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Forex basics


*RENU SINGH * (✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩ )     15 June 2012

*RENU SINGH *
✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩  
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Hello everyone,

Forex market  is the biggest market of the world which has a daily turnover of 4 trillion $. It is also known as FX in short term. In forex market currencies of different countries are exchanged for the purpose of trading.  There are 3 layers of forex market in India. Normally RBI works like a regulator.

 level 1 :- RBI which is also known as the regulator of the market

Level 2 :- Inter bank :- where the bank make transactions with each other

Level 3 :- Merchant rate :- where Bank deals with the customer

A customer can never directly buy or sell foreign currency. This work is done with the help of bank. Whenever the customer need to buy or sell the currency , he goes to bank and do the same.

  1. So Interpretation is always done with respect to the banker’s point of view…suppose X wants to purchase $ , we won’t say he wants to buy $, we would rather use the wording  Bank is selling $ or vice-versa.
  2. There are always two market rates which are named as Bid/ Ask . where Bid is the buying rate , ask is the selling rate.
  3. Market always sell at higher rate and buys at low rate. And the convention of the market is to buy at lower rate and sell at higher rate.
  4.  Suppose  1$ = INR 40.99/01 we will read the same as Bid is 40.99 and ask rate is 41.01
  5. There  are two types of quotes are in foreign exchange   first is  Direct quote and second is  Indirect quote.
  6. Direct quote means where price comes first  and commodity comes next .  Like Rs.20 per pen … here price is Rs.20 and Pen is commodity.  And the same is done with foreign currency  Rs.56 per $ means direct quote for US$ in   India.  So in shortest words Direct quote can be defined as No Of units of home currency per one unit of foreign currency.

 

Suppose in London we have sterling pound as home currency and  $ will be foreign currency. So  1 $= .2 sterling pound will be called as direct quote.

Indirect quote = it will be vice-versa  , here commodity will come first and price will come next. Let’s take the same example   1 $ = 1/56 doller  this will be indirect quote. So Indirect quote is 1/direct quote.

  1. Direct  quote will be called as American  and the indirect quote will be called as European  term across the globe.
  2. The difference between bid and ask is called as Spread suppose Rs 44-49 is the quote given . So spread will be  Rs.4.  The more stable the market will be, lesser will be the difference  between the spread.
  3.  Cross rate :- when we are faced with such kinds of rates which don’t involve the exact quote of what we want.  A cross rate is a rate which doesn’t involve the home currency.

Example :_

One quote is SGD/INR =0.045. Another quote is euro/INR= 0.02.

Ascertain the quote for SGD in terms of Euro.

Answer :- Here we can’t calculate Euro/SGD easily. So if we want we can calculate it with

Euro/SGD =  Euro/INR *INR/SGD

                 =      0.02* 1/0.045

                =    0.444

  1. Exchange rate in forex market can be brought under 2 heads :-
    1. Spot market :-  where settlement is made on second working day . Suppose a transaction take place on Friday , then Saturday and Sunday are holidays. So it means  settlement day is Monday.
    2. Future market :-  Forwards rate is the rate fixed  today for a future date. Suppose 1$ = 55/56. And the bank fixes the date on ending of march as  58/59. So even if the $ falls to 50/52.  The bank will still buy the $ at 58 not 50.
  2. We say $ was 45/46 , a year before and now its 54/55 per Rs. So we need to measure how much $ increase and how much the value Of RS.  Fall. We do the same with appreciation and depreciation formula.
  3. ( Forward rate –spot rate)/Spot rate *12/months *100 .This formula is used in case of direct quote.  And we can calculate the appreciation or depreciation of  the currency.
  4. (Spot rate-forward rate)/forward*12/m*100 . This formula is used in case of indirect quote.

And the percentage increase in doller doesn’t mean the RS.will also be decrease in the same ratio. So we calculate the same with required formulas.

  1. Swap points = Forward Rate-Spot rate
  2. Forward Premium and discount  

currency

Spot-INR

1 month swap points

Rate

CAD

34.65-80

30-20

34.35-34.60

NZD

29.85-05

10-20

29.95-30.25

 

We will just focus on one thing , if the swap ask >swap Bid  then we will add . As we had done in second example  where swap point increased from 10 to 20.

If the same don’t happen we will subtract the digits like we has done in 1st example.

 

Regards

Renu.

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*RENU SINGH * (✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩ )     15 June 2012

*RENU SINGH *
✩ §m!ℓ!ñġ €ม€§ fℓม!ñġ ђ♪gђ✩  
 4418 likes  21607 points

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As I feel, the discussion becomes so tough because everyone's timing becomes so different ... so we will use the message system to handle the queries and doubts.

I found this article really useful as well .....so please go on this link for further explanation for Direct and Indirect quotes.

/articles/print_this_page.asp?article_id=10459

 

I am also submitting J.B.Gupta's book 2 chapter on forex, so that we can learn in more better way.angelenlightened


Attached File : 523076 997112 chapter 2 foreign exchange risk management.pdf downloaded: 632 times
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Chetan (Senior Auditor)     15 June 2012

Chetan
Senior Auditor 
 5 likes  172 points

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The article is fabulous and very helpful, i want to learn more about the same as i wanna start FX Trading, if you can help me then please sent me a test mail to ccsn29 @ yahoo.in

 

 

Thanks

avater

Chetan (Senior Auditor)     15 June 2012

Chetan
Senior Auditor 
 5 likes  172 points

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The article is fabulous and very helpful, i want to learn more about the same as i wanna start FX Trading, if you can help me then please sent me a test mail to ccsn29 @ yahoo.in

 

 

Thanks

avater

Hardik Dave (IPCC and CS Professional(FINAL) Student)     15 June 2012

Hardik Dave
IPCC and CS Professional(FINAL) Student 
 3301 likes  15494 points

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Realy wonderful and important article sister.smile. Nice and wonderful explanation with example, thanku for sharing article , keep sharing. We can gain more knowlege from this article.

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RaGHuRaM (The Easy are never Good and the Good are never Easy....)     15 June 2012

RaGHuRaM
The Easy are never Good and the Good are never Easy.... 
 996 likes  4942 points

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Very informative article and you made it easily understandable with good example....Thanks for sharing, sister....:-)


(Guest)

thats great Renu..., today came to know a little bit abt forex..., continue dear...:-)

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Karan Teli (Life Is just an Illusion...!!)     15 June 2012

Karan Teli
Life Is just an Illusion...!! 
 730 likes  4568 points

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OMG...!

u started so soon...??? The article is too short and sweet covering all aspects but i couldn`t find sapce to add on something since u covered alll.......!!

Right now its bookmarked but surely i would come back and add on something when i start it...

 

Short and precise way but i still sometimes get confused with direct and indirect quotes.. May be i feel thats the crux of forex please try to get a seperate one specially for it... ( A request).

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CA. Akhil Maheshwari, CMA, MBA (CA CMA(USA) MBA CS Professional S.IAI)     15 June 2012

CA. Akhil Maheshwari, CMA, MBA
CA CMA(USA) MBA CS Professional S.IAI 
 21 likes  605 points

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Dear professional colleague,

shared very nice article, I have revised forex instantly through ur article, nice illustrative approach, keep it up....

With Regards
Akhil Maheshwari

[CAR_Commerce Artists & Rockstars Administrator]

https://www.facebook.com/groups/CommerceArtists.CAR/

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Vandana Mulchandani (Finance Manager )     15 June 2012

Vandana Mulchandani
Finance Manager  
 2080 likes  9222 points

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Thank you Renu...very precise and easily understandable....Keep sharing.


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