Chapter 1 – Forex Business

Factor Determining Exchange Rates

  1. Fundamental Reasons
  • Balance of Payment : Surplus –> Stronger Home Currency
  • Economic Growth Rate : High Growth –> Increase Import –>Fall Home Currency
  • Fiscal Policy : Lower Tax –> High Economics Growth
  • Monetary Policy : Central bank control on interest and money supply
  • Interest Rate : Short Term–>Attract overseas capital–>Strong Home Currency,

                       Long Term–>Economy down –> Weak Home Currency

  • Political Issue : Political Stability –> Steady Currency
  1. Technical Reason
  • Freedom or Restriction on capital movement can effect exchange rates

3.Speculation

  • Short Sell

Exchange Rate Mechanism

  1. Ready or Cash – Same day settlement
  2. TOM – Next working day settlement
  3. Spot – Second working day settlement
  4. Forward – Delivery of fund take place after spot date
  5. Premium – Forward value of Home Currency > Spot Rate
  6. Discount – Forward value of Home Currency < Spot Rate
  7. Direct Quotes – Local currency is variable Ex- 1 USD = Rs.71.10
  8. Indirect Quotes – Local currency is fixed Ex- Rs.1 = 0.014 USD
  9. Cross Rate  – Particular currency pair are not directly available, the price for the said currency pair is then obtained indirectly with help of cross rate mechanism
    • Ex- For GBP/INR first quote USB/INR and GBP/USD than you get GBP/I NR rate
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