP UP

Support
74.70-74.55 1.4120-1.4050 78.70-78.40 1.6080-1.6000 44.45-44.20 62.80-62.50 56.10-55.70 71.85-71.50

Resistance
75.55-75.75 1.4285-1.4245 79255-79.55 1.6255-1.6350 44.75-45.20 63.50-63.85 56.45-56.60 72.10-72.75

Note: The above levels are only for intraday trading

Currency Outlook for 15.07.2011 MAJOR MARKET UPDATES The U.S. dollar trimmed losses against its major counterparts on Thursday, as the euro came under pressure following an Italian debt auction, while markets awaited a flurry of key U.S. economic data. The Pound pulled back from a three-week high against the U.S. dollar on Thursday, trimming gains made after ratings agency Moodys warned that the U.S. may lose its topnotch credit rating. The U.S. dollar regained ground against the yen on Thursday, bouncing off a four-month low after Japans Finance Minister said the yens strength did not reflect economic fundamentals, fanning speculation that Japan would intervene to stem the currencys gains. The Australian dollar was down against its U.S. counterpart on Thursday, retreating from a nineweek high after the U.S.s credit rating was put under review for a downgrade, dampening demand for riskier assets

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
75.13 1.4150 79.11 1.6134 44.61 63.10 56.30 71.90

Short Term Trend

Down UP Down Down Down UP UP UP

Support
74.70-74.55 1.4050-1.3980 78.70-78.40 1.6080-1.6000 44.45-44.20 62.80-62.50 56-55.70 71.80-71.50

Resistance
75.55-75.75 1.4285-1.4245 79.35-79.65 1.6255-1.6350 44.75-45.20 63.50-63.85 56.40-56.60 72.10-72.75

Note: The above levels are only for intraday trading

Currency Outlook for 18.07.2011 MAJOR MARKET UPDATES The US dollar erased its gains today and posted the biggest weekly decline in three months after Standard & Poors warned that it may cut the US credit rating as the US lawmakers cant agree on the nations debt ceiling. The Euro has borne up relatively well against the dollar due to parallel concerns over the United States' own debt troubles and hints further monetary easing could yet be on the cards there, potentially flooding global markets with dollars. The Canadian dollar advanced today against all 16 most-traded currencies after eight banks in the European Union failed the stress tests, increasing concerns about the EU financial system. The Australian dollar fell today, heading for the second weekly loss against the US dollar and the Japanese yen, as stocks and commodities declined on concerns that problem in the US and Europe will have negative impact on the global growth.

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
75.13 1.4052 79.06 1.6080 44.65 62.70 56.41 71.80

Short Term Trend

UP Down Down UP UP Down UP Down

Support
74.70-74.55 1.3980-1.3870 78.70-78.40 1.6050-1.5980 44.45-44.20 62.50-62.10 56.30-56 71.70-71.50

Resistance
75.55-75.75 1.4150-1.4285 79.35-79.65 1.6140-1.6230 44.75-45.20 62.98-63.25 56.60-56.85 72.10-72.35

Note: The above levels are only for intraday trading

Currency Outlook for 19.07.2011 MAJOR MARKET UPDATES The U.S. dollar advanced against most of its major counterparts on Monday, while the euro came under broad selling pressure after Spanish and Italian bond yields surged to fresh euro-lifetime highs, adding to fears over the regions debt crisis. The Great Britain pound dropped against the Japanese yen and fluctuated against the US dollar as the report showed today that UK house prices declined for the first time this year. The Euro declined against the U.S. dollar on Monday, dropping to a three-day low as concerns over the regions debt crisis pressured the single currency lower The Swiss franc reached a new record versus the euro today on concerns that the European leaders wont be able to reach an agreement regarding necessary measures to battle the sovereign-debt crisis.

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
75.13 1.4157 79.06 1.6123 44.52 63 56.24 71.83

Short Term Trend

UP Down Down UP UP Down UP Down

Support
74.70-74.55 1.4100-1.4000 78.70-78.40 1.6050-1.5980 44.45-44.20 62.80-62.50 56-55.95 71.70-71.50

Resistance
75.55-75.75 1.4220-1.4285 79.35-79.65 1.6170-1.6230 44.75-45.20 63.15-63.38 56.45-56.85 72.10-72.35

Note: The above levels are only for intraday trading

CURRENCY OUTLOOK FOR 20.7.2011 MAJOR MARKET UPDATES The euro extended gains against the U.S. dollar on Tuesday, but remained vulnerable amid uncertainty ahead of an emergency summit of European Union leaders to discuss a second bailout for Greece. US President Barack Obama accepted the deficit reduction plan of the bipartisan group of senators, bringing hope for resolution of the deadlock in discussion an increase of the debt ceiling. The US dollar rose against the Japanese yen and trimmed its losses versus the euro. The Canadian dollar jumped yesterday after Canadas central bank held interest rates and signaled that it can resume its rates increases soon as economy improves.

