KAZAKH ABYLAI KHAN UNIVERSITY OF INTERNATIONAL RELATIONS AND WORLD LANGUAGES

WORK
Theme: Foreign Exchange and Exchange Rate regimes
Done by:
Usenkhan Duman;

Suleimenov Zhantas
423 group

ALMATY, 2014

Project head: Kisaeva G.T
 
Subject: International Foreign Markets
 
The project participants: Usenkhan

D; Suleimenov Zh. 423 g


Goal of project: To show what is the Foreign Exchange Market and Exchange Rate Regimes and how is it represented in the International Market

Idea of project: To define trade and economic characteristics of the Exchange market

Deadline of the project: 11.11.2014 – 18.11.2014
 
Project products: CD-ROM and Power Point

firms
Non-bank foreign exchange companies
 Trading characteristics
Exchange Rate Regime
Conclusion

for the trading of currencies. In terms of volume of trading,

it is by far the largest market in the world. The main participants in this market are the larger international banks. Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars.

and in the Middle Ages. However the modern currency markets

arose in the XIX century. The main prerequisites promoting formation of the currency market in modern understanding was the following:
broad development of various international economic relations;
creation of the world currency system founded on the organization and regulation of the currency relations, fixed by interstate agreements;
wide circulation of proceeds of credit of international payments and payments;
integration and centralization of a banking capital, broad development of the correspondent relations between banks of the different countries including maintaining correspondent accounts in foreign currency;
development of information technologies and means of communication: telegraph, phone, a telex that simplified contacts between the currency markets and reduced time for obtaining information on the made transactions.
The developing national currency markets and their interaction created the uniform world currency market in which the leading currencies in world financial centers began to address freely.

the world leading to high liquidity;
its geographical dispersion;
its continuous operation: 24

hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
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.

The foreign exchange market is unique because of the following characteristics:

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). Of this $3.98 trillion, $1.5 trillion was spot transactions and $2.5 trillion was traded in outright forwards, swaps and other derivatives.

2010 and April 2014 and has more than doubled since

2004. The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment

The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot turnover, or $150 billion per day (see retail foreign exchange platform).

divided into levels of access. At the top is the interbank

market, which is made up of the largest commercial banks and securities dealers. Within the interbank market, spreads, which are the difference between the bid and ask prices, are razor sharp and not known to players outside the inner circle. The difference between the bid and ask prices widens (for example from 0 to 1 pip to 1–2 pips for a currencies such as the EUR) as you go down the levels of access.

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 corporations (MNCs) can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

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 trading.

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 market. Banks, dealers and traders use fixing rates as a trend indicator.
The mere expectation or rumor of a central bank foreign exchange intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 European Exchange Rate Mechanism collapse, and in more recent times in Asia.

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.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. While the number of this type of specialist firms is quite small, many have a large value of assets under management and, hence, can generate large trades.

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).

It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.

are all important centers as well. Banks throughout the world

participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

to other currencies and the foreign exchange market. It is closely

related to monetary policy and the two are generally dependent on many of the same factors.
The basic types are a floating exchange rate, where the market dictates movements in the exchange rate; a pegged float, where a central bank keeps the rate from deviating too far from a target band or value; and a fixed exchange rate, which ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro or a basket of currencies.

regime in which a currency's value is allowed to fluctuate in

response to market mechanisms of the foreign-exchange market. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.
Pegged float
Pegged floating currencies are pegged to some band or value, either fixed or periodically adjusted. Pegged floats are:
Crawling bands
the rate is allowed to fluctuate in a band around a central value, which is adjusted periodically. This is done at a preannounced rate or in a controlled way following economic indicators.

with horizontal bands
the rate is allowed to fluctuate in a

fixed band (bigger than 1%) around a central rate.
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to.

This makes trade and investments between the two currency areas easier and more predictable, and is especially useful for small economies in which external trade forms a large part of their GDP.

rate with a foreign currency. This policy objective requires the conventional

objectives of a central bank to be subordinated to the exchange rate target.

Dollarization occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency. The term is not only applied to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

Currency substitution occurs when the inhabitants of a country use a foreign currency in parallel to or instead of the domestic currency.

US dollar
  Currencies pegged to the US dollar
  Currencies pegged to the

US dollar within narrow band
  Eurozone
  External adopters of the euro
  Currencies pegged to the euro
  Currencies pegged to the euro within narrow band

Worldwide official use of foreign currency or pegs.
  US dollar users, including the United States
  Currencies pegged to the US dollar
  Euro users, including the Eurozone
  Currencies pegged to the euro
  Australian dollar users, including Australia
  Indian rupee users and pegs, including India
  New Zealand dollar users, including New Zealand
  Pound sterling users and pegs, including the United Kingdom
  Russian ruble users, including Russia and other territories
  South African rand users (CMA, including South Africa)
  Special drawing rights or other currency basket pegs
  Three cases of a country using or pegging the currency of a neighbor

participate only after a thorough understanding of how they work.

In options, the risk is lower because the loss is limited to the premium paid. But investors need to know how puts and calls work and whether the premium being paid for an option is feasible. It's advisable to take a course on forex derivatives offered by currency exchanges and associations.
One has to be clued in to global developments, trends in world trade as well as economic indicators of different countries. These include GDP growth, fiscal and monetary policies, inflows and outflows of the currency, local stock market performance and interest rates.
The currency derivatives market is highly leveraged. In the stock futures market, a 20% margin gains a five-fold leverage. In forex futures, the margin payable is just 3%, so the leverage is 33 times. This means that even a 1% change can wipe out a third of the investment. However, the Indian currency markets are well-regulated and there is almost no counter-party risk. Investors should start small and gradually invest more.