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Any currency other than the local currency which is used in settling international transactions (export, import) is called foreign currency.
Currency includes instruments such as paper currency, notes, and cheques that are used to make payments between countries.
The system of trading in and converting the currency of one country into that of another currency is referred to as foreign exchange (Forex). |
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Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology. |
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| 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.
Economic growth and health: Reports such as gross domestic product (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. Internal, regional, and international political conditions and events can have a profound effect on currency markets. |
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Political conditions
All exchange rates are susceptible to political instability and anticipations about the new government. For example, political or financial instability in Russia is also a flag for the Euro to US dollar exchange because of the substantial amount of German investments directed to Russia. |
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Market psychology and trader perceptions
They influence the foreign exchange market in a variety of ways
Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. |
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There are two types of analysis which are generally used to keep a track of the Exchange market. These are: |
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Fundamental Analysis |
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Fundamental analysis includes a detailed study of the basic and primary elements which have and can potentially manipulate the financial system of a certain thing. This type of technique is often used to study and forecast the various trends like price action and market trends. These predictions are done mainly through evaluating the following indicators
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Activity Indicators relating to GDP, Production, Sales, Income, Spending, Housing. |
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Inflation Indicators comprising of CPI, WPI etc. |
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External Sector Indicators which include Trade Balance, Current account balance. |
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Technical Analysis |
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Technical analysis is a method of evaluating currencies by analyzing statistics generated by market activity, such as past prices and volume. It attempts not to measure a security's intrinsic value, but instead uses charts and other tools to identify patterns that can suggest future activity.
Some of the techniques used are:
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Candlestick Charts |
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Moving Averages (Simple and Exponential) |
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Bollinger Bands |
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Relative Strength Indicator |
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Oscillators |
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| Hedge is an investment position taken in order to protect oneself from the risk of an unfavorable price move in a currency. |
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To mitigate Exchange rate risk: |
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Fluctuations in the exchange rate of currencies give rise to exchange rate risk. |
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As the time gap between finalizing an export/import order and receiving/making payment against it widens, the possibility of fluctuation of exchange rate rises. A hedge helps in protecting businesses from unfavorable fluctuations. |
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To avail the following benefits: |
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It brings certainty in business- you would know the precise exchange rate at which your receivables/payables will be converted. |
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Helps in estimating receipts and payments-once you are aware of one side on the P/L you can plan the other. |
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Business is immune to any further movement in currency markets, thus Relieving itself of the exercise of tracking currency markets. |
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| Currency derivative is a financial instrument whose characteristics and value depend upon the characteristics and value of an underlying currency. |
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Forwards
It is a foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period.
Forwards contract is used as a foreign currency hedge when a person/business has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency Forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount. |
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Advantages |
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Helps in hedging the exchange rate risk. |
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Brings the certainty of converting foreign exchange at a fixed rate. |
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Provides for early or part settlement. |
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Disadvantages |
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Creates an obligation to settle the contract and does not allow the buyer to make use of better market rates, if available. |
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Currency Futures
A currency future, also FX future or foreign exchange future is a futures derivative contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. |
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| The exchange traded derivative market is at its nascent stage and currently only National Stock Exchange (NSE) of India has got an in-principle approval from SEBI. However few more exchanges like Multi Commodity Exchange (MCX) of India, Bombay Stock Exchange and others are to come up with currency derivatives. This will provide the investors optional exchange platforms and good arbitrage opportunities. |
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A hedging contract must be entered into as soon as the foreign currency exposure becomes certain. This may be at any of the following times.
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On the date of invoicing |
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On the date of shipment |
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On expectation |
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Or at any time during the tenor |
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| Yes, any entity be an Individual, a firm or a corporate body or even a bank can trade in Indian Currency Derivatives. |
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| The timings as provided by National Stock Exchange (NSE) of India is 9:00 hrs to 17:00 hrs IST from Monday to Friday. |
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| At present, the SEBI has given the approval in trading cross currency contract of US Dollar-Indian Rupee. The market participant can trade in this contract as if right now. |
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| There are 12 near month currency futures contracts available on NSE & each contract end on last business day of the respective month. |
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| No, the current currency derivative market required contracts to be settled in cash and the settlement prices of the contract would be RBI’s reference rate on the last trading day. |
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| In India, the currency derivative market falls under the purview of Security Exchange Board of India (SEBI). Indian Rupee trades in a managed floating rate regime and thus RBI intervention is also seen at time. Besides, the bye-laws of respective Exchange Platform will also apply. |
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| Kunvarji Group is a multi-platform financial service provider having well established State of Art Infrastructure with 24 x 7 backoffice, online trading facilities, professional customer service together with a professional research team providing intensive currency research based strategies that could help you invest your funds intelligently. |
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| A new Demat Account is not required.
Further as the currency future contract is based on NSE platform, the existing Kunvarji equity client are required to fill up a new contract agreement known as KYC form however the client code would be the same as their equity client code. On the contrary, new Kunvarji client or the existing Kunvarji Commodity Client are required to open up a new trading account by filling up KYC form and they will be given a new client code for currency trading. |