Greek Finance Minister Evangelos Venizelos suggested that agreement on measures to

resolve the European debt crisis at the coming European Union summit is attainable. These words boosted the euro.

Currency
Dollar index EUR/USD USD/JPY GBP/USD USD/INR(JULY) EUR/INR(JULY) JPY/INR(JULY) GBP/INR(JULY)

Current Rate
74.81 1.4226 78.89 1.6136 44.52 63.28 56.39 71.84

Short Term Trend

Down UP Down UP Down UP UP Down

Support
74.70-74.55 1.4140-1.4040 78.70-78.40 1.6050-1.5980 44.45-44.20 63.10-62.80 56-55.95 71.55-71.35

Resistance
75.55-75.75 1.4300-1.4345 79.35-79.65 1.6170-1.6230 44.75-45.20 63.50-63.78 56.55-56.85 72.10-72.35

Note: The above levels are only for intraday trading

CURRENCY OUTLOOK FOR 21.7.2011 MAJOR MARKET UPDATES The U.S. dollar was trading close to a four-month low against the yen on Wednesday, as concerns over sovereign debt levels in the euro zone and the U.S. bolstered safe haven demand. The U.S. dollar slipped to a daily low against the Swiss franc on Wednesday, as concerns over sovereign debt loads in the euro zone and the U.S. bolstered demand for the safe haven franc The Euro inched higher against the U.S. dollar on Wednesday, but gains were limited amid an air of caution ahead of a summit meeting of European Union leaders on Thursday, to discuss a new aid deal for Greece. The Australian dollar edged higher against its U.S. counterpart on Wednesday, as market sentiment received a lift after President Barack Obama supported a bi-partisan plan to avoid a U.S. debt default.

CHAPTER 1V SUMMARY, CONCLUSION, SUGGESTIONS

4.1 SUMMARY OF THE SYSTEM Forex, is definitely an exchange that allows investors to trade national currencies over the forex trading. This is the worlds largest industry for currency, using the Dollar, ranging from 1 ? 2 TRILLION dollars are traded upon this market on a regular basis. This type of trade is often performed online or around the telephone. By using benefit of the world wide web, you are enabling yourself to you could make your investments in a very reliable, easy, safe and fast way. Some investors are able to enjoy returns of about thirty percent monthly, this requires a good deal of experience to find this sort of enormous roi. The foreign currency market does not have one specific place of trade like lots of the other markets do, for this reason alone is why many of the trade is conducted by internet, fax, or telephone. To start with for currency trade hasnt been all of that popular, we were holding bringing in only about seventy billion dollars each day, together with the invention of Forex, that number grew massively. .Certainly, the currencies tend not to only handle the American dollar, these currencies might be translated to over 5,000 currency institutions world wide, that include, commercial companies, large brokers, international banks, and government banks. Many major countries have forex trading centers for instance, Frankfurt, London, New York, Paris, Hong Kong, Tokyo, and Bombay to name a few. When trading online there are several benefits for example, to be able to trade or track your investments whenever day or night, from anywhere inside the world that gives a web connection. Another added benefit, is always that some online exchange sites permit you to get started with a little investment, termed as a mini account, some with as little as two-hundred dollars. With internet trading, the trade is instant. After you trade offline you should deal with paperwork, with internet trading there isnt any paperwork involved. The field of the online world, has allow us do lots of things with just a phone, where else is it possible to bank, trade, talk to your friends, research your investments and earn income all simultaneously? Make the internet work in your own interest by implementing stock trading online for your portfolio. There?s a whole whole world of money awaiting you to earn along with your online investments, and it?s all offered at the press of the mouse button button. As the world looks up to, India for investing in many sectors the country is beginning to see some good trading via Internet through forex. Forex in India today is dependent on the reserves and how Reserve Bank of India deals with currency fluctuations with respect to the rupee. However, the history of forex in India shows that for the last twenty years there has been a regular deficit. The total imports until today exceed the exports. With the industrialization and liberalization the situation of forex in India has changed rather geometrically.

Being agricultural country earlier exports were confined to agricultural produces. It was with the help of IMF that imports in India improved. Despite so much of infrastructure, improvement the country constantly faces transport and power cut problems.Forex in India has been helped by invisible trading services like shipping, insurances, banking various investments, perking of tourism, IT etc. The cost of borrowing from international banks is very high. To recap: The forex market represents the electronic over-the-counter markets where currencies are traded worldwide 24 hours a day, five and a half days a week. The typical means of trading forex are on the spot, futures and forwards markets. Currencies are "priced" in currency pairs and are quoted either directly or indirectly. Currencies typically have two prices: bid (the amount that the market will buy the quote currency for in relation to the base currency); and ask (the amount the market will sell one unit of the base currency for in relation to the quote currency). The bid price is always smaller than the ask price. Unlike conventional equity and debt markets, forex investors have access to large amounts of leverage, which allows substantial positions to be taken without making a large initial investment. The adoption and elimination of several global currency systems over time led to the formation of the present currency exchange system, in which most countries use some measure of floating exchange rates. Governments, central banks, banks and other financial institutions, hedgers, and speculators are the main players in the forex market. The main economic theories found in the foreign exchange deal with parity conditions such as those involving interest rates and inflation. Scope of The System Forex market also known as foreign exchange or currency exchange is a new concept for India. It is a place where various currencies are traded. Foreign exchange or forex means a market place where one currency is traded for another. The major players of this market are banks, financial institution, large companies, financial brokers and individuals. In the recent years forex trading has gained tremendous popularity. These are unique by its large volume, extreme liquidity, 24 hour trading availability and various types of options available. Indian forex market is small when compared with other developed countries but with the multinationals coming up and new government policies the path of expansion is on its new heights. The Indian government has now open up new ways to trade and regulated this market as well. India has shown great rise in its forex turnover in last three years. People now feel comfortable to trade in and exit from the market. Indias share in world forex market has shown growth of 0.9% last year and will grow further. It is the fastest growth of any country. The growth rates of developed countries is much lower

compared with developing countries.UK and US have shown the lowest change in contribution of foreign exchange. In India people are now more aware of the kinds of trading like derivative markets, options, swapping, hedging etc. The most important characteristic of forex is the impact on various currencies by the change in one currency rates. Any economic activity in world affects the forex market immediately. The factors which influence the forex market in India are government polices and rules, tax structure, inflation rates, RBI rates and interest rates, foreign trade policies, world bank interest rates and economic growth and health. The three fold growth of forex trades in India has proved the upcoming power and will soon be called as a investment hub. The scope of forex market is very huge in India as it is in its initial stage. New developments are in row and very soon Indian market would emerge as a high potential foreign exchange market place. 4.3 CONCLUSION The survey I have carried out on Impact of currency market in India. The conclusion of the survey is as follows. The awareness of the forex market in India is very low in compare to other financial instruments. Only fewer people know about the currency trading. As the gender wise male investors are more investing than women investors. But the education level is as well a positive sign of women also taking interest in forex market. The equity and commodity investors are as well investing in currency. In India USD, EURO, GBP, and JPY are the currencies been traded most.USD and EURO are the most preferred currency in response from the respondents. there is high volume in this two currency pair in India. USD is on first position to trade in India, as per the data of MCXSX the volume of USD/INR of June contract 3588917 in lots as on 3 rd June 2011. The EURO is on second to be traded in India. The data of MCX-SX volume in EURO/INR is 156556 in lots, as on 3rd June 2011. GBP and JPY are been traded in India on 3rd and 4th position respectively. The volume in GBP/INR was 58255 in lots and volume in JPY/INR was 23628 in lots as on 3rd June 2011 respectively.In future 36% & 32% of respondent are relay on USD & EURO respectively. But in future as per the report of Bank Of Japan Change in the total quantity of domestic currency in circulation and current account deposits held at BOJ, It's positively correlated with interest rates-early in the economic cycle an increasing supply of money leads to additional spending and investment, and later in the cycle expanding money supply leads to inflation. This release would be affect the JPY rate.

The earning in currency market is low in comparison of Equity or Commodity market. The volatility in currency rates is very less. It doesnt volatile as equity or commodity market. The risk is also very less in the currency market. The main or primary object of investing in currency market by investor is hedging. More number of respondents is connected in the business of Import-Export. They use to hedge the currency market for future payment and earn the deference.

The impact of currency market in Indian economy can be measure from the Gross Domestic product and Gross national product. The GDP of current year if 7.8%. It is a positive in compare to last financial year; the second factor is foreign reserve. As on may 2011 India is having $ 3010 billion of foreign reserve as per the IMF data. Export of the country is as well increased as exports surged by 37.5 per cent for the financial year ended March 31, 2011 to touch $245.9 billion shooting well past the $200-billion target set for the year. Currency market in India is having a wide scope for development in future.

4.4 SUGGESTIONS

 Know what moves currency markets. Like any asset class, there are a number of factors that drive a currency's performance. A countrys macroeconomic situation can have a major influence--economic data releases, policy decisions, and political events can change an economists outlook on the country, and therefore its currency. There are also technical factors such as interest rates, equity markets, and international trade, which may also have an impact. Spend time getting to know these. Understand the strategies. Yes, there is a method to the madness. As a trader, you need to be aware of three crucial trading strategies, which are often used by currency traders: the carry, momentum, and value trade. Momentum tracks the direction of currency markets; the carry strategy sees investors selling currencies with low interest rates and buying those with high rates; and the valuation strategy takes a position based on the investors view of a currencys value. However, the strategies that you use are up to you.

Decide on trading strategy. Are you macro-driven or a technician? In currency trading, as in any form of active investment, it is important to understand how you arrive at your investment decisions. Are you someone who looks at the big picture (fundamental economic data such as inflation, or central bank decisions) and makes a call on how that may affect a currency pair? If so, then youre macro-driven. If you are someone who looks at the changes to a currency pair and then tries to understand what this may mean from a macro-perspective over the long term, then you are a technical investor. Manage risk. As with any investment decision, you must decide how much risk youre willing to accept. Ask yourself, how much am I prepared to lose on this position? If you dont have a convincing or comfortable answer then you should rethink the trade. Do not risk more than you can afford to lose. Think about how you can mitigate your downside risk; make use of trading strategies such as stop losses or limit orders.

Stick to what you know. There are 34 currency pairs that can be traded on dbFX, each of which have their own characteristics and considerations to understand and analyze. If youre participating in the market on a part-time and non-professional basis, it is probably better to concentrate on just a few pairs and commit to thorough and robust research on those, rather than superficial research on the many. Some key things to consider when analyzing a currency pair are its liquidity, transaction costs (the spread), and volatility. As a general rule, major currencies usually have better liquidity, tighter spreads, and lower volatility, versus emerging-market currencies, which have poor liquidity, wide spreads, and volatile movements. Plan your trade, and trade your plan. Its one thing to have a plan, its quite another to execute it. When trading currency, it's important not to get caught up in the moment--the markets are fast moving and in the short-term can be unpredictable. Rather than trying to make a quick

profit, stick to your long-term plan based on your research. Good currency traders make money in the long term by being disciplined, not necessarily by making short-term bets.

Research, research, research. Its important to stay current. All currencies move quickly, so checking the price once a week is not going to help you make strong, long-term returns. It is helpful to use an online provider that provides you with up-to-the-minute data and statistics. Traders use data to constantly assess their trading positions Keep your emotions in check. Like many important decisions, it is vital to keep emotion out of any trading decision you make. If youre upset about missing out on an opportunity and want to trade yourself into a better position, or want to stray from your trading strategy to make up for a loss earlier in the day-- reconsider, because youve got the warning signs of someone about to make an impetuous, irrational decision. If you do feel yourself getting emotionally involved in a particular trade, take a deep breath, review your strategy, and establish how such a decision will affect your overall approach before going anywhere near the "execute" button.

Dont expect to win on every trade. That may not sound like much of a sales pitch, but even the most successful of traders dont win on every trade. What they do have is a robust plan and long-term strategy, which carefully considers the risks. So dont necessarily be disheartened if a trade doesnt go your way; review why it went wrong and see if there is anything to learn from the experience. But dont think that currency trading is an option for those seeking quick money, because like any investment, it only should be played by those with a long-term goal in mind.

Dont put all (nest) eggs in the currency basket. Foreign exchange is only one of the many asset classes you should be considering as part of a balanced investment portfolio. Forex trading is not suitable for every investor, so if you are committing all of your financial resources to forex trading, be sure you are fully aware of the risks and rewards of doing so, because commitment to one asset-class is not recommended. The same applies for currency trading itself. Risk diversification allows you to mitigate your risk by spreading it out, that is, not placing all your faith in a single trade. Diversification is key, no matter what asset class youre investing with.

 BIBLIOGRAPHY Books: 1) Dales S. Beach, personnel, Macmillan, New York, 1985 2) P.F. Drucker, the Practice of Management, Allied, New Delhi 1970 3) Hull C John; Prentice hall, Introduction to Futures and Options Markets 4) Gupta S.P, Statistical Methods, 36 revised edition 5). V. A. Avadhani, Investment Management Newspaper & Magazines 1) The Economic Times 2) Business standard 3) Wise money(smc) 4) Securities Market Module: NCFM 5) Training kit provided by SMC Web sites 1) www.smcindiaonline.com 2) www.nseindia.com 3) www.bseindia.com 4) www.rbi.org 5) www.sebi.gov.in 6) www.mcxindia.com 7) www.ncdex.com

8) www.nmce.com 9) www.smctradeonline.com 10) www.bis.org 11) www.financewis .com